When the FCA’s Consumer Duty finally takes effect next year, it will be the culmination of a longer journey than many might realise.
Because while the regulator first sought views on ‘a duty of care and potential alternative approaches’ in 2018, calls for some form of duty of care in financial services had been growing for some time.
Among the most prominent such voices was the Financial Services Consumer Panel (FSCP), an independent statutory body set up to represent the interests of consumers and advise and challenge the FCA on policy.
The Panel argued in 2011 that a stronger duty of care to consumers would help the industry win back trust following the financial crisis, pointing to the duty of care introduced in the US under the Dodd-Frank act of 2010.
In 2015, the FSCP proposed that “the Financial Services & Markets Act (FSMA) should be amended to require the FCA to make rules specifying what constitutes a reasonable duty of care that financial services providers should exercise towards their customers”.
While falling short of being a full fiduciary duty, such a duty of care would require providers to avoid conflicts of interest and act with the best interests of the customer in mind.
When the Panel followed up in 2017, it argued the Treating Customers Fairly (TCF) regime wasn’t fit for purpose, doing little to protect consumers from conflicts of interest or deter firms from mis-selling.
It felt that without a requirement to take consumers’ best interests into account at every stage of engagement, TCF allowed firms to take a ‘let’s see if we can get away with it’ approach.
The Panel supported its case by supplying the FCA with a lengthy list of instances where firms across financial services had clearly breached TCF principles without breaking any FCA rules.
By requiring firms to take their customers’ best interests into account at every stage of their engagement, a duty of care would deliver what TCF had intended but failed to do.
The Panel also engaged with the Macmillan Cancer Support charity, which had launched its own campaign for banks to have a duty of care to customers.
At the time Macmillan said if banks and building societies had a legal duty of care towards their customers, it would give people with cancer confidence to disclose their diagnosis, knowing they could trust their bank to act in their best interests.
When the FCA’s initial discussion paper followed several months later, there was a sense it was reluctant to go any further.
Yet in a subsequent feedback statement the regulator said: “Most respondents consider that levels of harm to consumers are high and there needs to be change to better protect them.”
The regulator may have been persuaded by arguments that a ‘new duty’ would bring about much-needed culture change by forcing firms to ask, ‘is this right?’ rather than, ‘is this within the rules?’
The FCA set out more specific options in a consultation in May 2021, proposing a new ‘Consumer Duty’ that would set higher expectations for the standard of care that firms provide to consumers.
This pretty much brings us up to date, with this consultation forming the basis of the final rules published in July this year, including the three cross-cutting rules and four outcomes that provide the structure of the Consumer Duty.
Hopes versus reality
It’s widely accepted the new rules have the potential to drive a positive culture shift in financial services.
But the final guidance falls short of some of the original expectations of the FSCP and several consumer groups.
The Panel has also warned the Consumer Duty would be undermined by the FCA’s decision to change the Consumer Principle from firms having to ‘act in the best interests of retail clients’ to having to ‘act to deliver good outcomes for retail customers’.
Calls for the Consumer Principle to be enshrined in legislation also fell on deaf ears. Similarly, the Panel believes that the requirements under the four outcomes don’t go far enough to drive up standards beyond those already required under TCF.
So while the FCA’s work on setting out and implementing some form of duty of care has clearly exceeded the expectations of four or five years ago, reservations remain. The proof will be in the implementation.
Jeff Salway is a freelance journalist and former member of the Financial Services Consumer Panel