A Regulatory Scare for Consumer Duty of Care?
In July 2018 The Financial Conduct Authority (FCA) published a discussion paper where they made it abundantly clear; they will seriously consider the implementation of a new duty of care for consumers, to ensure that they are
treated fairly by financial services firms, as the current protections may not be sufficient or applied effectively to prevent harm to consumers.
This new duty would be to act in consumers best interests. At face value, this is a fairly anodyne duty, and would simply ensure that a firm puts the consumers interests above their own.
This duty is not unusual; we, as solicitors, have a duty to act in the best interests of each client, to ensure that we put the interests of our clients before our own interests.
Surely, the financial services sector must do likewise?
In April 2019, the FCA published their feedback statement.
The FCA have now significantly cooled their desire to implement a new duty of care on financial services firms to act in a consumers best interests, because financial services firms by and large do not want it; feedback from financial services firms included the criticism that the new duty would be a duplication of existing obligations, creating legal complexity and confusion; the new duty was also criticised as it could lead to the cost, delay and stress of litigation for consumers.
The current regulatory framework does contain high-level principles that a financial services firm must adhere to, such as conducting business with integrity, and with due skill, care and diligence.
However, there is no rule that says a financial services firm must act in consumers best interests. It can be inferred from the rules currently in place, but it is not an outright, express and actionable duty.
This is an interesting development, but it is not unsurprising; the financial services industry has been rocked by miss-selling scandals in recent years where financial institutions have clearly placed their own commercial interests above the interests of their clients.
I would argue, however, that where a clear adviser/client relationship exists (akin to that of a solicitor/client), the rules are comprehensive and prohibit the recommendation of any product that is unsuitable. It is unlikely that an additional obligation to act in consumers best interests would add anything.
In non-advised sales, the best interests obligation would arguably cause confusion for both financial services firms and consumers.
For example, an insurance company might sell a consumer an insurance policy, and the regulatory framework already means the insurance company needs to act honestly, with integrity and in good faith; if the company is also obliged to act in the consumers best interest, what does this practically add? Would a consumer be able to argue that an insurance company should be obliged to refer that client to a rival, if the terms of that rival’s policies are better? This is surely in the client’s best interests but does not fit well in a marketplace where consumers are free to contract and have the ability to conduct their own market research.
On the other hand, in circumstances where the financial institution is in a position of power and seeking to pressure clients into purchasing complicated financial instruments that they do not understand (as seen in the interest rate swap scandal), one could see how a best interests rule would have redressed the balance.
This is clearly an area fraught with difficulty, and the FCA are essentially caught between a rock and a hard place; the key question is, how can the FCA ensure that consumers are appropriately protected, but the financial services sector is not stifled with a plethora of duties that would inhibit their ability to properly function?
A simple act in consumers best interests is probably not the answer, but that the proposed duty was discussed, and has now prompted a wider debate, is certainly a step in the right direction.