The initiative formerly known as the New Consumer Duty, and now generally referred to as the Consumer Duty, was launched by the FCA with something of a fanfare in July.
You might be putting the finishing touches on your firm’s implementation plan, or you might be about to fire up the coffee machine and roll up your sleeves. But wherever you are on the readiness spectrum, it’s useful to consider the context of how we got here and why.
The significant failures of consumer care in financial services in recent years are no secret.
Some of these were plainly criminal activities such as fraud and theft. The regulatory and criminal justice system has explicit mechanisms to deal with these sorts of activities.
The question the Consumer Duty is attempting to answer is what to do about more complex situations which might be described as legal, but not right. What does the regulator do when firms aren’t technically breaking any rules, but a reasonable person looking at the situation thinks ‘this smells bad’?
One way to go about it is changing individual rules – which is time consuming, difficult and can involve primary legislation.
With the Parliamentary timetable full to bursting for the foreseeable future that isn’t an efficient way of driving change. So the FCA has for some time been aiming for what it sees as more effective ‘outcomes-based regulation’, on the grounds that generally consumers don’t care if a set of rules has been followed, they care about the outcomes they receive.
Why this, and why now?
The process of getting to the Consumer Duty has been a long and complex one.
The existing Treating Customers Fairly rules were widely criticised as being insufficiently robust to prevent conflicts of interest, not least by consumer bodies ranging from the Macmillan cancer charity to the FCA’s own Financial Services Consumer Panel.
These organisations have argued vigorously for a stronger duty of care, or even a fiduciary duty, to increase consumer confidence in financial services.
The FCA discussed, consulted, and consulted again, in an attempt to fine tune a wording that would achieve its objectives. Those familiar with the workings of the regulatory oil tanker will realise how long it can take to turn it around.
Unusually in this case there was enough political wind behind the initiative to result in an incentive.
This came in the form of a provision in the Financial Services Act 2021 for the regulator to publish general rules by 1 August 2022 about the level of care that must be provided to consumers. Which it managed to do with four days to spare, presumably resulting in much relief in the FCA’s Olympic Park HQ and a celebratory trip to Pret for flat whites all round.
A question of wording
The wording of the overarching principle has evolved along the way.
The final wording, that a firm ‘must act to deliver good outcomes for retail clients’, was one of two options, the other being that a firm ‘must act in the best interests of retail clients’.
There was significant pushback from the industry and others on the concept of ‘best interests’, which was seen by many as likely to be unworkable. For example, what happens if you have customers with different interests, such as a building society’s savers and borrowers?
The other issue was that ‘best interests’ would prove so expensive to implement that it would have the unintended consequences of product and service withdrawal, often focusing on the very products and services most used by vulnerable customers.
Good outcomes it is, then. And there’s one other option the FCA has kept on the table if the Consumer Duty isn’t seen to be achieving its objective of setting higher standards and putting consumers’ needs first. This is the concept of a private right of action, which wasn’t included in the final rules.
At the moment, consumers can only take legal action against a firm for a breach of some of the FCA’s very specific ‘best interests’ rules. Some consumer organisations such as Which? have a right to bring a super-complaint on behalf of consumers but it’s seldom used.
A private right of action would allow consumers to take firms to court for a breach of the new principle.
There are serious concerns in the industry that this would lead to a quagmire of litigation and a free-for-all for claims management companies.
The regulator has so far agreed with the industry that the risk of civil litigation driving how the Consumer Duty rules are interpreted and applied outweighs the benefit of consumers being able to take action against firms.
It is, however, an option the FCA is keeping open if the current rules aren’t seen to be achieving the desired outcomes. Which is an incentive to everyone to get it right the first time.
Alison Gay is senior public affairs consultant at the lang cat