Financial Conduct Authority (FCA) consultation on a new Consumer Duty

The Financial Conduct Authority (FCA) is proposing to introduce a new consumer duty that would set clearer and higher expectations for financial firms’ standards of care towards consumers. Financial Inclusion Centre (FIC) recently submitted its views to the consultation paper CP21/13: A new Consumer Duty in which the FCA set out what the new duty could mean for firms and, critically, the difference it could make for consumers.

FIC’s full submission can be found here: FIC submission FCA CP21-13 A New Consumer Duty FINAL

Summary of FIC submission

We very much support the principle of, and the intent behind, a new Consumer Duty. In theory, a powerful Consumer Duty could help enhance consumer protection and real competition, and could advance the FCA’s consumer protection and competition objectives.

A properly implemented Consumer Duty would also help improve confidence and trust in the financial services industry. It could also promote real competition by helping those firms who want to treat customers fairly, and allow the FCA to penalise those firms which do not.

We do not foresee any negative unintended consequences if the Consumer Duty is implemented properly. No doubt, some in the industry will claim that a Consumer Duty would stifle innovation, creativity, choice, and willingness of firms to market and sell to consumers with consequences for inclusion. This would be disingenuous.

So much innovation in financial services is not actually socially useful and is designed for the benefit of firms’ business models, to meet sales targets, and to exploit complexity. A robust Consumer Duty may well reduce the proliferation of products on the market that just add to search and distribution costs, and destroy value. It may reduce the degree of choice in the market but improve the quality of choice by forcing firms to become genuinely creative and develop socially useful products that represent fair value. That would be a good outcome.

Competition cannot be relied on to drive out bad providers and products in financial services. A properly structured and enforced Consumer Duty could introduce real competition by allowing more efficient, consumer focused firms the space to thrive thereby supporting inclusion.

Moreover, a new Consumer Duty (if properly implemented) represents to us a set of standards that society has the right to expect of well-run businesses. If some firms cannot trust themselves to engage with consumers on those terms and withdraw from the market, then that would be a good outcome.

The new Consumer Duty should ensure that firms act in the best interests of consumers. We have no particular views on how this requirement to act in their interests should be labelled. What matters are the steps the FCA requires firms to take to ensure they are acting in the best interests of consumers. These requirements should ensure firms and others treat consumers fairly and act in their interests throughout the whole of the firm/ customer relationship not just at the interaction point where firms are competing for custom.

We are concerned about calls from some quarters that the FCA should introduce a duty of care. This could undermine the intention of the Consumer Duty if the legal definition of duty of care becomes the standard for assessing whether firms are acting in consumers’ best interests. The generally accepted legal meaning of a duty of care is an obligation to exercise reasonable care and skill when providing a product or service. Obliging firms to exercise reasonable care and skill in our view would not have the same direct beneficial effect on firm behaviours as the defensive/ precautionary and positive measures we advocate to make a new Consumer Duty work.

To make financial markets work for consumers and wider society, a Consumer Duty should be supported by robust rules and meaningful outcomes. The FCA should have greater ambitions for the Consumer Duty. The FCA’s definition of what an effective market looks like appears to be quite limited. A recurring theme throughout our submission is that the FCA has to make markets work. The Consumer Duty should not be seen as another mechanism designed to create the conditions for competition to drive up standards. We are concerned about the continued reluctance of the FCA to use proven, necessary interventions such as price caps.

Critically, if a Consumer Duty is to have the desired effect, it should enable: more effective, responsive, and agile regulation; more effective supervision of markets and firms; and more effective enforcement and use of sanctions to deter harmful corporate practices. It should enhance the ability of consumers to obtain redress.

Unfortunately, the emphasis in CP21/13 on consumer responsibility, tackling information asymmetries, and intention to use tests of reasonableness is unlikely to make markets work significantly better than is the case now.

We are concerned about the phrasing that accompanies the FCA’s proposals for a Consumer Duty. It could set expectations with regards to firm behaviour that could undermine the intended effect of the overarching duty. Phrases such as  ‘reasonable expectations’ and ‘causing foreseeable harm’ are likely to be open to abuse by firms and intermediaries. These phrases could be open to interpretation and introduce a degree of uncertainty around the intent. This could make it difficult for the FCA to supervise markets, enforce against breaches and impose sanctions, and for consumers to obtain redress.

It would be more effective if the FCA adopted a much tougher approach by requiring firms to adopt the precautionary principle when determining whether products and practices are likely to cause harm. Firms and intermediaries, with all the huge financial and technology/ data resources at their disposal, are well placed to determine the likelihood of harm resulting.

It is unclear how the new duty as proposed by the FCA would deal with emerging risks at the intersection between FCA regulated financial services and non-regulated digital and data services and ‘Big Tech’ platforms. Regulated financial firms increasingly use digital and data services to target consumers and sell products. The FCA should emphasise that regulated firms must apply the Consumer Duty when using non-regulated digital and data services. Similarly, regulated firms should apply the Consumer Duty when associating with products and services outside the regulatory perimeter.

It is not clear how the FCA’s proposals on price and value would work. The FCA talks about ‘products and services that do not represent fair value, where the benefits consumers receive are not reasonable relative to the price they pay’. This is unlikely to result in significant improvements in prices and value for consumers. In many key financial services sectors, value is poor across the board. Product margins may be low because of high distribution costs so the end price for consumers will be high. But, with the FCA’s approach, a firm selling a high price, poor value product could still be considered to be offering a fair price and value because the rest of the market is doing so.

In other sectors, there may be a significant amount of choice available, so it looks as if there is competition in the market. But, industry margins can be high and significant value extracted from consumers. The result is that the market generally offers poor value. Actively managed investment funds are a case in point. It is genuinely difficult to see how actively managed funds (which tend to have higher prices) represent fair value if passive funds with similar investment objectives are available. In this case, would the FCA  expect asset management firms to reduce prices or not sell products, or advisers and platforms to not recommend products?

Consumers, particularly vulnerable consumers, cannot afford another experiment with competition as the primary mechanism for making markets work. So, we would urge the FCA to be more prescriptive on what concepts such as fair price and value mean and make it clear that it is ready to use price caps and other product interventions as a first resort not a last resort.