Proposed consumer duty: CP21/36
At present, firms are bound by rules and principles to treat customers fairly. The post-Brexit Financial Services Act 2021 introduced a requirement for the Financial Conduct Authority (FCA) to consult on whether it should make general rules providing that authorised persons owe a duty of care to consumers. In the FCA’s proposals in CP21/13, the FCA received a mixed response in relation to whether the new proposals for a Consumer Duty amounted to a duty of care.
The new Consumer Duty is not intended to be a legally enforceable instrument, or amount to a duty of care for example when combined with a private right of action under the 2021 Act. Further, the new Consumer Duty does not intend to create and is not capable of creating a new fiduciary duty. Instead, the new proposals intend to set a higher standard of care for retail consumers and a new set of measures designed to protect consumers against harms suffered through investments, products and services provided within the financial markets.
As well as an overarching new Consumer Principle for firms to act to deliver good outcomes for retail customers, firms will also be expected to adhere to new cross-cutting rules in favour of their retail customers to act in good faith, avoid foreseeable harm and enable and support retail customers to pursue their financial objectives in relation to products and services, price and value, and achieving consumer understanding and support.
This new structure will apply to firms conducting regulated activities in the UK, including electronic money institutions, payment institutions and registered account information service providers.
Replacing Principle 6 with the new “Consumer Duty”
The existing Principle 6 already requires that “A firm must pay due regard to the interests of its customers and treat them fairly”, which means that the new Consumer Principle requiring firms to “act to deliver good outcomes for retail clients” is in some ways, an overlap but also a higher duty.
The new Consumer Duty will replace the existing Principle 6 (and Principle 7) in so far as retail clients are concerned. Principles 6 and 7 will continue to apply to conduct that falls outside of the scope of the new Consumer Duty such as SMEs and wholesale business.
What this means for the Consumer
The FCA reported that in their 2020 Financial Lives Survey, only 35% of consumers agreed that firms had honest and transparent dealings with them. The principle aim of the new structure is to create a level playing field for consumers, who can buy products and services in the knowledge that consumers’ best interests are the central focus for the firm.
Under the new structure, retail consumers should confidently be able to make informed investment decisions and buy products and services at fair value and fit for purpose. Consumers should also be made aware of their right to compensation and how to seek it.
It is important for retail consumers to understand that the new structure does not seek to hold firms accountable for unforeseeable harm, or risks that an individual customer reasonably understood and accepted. The Consumer Duty will not create an unrestricted duty on firms to protect consumers from all potential harms, nor does it guarantee that the decision to buy a product or service will ultimately be free from harm.
What this means for the retail financial services industry
The aim of this new structure is to see individual firms ask themselves what outcomes consumers should be able to expect from their products and services and placing the responsibility of delivering good outcomes with a firm’s board and management (to be reflected in the senior managers and certification scheme). Overall, the new structure sets out an objective standard underpinned by the concept of reasonableness, that focuses on customer satisfaction being the driving force of competition between firms to attract retail consumers to their products and services.
The new Consumer Duty will not apply retrospectively to a firm’s past actions. However, the Consumer Duty will apply to existing products or services that are still being sold. Therefore, firms will need to consider the application of the new Consumer Duty overall, for example the renewal of certain products and services for existing customers would also fall within the scope of the new Consumer Duty requiring a review and update of terms and conditions on a “forward looking basis”.
It is perhaps not a surprise that when consulted in relation to the wording of the new Consumer Principle, several firms and trade bodies were opposed to “A firm must act in the best interests of retail clients” out of the fear that this may be interpreted as a fiduciary duty and instead preferred the alternative wording “a firm must act to deliver good outcomes for retail clients”, which is the wording thus adopted by the FCA in its new structure. It is thought that the new wording will help firms focus on putting consumers in a position where they can “act and make decisions in their own interests”.
Whilst most respondents to the new proposals saw outcome based regulation as a “significant undertaking”, the idea is that the good practice encouraged by the new Consumer Duty will increase consumer trust in firms, and will lead to an increase in firms competing and innovating with a central focus on consumer interests.
The FCA aims to implement the new Consumer Duty by April 2023, allowing firms time to adjust to the new requirements. The FCA will also work closely with the Financial Ombudsman to ensure a clear and coherent interpretation of the new Consumer Duty when resolving complaints under the new structure.
Commercial Litigation Associate
Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to clients of BLM. Specialist legal advice should always be sought in any particular case.