The Financial Conduct Authority – the UK’s financial regulator – is moving towards finalising its proposed Consumer Duty. It is welcome that the FCA is holding firm against suggestions from some (happily not all) in the industry that it is asking too much or that the proposal would over-protect consumers and remove competition. Instead, the regulator is continuing to insist that the industry must be fair to its customers.
The updated proposals are set out in a Consultation Paper, CP21/36, on which response are requested by February 15th. This is a further reflection on the FCA’s plans now it has had a chance to consider the responses to its earlier consultation, CP21/13 (discussed in FCA unpacks fairness: the Consumer Duty). The FCA reminds us of various ways in which the financial services industry has mistreated consumers by dealing with them unfairly, including:
- Firms exploiting consumers’ behavioural biases
- Firms selling products not appropriate for those to whom they are sold
- Firms selling products that do not offer fair value
- Firms providing such poor customer support that consumers are in effect hindered from taking the right decisions or rectifying the wrong ones
- Firms exploiting customer loyalty or inertia
Sadly, in each of these cases the FCA identifies multiple real-life examples of industry misbehaviour and consumer harm.
It is welcome that the FCA has not been blown off-course and is proceeding largely as it proposed. It is particularly welcome that it is not pandering to calls from some in the financial services industry for more detailed rules, for example in relation to deciding what amounts to fair value for consumers. Instead, the FCA is insisting on the industry being willing to exercise professional judgement. Fundamentally, that professional judgement must be exercised to put the interests of consumers higher up in their considerations than many companies previously have.
In particular, arguments that the proposals might limit competition are, rightly, given short shrift. Competition is fostered by treating customers fairly, ensuring that they can understand and trust what is going on. That is a necessary condition for real competition to function. I would therefore firmly endorse the following response to the argument (in paragraph 2.20 of the latest consultation) that a Consumer Duty might be in some way anti-competitive:
“We think the Consumer Duty will create a fairer and more consumer-focused playing field on which firms can compete and innovate in pursuit of good consumer outcomes. Competition can more effectively act in the interests of consumers where firms design products and services to meet consumer needs, and consumers are put in a position to make informed decisions and act in their interests. We do not think there is good reason to think this will reduce the intensity of competition.”
However, it is with regard to the proposed Consumer Principle where some reconsideration may still be needed. The proposed Principle is left as originally drafted: ‘A firm must act to deliver good outcomes for retail clients’. That’s in spite of the suggestion – apparently made not just by this blog – that ‘fair outcomes’ might be a better aim than ‘good’ ones.
This is odd, because the FCA accepts that not all outcomes for consumers will be good (it mentions the repossession of a house or a situation of money being lost on an investment). Its reasoning (in paragraph 5.24) that this is OK because “Our focus is on firms acting reasonably to deliver good outcomes” would carry more weight if the draft principle actually included the word ‘reasonably’. This is one area where this blog might have sympathy with comments from the industry that the standard the FCA seems to be asserting seems excessively absolute. Once again, asking firms to deliver fair outcomes would seem a more appropriate standard, as well as employing this blog’s favourite word.
The fact that the Consumer Principle lies at the heart of the Consumer Duty – it is the lodestar to guide all industry judgements – means that getting its drafting right matters crucially. I would again commend ‘A firm must act to deliver fair outcomes for retail clients’ as a better option, one that insists on judgement being exercised, both by the industry and by retail customers (who crucially must of course have the necessary transparency and understanding to enable them to exercise that judgement).
See also: FCA unpacks fairness: the Consumer Duty
A new Consumer Duty: Feedback to CP21/13 and further consultation (CP21/36), Financial Conduct Authority, December 2021
A new Consumer Duty (CP21/13), Financial Conduct Authority, May 2021