New City Agenda response to the FCA’s Duty of Care consultation

A New Consumer Duty – Response from New City Agenda

Key Recommendations

  • The new Consumer Duty should require firms to act in the best interests of retail clients.
  • The cross-cutting rules must require firms to prevent harm and help customers to pursue their financial objectives.
  • An additional outcome should be introduced that where retail clients, including SMEs, have suffered harm firms should be required to provide redress promptly and efficiently.
  • It is critical that the FCA introduces a Private Right of Action for the Consumer Duty, the cross-cutting rules and the five outcomes. The PROA should also be introduced for the existing Principles for Business.
  • The Consumer Duty should have a wide scope and apply to unregulated activities provided by regulated firms.
  • The FCA should not reintroduce the concept of the “reasonable expectations” of consumers when setting the standards firms need to meet to comply with the Consumer Duty. This concept is vague and impossible to quantify, helped cause the Equitable Life scandal and would damage the prospects of the Consumer Duty leading to the necessary improvements.
  • The FCA must ensure that alongside the new Consumer Duty it puts in place much stronger incentives for firms and senior managers to comply.
  • Accountability for complying with the Consumer Duty should be set at senior manager level, triggering the provisions of the Senior Managers and Certification Regime (SMCR).
  • Senior managers must be subject to enforcement action for breaches of the Consumer Duty.

To maximise the chances of these proposals advancing the consumer protection and competition objectives, the FCA should:

  • Understand why previous attempts to move to outcomes-focussed regulation were not successful and use the lessons learned to promote the success of the new Consumer Duty
  • Measure and assess the levels of consumer harm across different sectors
  • Set and measure the outcomes the FCA expects to be achieved for consumers
  • Understand how behavioural biases within firms and regulators could influence the implementation and responses to the new Consumer Duty.
  • Use the FCA’s full suite of powers to strengthen the incentives of firms and senior managers to comply with the new Consumer Duty and reduce the level of harm suffered by consumers
  • Conduct proper independent evaluation of the introduction of the new Consumer Duty and whether it has led to a reduction in harm.

A full copy of the New City Agenda response can be found through this link:

http://newcityagenda.co.uk/wp-content/uploads/2021/09/New-City-Agenda_New-Consumer-Duty.pdf

Executive Summary

The FCA should introduce a new Consumer Duty which should make it clear that firms should act in the best interests of their customers. This would encourage firms to identify and prevent harm before it occurs which is in line with the stated aim of the FCA’s Mission. This would help support a change of culture within the industry and provider a better balance between the responsibilities of consumers and firms.

We believe that it is critical that we give consumers a Private Right of Action (PROA) for the Consumer Duty, the cross-cutting rules and the five outcomes as well as the existing Principles. The key advantage of giving consumers a Private Right of Action for a breach of the Consumer Duty and the FCA principles is that it would enable the FCA to utilise its powers under Section 404 of FSMA to require firms to pay redress to consumers where there has been the breach of the New Duty or a Principle. It is vital that the FCA introduces a PROA for the Consumer Duty as a failure to do would weaken the incentives on firms to prevent harm or comply with the Duty. If a PROA is not introduced then what the FCA is proposing would not amount to a legal duty of care.

The Consumer Duty must have a wide scope and apply to a firm’s dealings with individual consumers as well as SMEs. The Consumer Duty should apply where a firm’s actions (or inaction) could cause harm to consumers. It must apply even where the firm does not have a direct relationship with the customer involved such as where a firm is the recipient bank for an Authorised Push Payment scam. In this consultation, the FCA haven’t asked the question as to whether the Consumer Duty should apply to the unregulated activities of regulated firms. We recommend that the requirement for firms to take all reasonable steps to prevent foreseeable harm to customers and the requirement to act in good faith should apply to the unregulated activities of regulated firms. This would particularly benefit SMEs where some of the activities such as lending are currently outside the regulatory perimeter.

The FCA/FSA has promised a shift to “outcomes-focussed” regulation many times in the past and this new attempt through the Consumer Duty would benefit from an honest assessment of why previous attempts have not led to the desired reduction in harm suffered by consumers.

The Consumer Duty must ensure that firms are proactive in preventing harm to consumers and deliver additional protection to vulnerable customers. Where harm has been caused it should help consumers get redress. It must stop firms from hitting their customers with excessive charges or taking advantage of consumer inertia. It should halt the trend towards tick-box regulation by setting an over-riding test for firms to act in the best interests of their customers.

The FCA must ensure that firms are acting in the best interests of their customers at every phase of the customer journey – from how they design and sell products to how they deal with complaints and requests to switch.

For the wording of the Consumer Duty, we believe that requiring firms to act in the best interests of retail clients will be more proactive and lead to better results. For the cross-cutting rules we think changing the wording by requiring firms to “prevent” foreseeable harm and “help” customers pursue their financial objectives would help ensure that firms are more proactive in achieving these goals. To help ensure that where harm has been caused, consumers receive proper redress, the FCA should add an extra outcome for redress to be provided “promptly and efficiently”.

Our recommendations for the wording of the Consumer Duty, Cross-cutting rules and Five Outcomes are:

Consumer Duty

  • A firm must act in the best interests of retail clients

Cross-cutting rules

  • Take all reasonable steps to prevent foreseeable harm to customers.
  • Take all reasonable steps to help customers to pursue their financial objectives.
  • Act in good faith.

Five Outcomes

  • Communications are understandable by consumers and equip them to make effective, timely and properly informed decisions about financial products and services.
  • Products and Services are specifically designed to meet the needs of consumers, and sold to those whose needs they meet.
  • Customer Service meets the needs of consumers, enabling them to realise the benefits of products and services and act in their interests without undue hindrance.
  • The price of products and services represents fair value for consumers.
  • When retail clients, including SMEs, have suffered harm they receive redress promptly and efficiently.

The FCA should not reintroduce the concept of the “reasonable expectations” of consumers when setting the standards firms need to meet to comply with the Consumer Duty. We believe that this would be extremely damaging to the prospects of the Consumer Duty leading to a reduction in harm. This concept of “reasonable expectations” is vague, lacking in clarity and was key in causing the Equitable Life scandal. It will be impossible to measure what the “reasonable expectations” of consumers were in any particular case and raises other awkward questions like whether standards can be low if consumers have low expectations. When the Government proposed reintroducing the concept of “reasonable expectations” in the 2012 Financial Services Bill, the Joint Committee described it as “problematic” and concluded that its reintroduction would be “unwise”. The Committee said that the concept of “reasonable expectations” would make it difficult for the regulator to be clear on the meaning of its duties, and near to impossible for consumers and Parliament to hold the [regulator] to account for its actions.

The consultation paper seems to assume a simple relationship between the introduction of a New Consumer Duty and firms automatically taking it into account and having a “stronger focus on customers’ interests and outcomes”. Without stronger action, the FCA risks repeating the mistakes of the Treating Customers Fairly initiative where it delegated to senior managers the task of defining what TCF meant but did not put in place strong enough incentives for firms to do so in a pro-consumer way.

The FCA must ensure that alongside the new Consumer Duty it puts in place much stronger incentives for firms and senior managers to comply. Accountability for complying with the Consumer Duty should be set at senior manager level, triggering the provisions of the Senior Managers and Certification Regime (SMCR). This would lead to a defined responsibility under the SMCR and it is very important that executives should be subject to enforcement action in the event of any breaches and harm suffered by consumers. The FCA must ensure that it has a clearer understanding of what measures would act as an effective deterrent across different sizes and types of firms.

To maximise the chances of these proposals advancing the consumer protection and competition objectives, the FCA should:

  • Understand why previous attempts to move to outcomes-focussed regulation were not successful and use the lessons learned to promote the success of the new Consumer Duty
  • Measure and assess the levels of consumer harm across different sectors
  • Set and measure the outcomes the FCA expects to be achieved for consumers
  • Understand how behavioural biases within firms and regulators could influence the implementation and responses to the new Consumer Duty.
  • Use the FCA’s full suite of powers to strengthen the incentives of firms and senior managers to comply with the new Consumer Duty and reduce the level of harm suffered by consumers
  • Conduct proper independent evaluation of the introduction of the new Consumer Duty and whether it has led to a reduction in harm.