Financial Conduct Authority  

Interrogating our duty of care

Interrogating our duty of care

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

  • The FCA has published a discussion paper to see if a duty of care is needed
  • It is exploring a number of options in terms of how to protect consumers
  • SMCR will improve oversight

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: 

  • Introducing a statutory duty of care: this would have a higher status than the principles, so respondents argue that it would be taken more seriously by firms. However, the FCA cannot introduce a new statutory duty without an amendment to primary legislation.
  • Extending the scope of the client’s best interests rule: the rule could be extended to cover all regulated activities through the amendment of principles six or nine.
  • Introducing additional rules or guidance: the regulator is seeking views on whether the same outcomes could be achieved by introducing additional rules and guidance around the existing principles, monitored through the FCA’s ongoing programme of supervision. This also forms part of the FCA’s commitment to reviewing its handbook following the UK’s departure from the EU. If the FCA is serious in its desire to review the effectiveness of the regulatory regime, then there are more beneficial measures it could put in place.

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.

  • Fully resourced compliance departments: often, a firm’s compliance department is lacking the full capacity to provide effective second line challenge and oversight. The FCA could introduce a formal training and competence scheme, mandatory examinations, and continuing professional development for compliance staff.
  • Audit, risk and compliance committees: mid and large tier firms are used to having board level risk and audit committees. These committees do focus on compliance matters, but that is not enough.

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. 

  • Genuine oversight and control: there are too many examples of firms’ management not having real control over the regulatory risks posed by their activities for example, a non-authorised group entity holding budgetary control and oversight of a regulated firm’s activities

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.   

  • Rapid regulation: put simply, the FCA is too slow to act. The regulator needs to use its resources more efficiently, rather than going to the printing presses with yet another new ‘initiative’.
  • Learn from the mistakes of others: the FCA publishes detailed enforcement notices outlining firms’ failings, yet time and time again, we see these mistakes being repeated. Firms need to read-across from enforcement notices and make changes to their business practice where similar weaknesses are uncovered.

The FCA also needs to identify trends in its enforcement action and more effectively communicate its expectations.