Carl Wallis, compliance and risk director at Sesame Bankhall Group, says he expects claims management companies to test the Financial Ombudsman Service's treatment of the rules, which present the biggest regulatory change since the retail distribution review 10 years ago.
The duty consists of a new principle: "A firm must act to deliver good outcomes for retail customers", as well as three cross-cutting rules: firms must act in good faith, avoid foreseeable harm and enable and support customers to pursue their financial objectives. The latter rules are why firms might find themselves in the crosshairs at the Fos, Wallis predicted.
Speaking at the Open Banking Excellence Campfire webinar on July 21, Wallis said: "We will see tests against the cross-cutting rules, so for example claims management companies or other stakeholders might bring about claims to Fos to understand what they will and won't rule on.
"What that will create is more work for firms, a potential backlog of cases, more cost in terms of administration."
But he does not think it will make a difference to firms' liabilities as such, as the Fos already judges cases by whether or not firms have acted in good faith.
In terms of Fos, consistency of approach is really going to be key.Jill Jackson, independent non-executive director"Firms are worried about a disconnect between FCA rules and Fos rulings," he said. "But in terms of liabilities at this point, I'm not entirely sure it will change, simply because Fos does take into account a lot of things that the consumer duty is trying to bring about when it opines on cases currently."
Vaughan Jenkins, business development director at Moneyhub, said there could be different interpretations of the standards expected of firms.
He said many advisers are worried that even if they comply with the consumer duty, they could still find themselves at the wrong end of rulings, with case law potentially trumping all of that on top.
"That must be a worry, particularly for firms that are at the sharp end of all of this with customer interactions and have all the professional liabilities sitting on their shoulders."
Tony Crane, founder of Crane Consultancy, had also predicted the industry would face issues in how the Fos will apply the rules, particularly in the transition period.
"You'd like to think the duty wouldn't have any [unintended consequences]," he said. "But given the breadth of the change, it does seem impossible that there aren't going to be some elements that end up with outcomes that may be less desirable."
He said he was most concerned about how back books would be assessed under the new rules. "I do have a concern about retrospective action," he said.
During a press briefing yesterday (July 26), the FCA said it will measure the success of the duty by monitoring Fos final decisions that are to do with fees, charges, or inappropriate products or services sales.
The Fos told FTAdviser it would work closely with the regulator to ensure there is consistency in how firms' implementation of the rules is assessed.
A spokesperson said: “The Financial Ombudsman Service welcomes the publication of the new consumer duty to raise standards, so that consumers are better protected and can make good financial decisions.
"We will continue to work closely with the FCA to ensure a consistent and complementary approach to the application of the new rules, whilst respecting the different statutory roles we deliver.
"Reducing queues and bringing down waiting times throughout the customer journey continues to be at the forefront of our commitments."
A huge backlog of claims forced out the previous Fos chief executive last year, but a temporary initiative to encourage businesses to settle complaints swiftly has already helped to cut this backlog to a third of what it was at the beginning of last year.
'Subjective treatment of subjective rules'
Jill Jackson, an independent non-executive director at impact investing platform The Big Exchange among others, who also spoke at the Campfire, said she was most concerned about the "subjectiveness" the Fos could sometimes show in its decision-making.
"You could have the same case presented to four or five different Fos employees and the outcome is different," she said. "And that's always a challenge when you've got subjective rules or guidance to look at.
"In terms of Fos, consistency of approach is really going to be key because the industry is going to be wrestling with how we do our best for these customers, and consistency will really help with that."
The panel agreed that the consumer duty itself contained a number of subjective elements, which could be challenging for firms to navigate.
We will continue to work closely with the FCA to ensure a consistent and complementary approach to the application of the new rules, whilst respecting the different statutory roles we deliver.Financial Ombudsman ServiceSBG's Wallis said there was uncertainty in the requirement for firms to “avoid foreseeable harm to consumers”.
"The key issues firms get concerned about is when the regulation is subjective and they don't have that element of certainty about how they can comply," he said.
But he added: "What the FCA is getting at [with avoiding foreseeable harm] is it's not saying that every single individual customer can never achieve a poor outcome, so for example you could sell or advise a customer to purchase a mortgage and they may have their home repossessed, but that's not within the firm's gift so long as they understand what the risks are.
"What it really is, it's about firms being able to demonstrate that they're taking active steps to avoid that harm at firm level. And some of the things that they will have to do to demonstrate good outcomes – such as reviewing the products and services, reviewing the price and value, ensuring customer understanding – will all go to supporting compliance with that rule."
But Craig Hamilton, group director for conduct and compliance at Phoenix Group, was less confident about the practical implications of that rule as people at the regulator, or the people in government, change.
"It's within our gift to define and, you know, control foreseeable harm; I agree with that, but we should just always recognise that those persuasions of those who set the policies and the rules may shift over time."
Layers of responsibility
The consumer duty is a culmination of lots of FCA initiatives, said Wallis, such as fair value assessments, product design, treating customers fairly.
It will bring about two layers of responsibility, ensuring providers have some responsibility even when they do not have a direct interaction with the customers.
For Wallis, collaboration will be key between providers, advisers and other stakeholders in the distribution chain.
"I don't think it's an optimal position if product providers are almost regulating what might constitute value through distribution and vice versa.
We should always recognise that the persuasions of those who set the policies and the rules may shift over time.Craig Hamilton, Phoenix Group"There is ambiguity in the consumer duty because, as it stands, on the one hand the FCA is saying that these rules don't mean that those within the distribution chain have to oversee others within the distribution chain, and yet clearly through product governance rules and in other elements of the duty there is an obligation on providers and everybody else... to ensure that there is no issue when the sum of the parts is taken into account," he said.
This could create friction between the different elements in the distribution chain, he said.
Hamilton agreed that collaboration was going to be even more important. And he said it needed to be clear who is accountable for what, particularly as the Senior Managers and Certification Regime bestows individual responsibility onto senior managers too.
Details of the consumer duty were released this morning (July 27) and will be enforced in July 2023, three months after the original April date to give firms more time to prepare for the rules.
Find additional FTAdviser coverage of today's consumer duty announcements here:
Firms given extra three months to implement FCA's consumer duty
Advisers will need to work out value of advice, says FCA
Enforcement of consumer duty critical to its success, say advisers
carmen.reichman@ft.com
