The Financial Conduct Authority (FCA) has just published its Consultation Paper on a proposed Consumer Duty for financial services firms selling products and services to customers classified as retail clients.
From the FCA’s perspective, the duty is intended to be a “paradigm shift” which would set clearer, higher standards impacting firms’ culture and conduct. The new duty focuses on outcomes experienced by consumers, and therefore in the FCA’s view, will mean that firms need to act in a way which reflects how consumers actually behave and transact in the real world. Although in many ways the proposals reflect the approach that the FCA has increasingly taken in enforcing its powers recently (including a heavy emphasis on behavioural economics), they also raise a number of questions about the very high standards that the FCA is seeking to impose on firms.
Why is the FCA proposing a Consumer Duty?
There has been debate for some time about whether financial services firms should be subject to a special duty of care; the FCA published a Discussion Paper on the topic in 2018, the Financial Services (Duty of Care) Bill has been introduced twice (see our previous blog here), and last month a duty was debated again just before the Financial Services Act 2021 was passed. The Act now contains provisions which formally require the FCA to carry out a public consultation on the level of care financial services firms provide consumers, and whether the FCA should create rules providing for a duty of care – which is what the FCA is doing in this consultation.
However, at this stage the FCA has avoided describing the Consumer Duty as a duty of care on the basis that it imposes higher duties than simply acting with reasonable care and skill, which is already provided for in the current law and the FCA’s Principles for Businesses. Instead, the FCA describes the Consumer Duty as a package of reforms aimed at tackling the harms it sees in the financial markets.
What is the proposed new Consumer Duty?
The proposed Consumer Duty comprises of three key elements. The Consumer Principle would provide a clear overall message as to the standard expected from firms. The FCA is seeking feedback on two options for the wording of the Principle: “A firm must act to deliver good outcomes for retail clients”, or “A firm must act in the best interests of retail clients”. This would be supplemented by three Cross-cutting Rules which would explain how the Consumer Principle applies in practice. Firms would be obliged to (i) act in good faith, (ii) take all reasonable steps to avoid causing foreseeable harm to customers, and (iii) take all reasonable steps to enable customers to pursue their financial objectives. The FCA’s guidance on Outcomes sets out detailed expectations in four key areas: that communications equip customers to make effective, timely and properly informed decisions; that products and services are designed to meet the needs of consumers, and are sold to those whose needs they meet; that customer service meets the needs of consumers, enabling them to realise the benefits of the products and services and act in their interests without undue hindrance; and the price of products and services represents fair value for consumers.
In assessing outcomes, firms would need to consider the reasonable expectations of their customer base, rather than achieving the best outcome for each individual customer. However, additional care should be taken to ensure vulnerable customers receive outcomes that are as good as for other consumers, in line with recent FCA guidance (see our blog post here).
The Consumer Duty would extend to firms involved in the manufacture or supply of products and services to retail clients, if that firm can influence material aspects of the design, target market, or performance of a product or services that will be used by consumers, even where that firm does not have a relationship with the consumer.
What is the Consumer Duty intended to address?
The FCA has said that the Consumer Duty is intended to ensure that firms are consistently putting consumers’ interests at the heart of their business, and to prevent harms it sees in the current market, including practices such as:
- firms providing information which is misleadingly presented or difficult to understand, hindering consumers’ ability to properly assess the product/service;
- products and services that are not fit for purpose in delivering the benefits that consumers reasonably expect, or are not appropriate for the consumers they are being targeted at and sold to;
- products and services that do not represent fair value to the consumer, where the benefits consumers receive are not reasonable relative to the price they pay;
- poor customer service that hinders consumers from taking timely action to manage their financial affairs and making use of products and services, or increases their costs in doing so (such as complaints being dismissed without proper investigation, leading to consumers missing out on redress payments to which they are entitled);
- other practices which hinder consumers’ ability to act (such as barriers to exiting from a product/service), or which exploit information asymmetries, behavioural biases or vulnerabilities; and
- exploitation of consumer loyalty or inertia.
The FCA is currently seeking feedback on its consultation and responses are due by 31 July 2021. A further consultation is expected to be published by end of this year, which addresses further details of the Consumer Duty as well as the FCA’s proposal as to whether there will be a private right of action attached to it, with any changes due to be implemented by 31 July 2022.
Are the FCA’s proposals in fact a paradigm shift?
The answer is both yes and no. In many ways the FCA’s proposals simply reflect the way that it has increasingly been using its powers over the past few years, with a dual focus on both consumer protection and on ensuring that competition between firms works in consumers’ favour. The Consumer Duty is likely to be the high point of the FCA’s philosophy on outcomes-based regulation, where it effectively works backwards from outcomes which could have been better for consumers to identify failings, even in cases where there is no economic loss. Similarly, it is likely to be as far as the FCA can go with its competition lens; the concepts of good faith, a fair price and value for money are embedded in the proposed Consumer Duty.
In saying that, the structure of the Consumer Duty itself is significantly different from the FCA’s initial proposal in 2018, and whichever formulation is chosen, would impose a very high standard on firms – going far beyond current requirements to act with due skill, care and diligence, have due regard to consumers’ interests and treat them fairly (or to act in consumers’ best interests in very limited circumstances) and to pay due regard to consumers’ information needs and communicate in a way that is fair, clear and not misleading. Taking that last requirement on information needs as an example – which is currently reflected in Principle 7 – the proposed Consumer Duty appears to require firms to go beyond that and actually facilitate consumers’ understanding of information given to them, actively anticipating where consumers may misunderstand and structuring information in a way which prevents any exploitation of known behavioural biases. Codifying the way that the FCA has been regulating in this way must mean that the standard expected from firms overall will be higher, and therefore enforcement easier for the FCA.
Financial services firms might be justified in pointing out that this high level of care is unparalleled in any other commercial relationship where advice is not being given and there is no fiduciary relationship. To be fair to firms, the FCA will need to demonstrate that it will take a sensible approach to firms’ decisions across their customer base, rather than focusing narrowly on outcomes in particular cases. The question of whether there will be a private right of action under 138D of FSMA attached to the Consumer Duty (which the FCA can apply or disapply) will also be important for firms, as will the way that the Financial Ombudsman Service interprets and enforces the new rules.