Financial Conduct Authority on the Duty of Care

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On 23 April, the Financial Conduct Authority (FCA) has published a Feedback Statement on Duty of Care (FS19/2), which summarises the feedback the FCA received to a previous Discussion Paper. The wider context of this debate is that stakeholders in the financial services sector have previously informed the FCA that its regulatory framework, including its Principles for Businesses (the Principles), may not be sufficient or applied effectively enough to prevent harm to consumers. To remedy this, it was suggested the FCA introduced a duty of care to reduce harm, and to ensure that firms avoid conflicts of interest, as well as supporting firms’ longer-term cultural changes.

The FCA reported to have received many well-considered responses from the full range of stakeholders, including consumer groups, individual consumers, firms, parliamentarians, think tanks, and academics. Most of them consider that levels of harm to consumers are high and there needs to be a change to better protect them. It was also noted that a real change to consumer outcomes can only come from fundamental cultural change within firms – of a kind that cannot be driven by external force, such as regulatory intervention or a legislative duty. Arguments against the introduction of a New Duty were based on the combination of existing Principles (particularly, Principle 6, Customers’ interests), rules, guidance, and the provisions of the Senior Managers & Certification Regime (SM&CR), which amounts to a sufficiently robust duty on firms. Also, costs to firms, restrictions of competition and innovation, and lack of deterrent effect (on firms that already fail to comply with current regulatory standards), were amongst the reasons against it.

The FCA has, therefore, identified options for change that, alone or in combination, are most likely to address potential deficiencies in consumer protection. These are:

  • Reviewing how it applies the regulatory framework – in particular, its application of the Principles in its authorisations, supervisory and enforcement functions, and how transparently it communicates with firms about that
  • New/revised Principles to strengthen and clarify firms’ duties to consumers, including considering a potential private right of action for Principles breaches

The Feedback Statement considers changes to its regulatory approach to increase protection for consumers, which is an important part of the FCA’s Business Plan priority for 2019/20 to consider the future of regulation. A further paper is due for publication in autumn 2019, seeking detailed views on specific options for change. The FCA also announced it will start a programme of further internal work to examine the options they think are likely to be the most effective and proportionate.

Within this debate, another clear message is being sent to firms in the financial services space on how important is the topic of culture, and the prevention of harming customers. How firms are managed, which arrangements they have in place to treat their customers fairly, to prevent conflicts of interests, is at the heart of the FCA. This evolution in the FCA agenda requires a similar advancement in firms’ agenda, and they need to be prepared to demonstrate compliance with this expectation. How to do it depends on each individual organisation, size, nature of the business, existing culture, and will to improve.

Should you wish to discuss further any of the points covered in this blog, to receive guidance on how to comply with regulatory expectation, please do not hesitate to contact us.