Financial regulator mulls 'duty of care' and new damages regime

The FCA is seeking views on whether there is a need for a new customer 'duty of care' or 'fiduciary duty', or whether the existing rules already provide sufficient protections for consumers. It is also seeking views on a new right for consumers to seek private damages against firms which have breached the new duty or the regulatory principles set out in the FCA Handbook, particularly the requirement to 'treat customers fairly'.

The consultation (37-page / 775KB PDF), which closes on 2 November, has been published alongside a new paper setting out the FCA's approach to consumers (45-page / 1.97MB PDF)including when and how it will take regulatory action against a firm. The two documents are "intended to ensure there are no gaps in protection for consumers in the financial sector", the regulator said.

The FCA first raised the possible introduction of a duty of care last year, as part of a draft of its'approach to consumers' paper. It received very different feedback, with some respondents suggesting that a new duty of care could reduce consumer harm by requiring firms to avoid conflicts of interest and support longer-term cultural change. Others said that the existing rules were sufficient, and effectively imposed the same requirements on firms as would a duty of care.

The new discussion paper forms the next stage of this work. It sets out a number of different potential models of 'new duty' and different ways that this could be introduced: whether as a new regulatory rule or statutory duty, through more flexible guidance or by way of an extension to the existing 'clients' best interests' rule to cover all regulated activities, as well as non-regulated activity.

The FCA is also seeking to understand whether the creation of a new duty would prevent harm occurring to consumers in the first place; and whether existing complaints mechanisms and redress schemes would be relied on more or less. It is also seeking views on whether breach of a new duty, should one be introduced, give rise to a right of action for damages in court.

There is currently no right to take court action for breaches of the FCA Principles. This is because "the risk of civil litigation driving the interpretation and application of the principles outweighs the benefit to consumers of being able to take action against firms, given that consumers can take action in respect of other, more specific rules", the FCA said in the paper.

Insurance law expert Elaine Quinn of Pinsent Masons, the law firm behind Out-Law.com, said that the paper would "generate an important dialogue between industry stakeholders that believe the current regulatory environment is already strict and sufficiently protective of consumers and those that believe there is considerable room for improvement".

"Some believe that a new duty of care will bring about the long-term cultural change that existing regulation has not been able to achieve," she said.

"One of the possibilities being looked at by the FCA is whether, going forward, breaches of its over-arching principles should give rise to a private right for damages in court. Its predecessor, the Financial Services Authority (FSA), specifically rejected this possibility in a 1998 consultation as not in line with the principles themselves, but the FCA is reopening the conversation now," she said.

Contentious financial regulatory expert Jonathan Cavill of Pinsent Masons said that the introduction of a private right for damages for breaches of the principles would "seem to extend the options available to private persons in tandem with the existing rights they have under section 138D FSMA to sue for breach of statutory duty or FOS".

"However, at this stage, it is unclear how much this would really change things for private persons in cases where they would ordinarily go to the Financial Ombudsman Service, which happily relies on breaches of the FCA Principles to uphold complaints," he said. "In circumstances where civil action is preferred, there may already be a number of other causes of action which can be relied on by the individual. There may also already be a duty of care, not withstanding the FCA's proposed changes".  

"The bigger impact would probably be the effect the change would have on cultures within firms – it would most probably lead to a more of open awareness within firms of the concept of a "duty of care" being owed to customers. . If the changes go ahead, firms will also need to consider the knock-on effects on their professional indemnity insurance; and on the internal costs of re-assessing their legal and regulatory risk from the change. Given the potential ramifications, firms would be advised to engage in this dialogue and express their views," he said.