Over the last two years, a great deal has been said about the new Consumer Duty – indeed, it has become a buzzword. The regulator, with good intentions, hopes that it will usher in a new era of investor protection. However, the introduction of the Consumer Duty is not without its difficulties – not only for the firms that are obliged to comply with it but also for the consumers that it is designed to protect.
The regulator, with good intentions, hopes that it will usher in a new era of investor protection.
Backdrop to the Consumer Duty
It is helpful to step back and consider the broader context – regulatory and historical – in which the Consumer Duty sits. The rationale behind the Duty is not novel. Back in 2006, Callum McCarthy, then Chairman of the predecessor to the FCA, spoke of the “central importance of a financial sector that is able to provide the right kind of products in the right way and at the right time to those that need them”. He was making the point that the market of long-term insurance products was not working for the product providers, nor the consumers that bought them, and not even for the Independent Financial Advisers (IFAs) that sold them. The thrust of his point was that sales influenced by the commissions paid by product providers to IFAs had low rates of persistency, which was in nobody’s best interests. That problem of ‘commission influenced advice’ has been resolved by the Retail Distribution Review (RDR). However, the reality now is that most consumers get no advice at all.
So that leaves just the product provider/distributor and the consumer. However, the FCA has itself commented that the average consumer’s financial literacy must improve for markets to thrive. Sadly, understanding of financial products and services remains low, which leaves most consumers vulnerable to mis-buying. Hence, the regulatory focus has fallen on the product provider/distributor and addressing the information and knowledge asymmetry that exists between the seller(s) and the buyer. This explains the switch in the Consumer Duty from inputs to a focus on outcomes.
The position today is this: most consumers are no more financially literate than they were in 2000; they no longer receive advice from IFAs or anyone else, but firms have now been given a responsibility for ensuring good customer outcomes. This is the case across the whole retail market, which ranges from simple products to more complex, long-term products. And, of course, consumers will range from the vulnerable all the way through to the sophisticated (who may be paying for advice as well).
Key areas of risk for firms under the Consumer Duty
The obligation on firms is not just at the point of sale but throughout the product lifecycle. This potentially creates a tension given that consumers can only be expected to take responsibility where firms’ communications enable them to properly understand their products and services. To comply with the FCA’s expectations, some firms may stray into providing advice, in circumstances where they do not have advice permissions to do so. Equally, in the absence of advice, customers may act on the information provided by the firm in a way that does not deliver them a good outcome (for example, selling an investment at a loss when the market is down rather than waiting out the volatile period). Even where the information is clear and comprehensive, provided in a timely manner and properly drawn to the customer’s attention, there remains a possibility that the customer acts either in a way contrary to their long-term best interests or differently to what they reasonably could be expected to have done based on the information provided, resulting in harm. The same concerns apply to the provision of too much information, as well as too little information. There is much scope for argument and thus for complaints.
To comply with the FCA’s expectations, some firms may stray into providing advice, in circumstances where they do not have advice permissions to do so.
Arguably, the greatest area of risk lies with long-term investment products. With risk comes reward and it would be unfortunate if consumers are deterred from taking out investment products, especially when they need to take increasing responsibility for their provision in retirement. However, as described above, if they do invest but do not persist with the product and instead sell during market dips, we can see the possibility of consumers launching complaints on the basis that their outcome was not a good one.
Jurisdiction of the FOS
One positive for firms is that no private right of action has been provided for under the Duty, but, of course, customers are still able to complain to the FOS. Firms will handle these complaints themselves initially and, where they consider they have given helpful information in a fair and balanced way and the customer has acted against their own interests, they will no doubt dismiss the complaints. In our view, it is just a matter of time before these issues start crystallising as FOS complaints.
The FOS is not bound by the law or any rules in its decision-making – it is only required to “have regard to” the relevant regulatory provisions and can decide what, in its opinion, is “fair and reasonable in all the circumstances of the case”. That jurisdiction applied to the obligation to “seek good customer outcomes” is one that gives considerable latitude to the FOS in its decision-making. Furthermore, FOS decisions are not subject to appeal; there is only the unlikely prospect of a successful judicial review challenge. As the FOS limit for awarding compensation has now increased to £415,000, there is significant power in the hands of the FOS, and we hope that a fair and consistent approach will be taken. Although helpful-sounding ‘Consumer Duty-specific’ case studies to guide firms’ understanding of the FOS’ approach have been promised, these are (at the time of writing) not yet available.
How the interplay between the Duty and the decision-making of the FOS will develop is something that needs to be watched carefully, especially when there is also an obligation on firms under the Duty to consider whether they should proactively offer redress to retail customers that have suffered harm, even where no complaint has been made.