Associate Alessio Ianiello discusses the introduction of the Financial Conduct Authority’s new Consumer Duty and the difficulties of enforcing it, in Law360.
Alessio’s article was published in Law360 on 30 August 2023, and can be found here.
The new consumer duty regime, recently introduced by the U.K. Financial Conduct Authority and in force since July 31, may be considered “the biggest regulatory shake-up of UK retail financial services for two decades,” according to The Guardian newspaper.
The purpose of the new duty is to improve consumer protection for financial services firms by setting higher standards that are more transparent.
The New Regime
Under the new regime, firms in the retail financial services sector — notably banks, building societies, insurers and investment companies — are required to act in good faith; to avoid causing foreseeable harm; and to enable and support customers to pursue their financial objectives.
The overriding objective is to focus on the delivery of good outcomes for customers and the prevention of foreseeable harm.
The FCA has warned companies that if there is any evidence of risk of harm, this could lead them “to take robust action such as interventions or investigations, along with possible disciplinary sanctions.”
Meanwhile, the Treasury Select Committee has said that it will scrutinize very closely how banks comply.
FCA Plan of Action
Ideally, all of this should have the intended effect of ensuring that retail financial services clients receive clear advice, and appropriate products that fully ensure that their individual needs, characteristics and objectives have been considered.
The FCA’s 14-point plan of action, delivered in tandem with the consumer duty, also seeks to ensure that the most appropriate interest rates are being offered on customer savings accounts — a matter of considerable tension at present between depositors, banks and building societies.
The primary driver behind the new regime is to prevent customers from being exploited or cheated, which has regrettably happened too often in the past, and to enhance the level of service they receive.
This is important in restoring customer confidence, in light of recent findings by the FCA, which found that just 41% of U.K. adults have confidence in the financial services industry.
Meeting Customers’ Needs and Offering Fair Value
Accordingly, firms are now required to only provide customers with products and services that specifically meet their needs and offer fair value. They will also need to provide helpful and responsive customer service, in order to make it as easy to use a product or service, sort out a problem, or switch or cancel, as it was to buy in the first place.
To ensure that this happens stronger rules have been introduced under the consumer duty regime to ensure that customers are provided with good value for money and are offered with fair pricing. It is predicted that these new rules will lead to some financial products being removed from the market if they do not meet the new higher standards.
However, as is often the case with the introduction of such well-intentioned regulations, the most obvious problem relates to the scope and scale of policing that is necessary to enforce them.
Given the myriad products that are available across the full spectrum of the U.K. financial services sector, this is going to be a challenging task. As an example, there are currently more than 4,000 mortgage products available on the U.K. market, with this number fluctuating weekly, and sometimes daily.
It is no secret that the FCA is currently overstretched and, until it deals with its own resourcing issues, it is difficult to see how they will be able to monitor firms and truly enforce the consumer duty with the vigilance that is necessary. Much higher levels of proactive reviews of firms will be required by the FCA, particular to be genuinely effective in tackling problem areas, such as misselling.
Regrettably, it would be fair to say that the FCA has not always been at the top of its game in protecting consumers, particularly those who are vulnerable. A notable example of this in recent years is the British Steel scandal. Here thousands of pension scheme members suffered considerable financial losses as a result of being advised to transfer their secured pension benefits by predatory and commission-hungry advisers.
Although the FCA had identified serious problems within the advice market as far back as 2015, its lack of sufficient market data meant that the true scale of the transfers was not apparent until mid-2018. The delays in the FCA taking action have ultimately resulted in significantly greater losses for individuals.
The FCA Principles
The 11 principles of business — including integrity, skill, care and diligence, management and control, financial prudence, and market conduct — have been outlined in the FCA’s handbook since the regulator was first created a decade ago.
The new consumer principle that has been introduced under the consumer duty, known as principle 12, requires firms “to act in good faith; to avoid causing foreseeable harm; and to enable and support retail customers to pursue their financial objectives.”
Although the duty rightly seeks to ensure that a firm must act to deliver good outcomes for retail clients, what constitutes a good outcome is, by its nature, subjective. What might be deemed a good outcome for the retail client may not necessarily be deemed as such by the firm, and vice versa.
It will be interesting to see how the FCA, the Financial Ombudsman Service and the Financial Services Compensation Scheme will consider enforcement of the consumer duty in due course.
Clearly, a tailored focus will have to be applied to the specific needs of individual clients. Firms will not be able to apply the same rationale, or a one-size-fits-all approach to every low-risk client, given that each will have different circumstances, needs and objectives.
Equally, there are concerns that applying the new consumer duty will inevitably result in additional costs being incurred by regulated firms.
It is hoped that many larger firms will follow a similar approach to that of St James’s Place PLC, an investment management company, which recently announced a new product charge cap, ahead of the introduction of the consumer duty.
However, given that this action resulted in a dramatic drop in its share prices by £859 million ($1.08 billion), it is difficult to see how many firms will follow suit.
While larger firms will be able to weather the increased associated costs, it is probable that smaller firms will struggle to do so and may be priced out of the market.
Ultimately, it is likely that the customer is the one who will bear the true costs of these smaller firms leaving the market, since such a move will reduce their overall choice of available firms.