UK financial firms to be held to higher standard of care under proposed consumer duty

The duty the FCA is proposing would be introduced as a new Consumer Principle, underpinned by ‘cross-cutting’ rules and four key outcomes setting expectations for firm conduct.

The cross-cutting rules would require firms to take all reasonable steps to avoid foreseeable harm to customers and to enable customers to pursue their financial objectives. Firms must also act in good faith in respect of their customers.

Meanwhile the four outcomes address the four key elements of the relationship between firms and consumers: communications, products and services, customer service and price and value.

Firms will be expected to monitor, test and adapt their policies, practices and processes to demonstrate that outcomes for customers are in line with FCA expectations.

The FCA said its aim was "to set a higher standard of conduct for firms in relation to retail market activities", strengthening the existing requirement in its Principles for Business that a firm “must have due regard to the interests of its customers and treat them fairly."

The FCA is currently proposing two ways in which the principle could be expressed and is seeking comment on these versions from the market. Option 1 is that a firm must act to deliver good outcomes for retail clients. Option 2 is that a firm must act in the best interests of retail clients. It is not consulting currently on the drafting of the rules.

Financial regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law, said “ Firms need to assess the ramifications for their products and business of these two sets of wording for the principle to decide how to respond to the regulator. Firms should consider how each principle could apply to their products and business and whether any tensions might arise on what is "best" for the customer.  What is clear is that the FCA is moving the dial here for firms.”

The Consumer Duty would be an objective standard the FCA said. It would require firms to consider the reasonable expectations of their customers  as a whole rather than reaching the outcome that is "the absolute best" outcome for every individual customer.

The FCA said the duty would drive a shift in culture and behaviour for firms so they "consistently focus" on outcomes for consumers, and it would help consumers to make well informed choices about financial products.

The duty will apply to firms selling products and services to retail clients as well as firms involved in the manufacture or supply of products and services to retail clients, even if they do not have a direct relationship with the end customer.

The publication of the proposed new duty continues a recent focus by the FCA on the fair treatment of vulnerable consumers. In March 2021, it published finalised guidance on the fair treatment of vulnerable customers, with the guidance linked to its principles. This built on work carried out over the previous years on the drivers of vulnerability and its impact and on firms' understanding and catering for the needs of vulnerable consumers.

The FCA said there was evidence of continued practices causing consumer harm, including the provision of misleading or confusing information; products that are inappropriate for the consumers they are targeting or sold to; products that do not represent fair value; and poor customer service. These practices made it harder for customers to make timely decisions about financial products, may result in them taking out overly risky or inappropriate products and meant they were at risk of incurring both monetary and non-monetary costs.

Failure to follow the Consumer Duty could lead to regulatory action including enforcement investigations. The FCA is also asking for views on a private right of action in respect of the consumer duty, although it has not made specific proposals yet and views such a right as part of the wider processes for consumer redress and holding firms to account.

Regulatory expert Jonathan Cavill of Pinsent Masons, the law firm behind Out-Law, said: “The consultation does not focus on the private right of action for Principle breaches. While the FCA has asked for stakeholder input on a private right of action, the regulator has for some time said that it would prefer making changes to its principles and how the existing regulatory framework is applied – which we can see in practice from this consultation.”

“It is debatable how much of a benefit such a right would practically provide retail customers. The Consultation Paper refers to the positives and negatives of such a right of action, and firms will no doubt be keen to express their views to the regulator why such an action is not necessarily the right thing for the industry, and that the lack of such a right is unlikely to negatively impact customers in a meaningful way as they will often be best served by taking their grievances to the Financial Ombudsman Service with its fair and reasonable jurisdiction, rather than progressing costly and time consuming court action,” he said.

The consultation is open for comment until 31 July, with a further consultation on proposed rule changes before the end of the year and the introduction of new rules by the end of July 2022