Could there be consumer duty failure claims within your distribution chain?

This article highlights some key issues and considers how the new consumer duty may operate in practice and how it might be revised in the future. 

What constitutes a serious breach?

The regulator has confirmed that once the duty is in force it will prioritise the most serious breaches and act swiftly and assertively where it finds evidence of harm or risk of harm to consumers.

This makes it clear the FCA will not wait for actual harm to act where a risk is identified, but what makes a breach “serious”?

The FCA has confirmed it intends to intervene “before harmful practices become entrenched as market norms”, and in his speech on February 22 the executive director of consumers and competition, Sheldon Mills, confirmed the FCA “always go after the worst offenders who are at risk of having the biggest impact on our financial services industry”.

The number of customers harmed/at risk therefore seems to be a crucial factor. Other factors might include:

• the value of the actual/potential harm in terms of financial loss;
• the vulnerability of the customer(s); and
• the degree to which customers were misled by the firm.

It will also be sector specific, so just as the FCA cannot prescribe what a blanket ‘good outcome’ is, it is unlikely to prescribe what amounts to a serious breach.

Examples and themes should arise in due course, however, as the FCA takes action against non-compliance.  

Could there be a private right of action?

The FCA has the power to create a PROA in relation to a breach of its principles, but has not currently created a PROA in respect of breaches of the consumer duty principle. 

In its consultation paper CP21/36, dated December 2021, the FCA set out its reasoning behind this:

• The consumer duty is a significant change and implementation is likely to be iterative, with firms and consumers gaining a more detailed understanding of the duty over time through FCA communications, supervisory action, and complaints. 
• Allowing the industry adequate time to embed the consumer duty, without the prospect of private action being brought, is important to fully realising the benefits for consumers.  
• The existing redress framework is likely to be a more appropriate route for most consumers, which consumers can utilise at no additional cost to them or need to instruct legal representation. 

However, the FCA will be keeping the possibility of a PROA under review.

We anticipate that once the consumer duty is more established, and its scope and consequences clarified further, that the FCA could introduce a PROA as a further deterrent if compliance with the consumer duty is still not at a satisfactory level.

Could there be claims as between companies within a distribution chain, relating to the consumer duty?

Significant hurdles may need to be overcome when bringing private actions relating to the consumer duty. 

The FCA states: “The duty applies across the distribution chain, including all firms involved in the manufacture, provision, sale and ongoing administration and management of a product or service to the end retail customer”. 

Any FCA-regulated firm has a duty to notify the FCA if it suspects or knows that another regulated firm within its distribution chain is not complying with the consumer duty. But beyond their duty to notify, each firm is responsible for its own compliance with the consumer duty. 

The FCA has made it clear in its final guidance that where a firm works with others in a distribution chain and conducts due diligence on those other firms, it should consider the consumer duty as part of that due diligence.

It appears that to the extent it is within a firm’s control it should ensure compliance throughout the distribution chain it is a part of, but a firm is not obligated to go beyond its role in the distribution chain nor monitor or take responsibility for a separate firm’s compliance.

It follows that another firm’s non-compliance cannot excuse your own. 

But what if another firm’s non-compliance resulted in a poor outcome for your customers? How the FCA will approach this remains to be seen, but our view is that the FCA will review the compliance of each firm individually, meaning:

1. a firm will not be penalised for the non-compliance of another, unless for example they know of the non-compliance and failed to notify the FCA; and
2. the compliant firm can only rely on the FCA taking enforcement action and cannot make a claim for breach of duty against the non-compliant firm. 

Alternative options for launching civil actions remain which may be applicable.

For example, if the contract between firms within a distribution claim included obligations relating to compliance with the consumer duty, a contractual claim may be available if either firm does not comply with its ongoing responsibilities to comply with the consumer duty. 

Complex issues of whether the breach of contract caused loss to the innocent party might then arise. 

It will take some time to see how the consumer duty will work in practice and how the FCA will choose to implement it. 

Alternatively, if a firm gave false/misleading information to another about their product/service and its compliance with the consumer duty, this may give rise to breach of warranty claims (if warranties are included in the contract between them) or tortious claims such as misrepresentation.

Again, when bringing such claims, causation and loss need to be demonstrated, as well as showing that the innocent party relied on the misrepresentation. 

Significant hurdles may therefore need to be overcome when bringing private actions relating to the consumer duty. 

It will take some time to see how the consumer duty will work in practice and how the FCA will choose to implement it. 

In the meantime, firms are advised to prepare themselves as best they can by following the FCA guidance and considering whether their contractual arrangements with other firms in their distribution claim provide them with the maximum possible protection.  

Robin Henry is a partner and Abbie Coleman is an associate at Collyer Bristow