The Financial Conduct Authority (FCA) first proposed introducing a "duty of care" requiring firms to exercise reasonable skill and care when serving consumers, in addition to the requirement to treat customers fairly and the six TCF outcomes, in its 2017 mission consultation.
This was repeated in its Approach to Consumers document, one of a number of publications which have the laudable intent of bringing additional clarity to the regulatory framework.
The FCA has now published discussion paper (DP18/5) to explore whether a duty of care is needed.
The FCA refers to it as a “new duty” and it has been defined two-fold: both as a positive duty to promote customer’s best interests; and has a fiduciary duty not to cause harm to a customer’s financial interests or create or exacerbate conflicts of interest.
Some stakeholders believe that without such new duty of care there are gaps in consumer protection.
However, from the way the FCA has positioned this duty indicates that the FCA may believe that the current regulatory framework provides sufficient consumer protection.
Further, given other regulatory priorities, the FCA believes it may be better placed putting its focus into other initiatives.
Key points
What are the FCA’s objectives with the discussion paper?
What are the FCA’s objectives with the discussion paper? The FCA is committed to reviewing the effectiveness of its approach and exploring credible alternatives where weaknesses are uncovered.
In its mission consultation, it posed the question: “Would a duty of care help ensure that financial markets function well?”
Overall, industry feedback was mixed, with respondents providing arguments both for and against.
Within the discussion paper, the FCA outlines a number of credible options it could explore to address any gaps within the regulatory framework, including:
What regulation could be more effective?
Nothing would achieve instant regulatory reform, but in the spirit of the FCA’s DP18/5, I would like to discuss five things that could be provide greater consumer protection and market stability than a new duty.
But the burden is not solely on the regulator: collectively, firms must take far greater responsibility for the success of the regulatory regime.
The UK’s regime is based on principles, and gives participants “freedom within a framework”, tweaking that framework can only have limited impact: market participants need to raise their game and take their obligations seriously.
Proportionate to their size, firms should be required to establish a specific board sub-committee responsible for FCA compliance, led by the chairperson or other senior non-executive directors with responsibility for holding the firm’s SMF16/17 to account.
The Senior Managers and Certification Regime (SMCR) should address much of this, but we believe improved oversight and control within firms is both necessary and will have a greater impact than any new duty.
The FCA must supervise the application of SMCR effectively, and ensure that firms have effective oversight of their own risks.
The FCA also needs to identify trends in its enforcement action and more effectively communicate its expectations.
It is telling that, despite the constant regulatory change we all face, firms are still being fined for what should be the basics of our industry: know your customer, suitability, and complaints handling.
When fully implemented, the SMCR should achieve many of the same objectives of a new duty.
The FCA views the SMCR as a key tool in driving culture and governance improvements, driving better outcomes for consumers and placing obligations on both individuals and firms.
For individuals, the conduct rules set out minimum standards of behaviour, including paying due regard to the interests of consumers and treating them fairly.
Of utmost importance is the need for firms to ensure SMCR is effectively implemented and then maintained.
It must not become another new initiative which is rolled out with great fanfare but then quietly left to go out of date by firms and their supervisors.
One of the overarching messages of the FCA’s 2018/19 business plan was that it has finite resources, particularly in light of Brexit, and therefore needs to provide protection to those consumers who need it the most.
In our view, rather than introduce a new duty, it should prioritise interventions where it finds business practices that are exacerbating customer fairness issues, and where vulnerable customers are not being treated with appropriate levels of professionalism.
The introduction of any additional rules, guidance or duty on firms would risk introducing additional complexity and confusion into the regulatory regime, something the FCA has been working to tackle in recent times.
While there is much that FCA needs to do to improve itself, improvements in market stability and consumer protection must start with firms.
Mike Harrison is associate director of TCC