Do we care enough? The new duty of care being debated for financial services firms in the UK

The FCA has been considering whether to introduce a duty of care for financial services firms for some time, with the aim of reducing and preventing harm suffered by consumers. However, its hand may soon be forced; on 9 January 2020 Lord Sharkey (re)introduced his Financial Services Duty of Care Bill, which, if passed, would require the FCA to make rules for authorised persons (i.e. financial services firms) to owe a duty of care to consumers in carrying out their regulated activities, within six months of the Bill being enacted.

As currently drafted, the Bill defines “duty of care” as an obligation to exercise reasonable care and skill when providing a product or service, and “consumer” as it is defined in the Consumer Rights Act 2015 (CRA) i.e. an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession. The finer details of the duty would be left to the FCA.

Scope of the duty being considered by the FCA

The scope of the duty being considered (separately) by the FCA has not been precisely defined. In its July 2018 discussion paper the FCA indicated it was considering various formulations of a duty to exercise reasonable care and skill when providing a product or service, which could also incorporate some elements of a fiduciary duty (such as a duty not to put personal interests above those of the client, to avoid conflicts of interest, and not to profit from the firm’s position without the client’s knowledge and consent).

Many of these concepts are of course already found throughout the FCA’s rules, including in Principles 2, 6, 7, 8 and 9 of the FCA’s Principles for Businesses, and in the rules requiring firms to act in the best interests of their clients in certain situations, such as in relation to designated investment business, mortgage activities and insurance distribution. The Senior Managers and Certification Regime (SMCR) is centred on the concepts of individuals within firms acting with integrity, with care, skill and diligence, and paying regard to the interests of customers and treating them fairly, and it places accountability on individuals as well as firms. Separately, the CRA implies a duty to act with reasonable care and skill into all contracts between traders supplying a service and consumers.

What we don’t have in all of this is a direct right of action for consumers if these various provisions are breached: consumers can’t take action for breach of the Principles or the SMCR, and although they can take action for particular breaches of FCA rules (via s138D of the Financial Services & Markets Act 2000) if they can demonstrate loss, these rules apply to very specific scenarios.

However, the duty under the CRA to act with reasonable care and skill when supplying a service is actionable, and in principle consumers of financial services should be able to use this route to obtain compensation for a firm’s breaches of the FCA’s Principles and other rules, where those breaches are a lapse in reasonable care and skill and have caused the consumer loss.

The FCA’s case for change

The case for change, as set out in the FCA’s April 2019 feedback statement, is that one clear overarching duty of care for financial services firms will incentivise firms to anticipate and evaluate harm at every level and to take better preventative action, create clarity for consumers about what they can expect and/or demand of firms, and create clarity for the FCA, forming a ‘baseline’ against which it can take action in cases of new and emerging harms not captured by existing rules. The FCA’s feedback statement did resile from the stronger position it had taken in the discussion paper, and concluded that it was more likely to introduce any new duty via revisions to its Principles (and consider whether a private right of action was appropriate here).

Next steps

The FCA has said it will publish a paper setting out detailed views on specific options for change shortly. The next reading (and general debate) of the Bill is yet to be scheduled.

The impact of any new duty will of course depend on its exact phrasing. While a simple formulation obliging firms to exercise reasonable care and skill may well encourage consumers to bring claims more readily, from a legal perspective it seems unlikely to add much to the duty that already exists in the CRA. And it is difficult to see how a much wider and more sweeping duty (such as one incorporating fiduciary elements, for example, which would further erode the distinction between advised and non-advised sales) is justified.

Perhaps the most persuasive case against any wider new duty is the fact that a significant extension has already been made to the Financial Ombudsman’s (FOS’s) powers recently which may remove the need for many consumers to engage in litigation at all – the FOS can now award compensation of up to £350,000, and its procedures and fairness-based approach to decision-making is specifically designed for consumers and small businesses. The FCA can use its formal and informal powers to require firms to undertake redress on the same basis. This means that the only real beneficiaries of a new wider duty would be consumers with claims above the revised FOS limit – who are unlikely to be the vulnerable individuals the FCA is focused on. Watch this space.