Discussion Paper on a duty of
care and potential alternative
approaches
Discussion Paper
DP18/5
July 2018
2
Contents
Executive Summary 3
1. Introduction 5
2. Our regulatory and legal framework 8
3. How we regulate in practice 21
4. Consumer outcomes including redress 28
5. Questions 33
Annex 1 The concepts of duty of care and fiduciary duty 35
Annex 2 Our customer outcomes for treating customers fairly 37
3
Executive Summary
In our Mission 2017
1
, we explained how and why we prioritise, protect and intervene in
financial markets. We also set out our intention to be more transparent and accountable
for the way in which we carry out our role.
Parliament has given us a single strategic objective – to ensure that relevant markets
function well – and 3 operational objectives, one of which is securing appropriate
protection for consumers. To deliver these objectives, Parliament has given us a range of
tools. As a regulator, we use these tools to prevent harm from occurring, and use them
to tackle harm when it arises.
Consumers get the best outcomes from markets when they are treated fairly. The FCA’s
Principles for Businesses in our Handbook (our Principles) apply to most authorised firms
and include the Principle of ‘treating customers fairly’. Our Handbook also requires that
firms act in the best interests of their clients in certain circumstances.
Our Principles are clear that firms are responsible for making sure that all their
customers are treated fairly. This also applies to firms that do not have direct contact
with retail customers. We expect all firms to exercise extra care where consumers may
be vulnerable.
While we have regard to the general principle that consumers should take responsibility
for their decisions
2
, we know that there are factors that might limit their ability to do so.
Our regulatory and legal framework recognises that different consumers may have
different degrees of experience and expertise and that the level of care provided by firms
should be appropriate for their capabilities
3
. We expect firms to frame decisions for
customers based on real consumer behaviours and not to exploit biases. For consumers,
businesses and regulation this is a challenging balance to strike.
Some stakeholders have voiced concerns that our regulatory framework, including our
Principles, may not be sufficient or applied effectively to prevent harm to consumers and
protect them appropriately. Some have said that the introduction of a duty of care could
reduce harm by requiring firms to avoid conflicts of interest, as well as supporting
longer-term cultural change within firms.
Other stakeholders have suggested that existing FCA rules already provide sufficient
protections for consumers and impose the same requirements on firms that a duty of
care would.
Given these differing views and the strength of the concerns expressed, it is important
that we have an open discussion and debate about the potential merits of a duty of care.
We must also ensure we understand the consequences of any changes we may make.
1
Our Mission 2017 - www.fca.org.uk/publication/corporate/our-mission-2017.pdf
2
See section 1C(2)(d) of the Financial Services and Markets Act 2000 (‘FSMA’).
3
Section 1C(2)(b) and (e) of FSMA.
4
We have a responsibility to consider, and be open to, alternative approaches that might
address stakeholders’ concerns and we use the term ‘New Duty’ in the Paper to
encompass a duty of care and alternative approaches.
In our Approach to Consumers paper, published alongside this, we commit to keeping
our powers and tools and how we use them under review, to ensure we are working
effectively to protect consumers. This Discussion Paper forms part of that commitment.
We are publishing this Discussion Paper to:
Help us better understand whether there is a gap in our regulatory and legal
framework, or the way we apply it in practice, that could be addressed by
introducing a New Duty.
Assess whether change is desirable and, if so, what form it could take, how it
would work in practice alongside our current framework, and what consequences
it would have for consumers, firms and the FCA.
Better understand and consider possible alternative approaches that might
address stakeholders’ concerns.
Understand what a New Duty for firms might do to enhance good conduct and
culture in financial services, and how this could influence consumer outcomes,
alongside the Senior Managers and Certification Regime (SM&CR).
We provide an overview of the existing regulatory and legal framework within which we
operate, and seek views on potential changes through a New Duty. We illustrate how we
apply this framework in practice using our suite of powers and tools and ask whether
this is being effective in preventing harm to consumers.
We also explain the various routes by which consumers can currently obtain redress
when harm does occur, such as the Financial Ombudsman Service. We consider whether
a New Duty would provide an additional route by which consumers could secure redress,
and whether that is needed.
Who will be interested in this Discussion Paper?
We invite views from all parties with an interest in this issue. This includes:
consumer groups and individual consumers
industry groups / trade bodies
regulated firms
policy-makers and regulatory bodies
industry experts and commentators
academics and think tanks
Next steps
We welcome discussion and feedback on this important and complex debate. We ask for
views, including responses to our questions, by 2 November 2018. Details on how to
respond are on page 34.
5
1. Introduction
Our vision
We carry out a significant amount of work to identify proactively the harm that is caused
to consumers and to understand what drives it, so we can intervene effectively to
address actual or potential harm.
Our Mission, published in 2017, made it clear that consumer protection lies at the heart
of everything we do. Our Approach to Consumers, published alongside this discussion
paper, provides further clarity about the actions we will take to protect consumers,
including those in more vulnerable circumstances.
In our Approach paper, we set out our vision for well-functioning markets for consumers
and commit to keep our powers and tools and how we use them under review, to ensure
we are working effectively to protect consumers. The Approach paper sets out how we
prioritise our interventions and how we use our powers and tools. These include our
Principles for Businesses (the ‘Principles’), set out in further detail in Section 2 below.
Calls by some stakeholders for a duty of care to improve consumer outcomes
Some stakeholders have raised concerns that our current regulatory framework does not
provide adequate protection for consumers. They have called for the introduction of a
‘duty of care’ on firms when dealing with consumers. It has been suggested by some
that the extent and longstanding nature of consumer detriment indicates that cultural
change is required within firms and the market as a whole. They consider that current
regulation has not yet delivered the change required, and that a duty of care would do
so.
In calling for a new duty, some stakeholders have suggested that it should be a
‘fiduciary duty’ and some have suggested it should be a ‘duty of care’. Sometimes the
proposed new duty has been expressed in a way that incorporates concepts from the
legal definitions of both ‘duty of care’ and ‘fiduciary duty’. The legal definition of a ‘duty
of care’ is an obligation to exercise reasonable care and skill when providing a product or
service. A ‘fiduciary duty’ is complex to define but means, broadly, that firms must not
put personal interests above those of the client, must avoid conflicts of interest and must
not profit from the firm’s position without the client’s knowledge and consent. We
provide further description of the concepts in Annex 1.
Our definition in this paper of a New Duty
A duty of care and a fiduciary duty, therefore, have somewhat different purposes. A duty
of care is a positive obligation whereas a fiduciary duty is largely a prohibition. In this
paper, we use a ‘New Duty’ to cover all possible formulations of any new duty of care or
fiduciary duty on firms and any other changes that could address stakeholders’ concerns.
6
In the consultation on our Mission 2017, we asked the question ‘would a duty of care
help ensure that financial markets function well’
4
. We received a range of differing
responses
5
. Several respondents also expressed views on this issue as part of our later
consultation on our Future Approach to Consumers
6
. These focused largely on the
treatment of retail consumers, but there is a question as to whether any New Duty could
also apply to wholesale markets.
Some respondents said that they believe that a duty of care would operate as a
preventative measure to protect consumers, obliging providers of financial services to
avoid conflicts of interest and act in customers’ best interests. They stated their view
that the existing Principles do not remove conflicts of interest and do little to deter firms
from mis-selling products and services.
7
Some respondents also argued that once poor conduct is found, consumers have to face
a lengthy battle to obtain redress. They explained that if firms had a legal duty of care to
customers, it would help achieve better outcomes in the first instance.
Broadly, these concerns show that a number of stakeholders are dissatisfied with the
consumer outcomes they have seen in the markets we regulate. They see these as being
either due to our framework not being sufficiently clear or not being applied effectively.
They put forward a duty of care as a solution which would promote responsible
behaviour on the part of businesses, ensuring fairer outcomes for consumers
(particularly the vulnerable) and an improvement in firm culture.
But other stakeholders disagree
Some respondents said that existing FCA rules and common and statute law, now
complemented for some firms by the Senior Managers & Certification Regime (‘SM&CR’),
which is being extended, already require firms to follow good business practice and that
collectively they represent in practice the same requirements on firms as a duty of care.
Some stakeholders said that a duty of care would result in firms introducing a new set of
highly complex rules for staff to understand and follow and these changes could result in
additional and unnecessary layers of complexity and uncertainty. Some said this could
have an effect on their product provision and approach to innovation. This would result
from a real or perceived increased risk to firms of costly and extensive legal action, with
potentially large redress payments being passed on as increased costs to consumers
8
.
Respondents also suggested that the definition of what would constitute a reasonable
duty of care could be difficult to achieve. They explained this would be burdensome to
develop and likely to be very detailed to cover all potential relationships with customers,
which could only be clarified and tested through claims in court.
4
https://www.fca.org.uk/publication/corporate/our-future-mission.pdf
5
Our Mission 2017: Feedback Statement FS17/1, April 2017, FCA.
6
See www.fca.org.uk/publication/corporate/our-future-approach-consumers.pdf. The summary of responses is
contained in our Feedback Statement annexed to the Approach to Consumers, 2018, published alongside this
document.
7
See for example the briefing paper of the Financial Services Consumer Panel: A duty of care for financial
services providers, January 2017 at www.fs-cp.org.uk/sites/default/files/duty_of_care_briefing_-
_jan_2017.pdf.
8
Our Mission 2017: Feedback Statement FS17/1, April 2017, FCA.
7
We are grateful to stakeholders who have already submitted views to us. We recognise
the concerns expressed both for and against a duty of care and the importance and
complexity of the debate.
The purpose of this paper
In our Mission 2017, we committed to produce a Discussion Paper to explore the
potential merits of a duty of care as part of our Handbook Review following the UK’s exit
from the EU in 2019. We stated that it would be difficult to make extensive changes to
the FCA Handbook at the same time as undertaking the major overhaul needed to put
the EU Withdrawal legislation into effect.
We recognise the wider debate on this issue, including feedback received on this topic
following our Future Approach to Consumers 2017. Launching this Discussion Paper now
will help us understand more fully what outcomes a New Duty might be able to achieve
and what a New Duty for firms in financial services might do to enhance behaviour in the
financial services market.
We have a responsibility to consider and be open to alternative approaches that might
address stakeholders’ concerns. We must also consider operational implications and
avoid unintended consequences of any changes we make: for example, by introducing
complexity or confusion to the current regulatory regime. We welcome an open debate
on this issue to help us to assess whether change is desirable and, if so, what form it
could take.
8
2. Our regulatory and legal framework
When considering the potential merits of a New Duty, we want to understand whether
our existing regulatory framework and the standards that we apply to firms (and, in
some cases, to individuals) are fit for purpose in delivering the right outcomes for
consumers.
To deliver our objectives, Parliament has given us a range of tools. As a regulator, we
use these tools to prevent harm from occurring or tackle it when it has already arisen.
Some stakeholders have raised concerns that our current regulatory framework does not
provide adequate protection for consumers. Some of the gaps identified include our
existing Principles, which they said do not remove conflicts of interest. As such,
stakeholders have said they are insufficient to deter firms from mis-selling products.
They also said that the current framework does not go far enough in improving and
incentivising good conduct and culture in firms. They suggested that a duty of care could
bring benefits to these areas, by providing an additional incentive to firms to behave in a
way that benefits all consumers.
In this section, we set out the framework within which we operate, the standards that
we apply to firms and the powers we have to protect consumers. This is to help
understand whether our existing framework is sufficient to enable us to protect
consumers, or whether there are gaps that a New Duty (whether a duty of care or other
change) could address.
Our objectives
Under the Financial Services and Markets Act 2000 (‘FSMA’) we have a single strategic
objective
9
which is to ensure that relevant markets function well. This is underpinned by
3 ‘operational objectives’:
• to secure an appropriate degree of protection for consumers
10
• to protect and enhance the integrity of the UK's financial system
• to promote effective competition in the interest of consumers
When carrying out certain functions, including making rules, we must act to advance one
or more of those objectives. The need to advance one or more operational objectives will
be relevant to any decision by the FCA to introduce a New Duty.
FCA regulatory perimeter and rule-making powers
Regulated financial services (referred to as ‘regulated activities’
11
or the ‘FCA’s
perimeter’) include activities related to a number of sectors including banking, consumer
9
Section 1B of FSMA.
10
The meaning of ‘consumer’ is limited in this context and the emphasis is on persons who use, may use, or
have used, regulated financial services or have invested, or may invest, in financial instruments.
11
These are set out in detail in the Financial Services and Markets Act 2000 (Regulated Activities) Order.
9
credit, pensions, investments, asset management and insurance. Persons who are
licensed, or otherwise permitted, to perform such activities are ‘firms’
12
.
We have the power to make rules applying to firms for both their regulated and
unregulated activities
13
. These rules can apply to both retail and wholesale transactions.
Our focus is primarily on regulated activities when advancing the operational objectives
of consumer protection and promoting competition. The unregulated activities of a firm
may, however, still be relevant
14
and, in some circumstances, we may take action or
refer matters to other bodies who have relevant responsibilities in these areas.
There have been a number of cases where we have been asked to intervene in relation
to unregulated activities or where uncertainty about our role has raised questions about
what we do and do not regulate. Concerns about our role in these areas have been one
of the factors driving calls for the introduction of a duty of care.
Examples of where this has occurred include:
commercial lending (which is not a regulated activity unless it constitutes
consumer credit)
cryptoassets (which are not regulated investments themselves, although
derivative contracts that reference cryptoassets and certain cryptoasset tokens,
for example, may be)
mortgage purchasers (who are not required to be regulated, as long as they
employ an authorised third party to ‘administer’ the mortgage contracts)
15
Any introduction of a New Duty, or expansion of the scope of any of our existing rules
(such as those requiring firms to act in the best interests of consumers), would be
limited by the extent of our rule-making powers and would not address concerns about
areas that we do not regulate (such as those described above). Intervention in these
areas would require Government legislation.
Current FCA rules
Outcomes-focused regulation
Our regulation is outcomes-focused and is based on a combination of the Principles
16
,
other high-level rules and, where necessary, detailed rules and guidance. Some have been
introduced through domestic policy and some as a result of implementation of EU
directives.
The Principles act as a general statement of the fundamental obligations of firms
reflecting our operational objectives. The Principles are then amplified in more detailed
rules and guidance (the effect of which is discussed below) to address particular
12
While the FCA also has responsibilities for other types of regulated financial services under FSMA and outside
of FSMA, this discussion paper is concerned with our regulation of the regulated activities of firms.
13
A number of our Principles for Businesses, for example, encompass the unregulated activities of firms.
14
For example, whether they meet the Threshold Condition on suitability at authorisation and subsequently.
15
For further information and other examples, see this letter from the FCA to the Treasury Select Committee
dated 30 January 2018.
16
Set out at PRIN 2.1 in the FCA’s Handbook.
10
circumstances. This combination of Principles, rules and guidance allows us to apply a
range of tools and protections that are appropriate in different situations.
Increasing transparency and engagement at renewal
Our mandatory renewal disclosure rules for insurers are an example of our Principles,
rules and guidance-based approach to regulation. These rules amplify Principles 6
(treating customers fairly) and 7 (communicating in a way that is clear, fair and not
misleading). In April 2017 we introduced rules
17
to require firms to disclose, in
particular, the previous year’s premium at renewal in a clear manner so that
consumers can easily compare this with the new renewal quote. At the same time, we
issued guidance under Principle 7 encouraging firms to review whether the language
used in their renewal notice could risk discouraging customers from shopping around.
The overarching framework of the Principles is necessary because the detailed rules
cannot constitute an all-embracing comprehensive code of regulation that covers all
possible circumstances. Any code that tried to be exhaustive could be circumvented,
could contain provisions which are unsuitable for the many and varied circumstances
which arise in financial services and could also stifle innovation. So, even in areas where
there are detailed rules, a firm must continue to comply with the Principles. In this way,
the Principles can deal with situations or issues that are not specifically envisaged by the
detailed rules.
However, the success of this approach depends on a number of factors which we discuss
in more detail below and in Section 3:
We must have the right Principles and detailed rules in place.
Firms must understand what is expected of them.
We must use our authorisation, supervision and enforcement tools effectively.
Firms must have the right culture, particularly at senior management level, so
that the standards of conduct set out in the Principles are at the heart of their
approach.
Principles for Businesses
These generally apply to all firms in respect of their regulated activities
18
. The most
relevant in the context of a New Duty are:
• Principle 2 Skill, care and diligence – A firm must conduct its business with due
skill, care and diligence.
• Principle 6 Customers' interests – A firm must pay due regard to the interests of
its customers and treat them fairly.
• Principle 7 Communications with clients - A firm must pay due regard to the
information needs of its clients, and communicate information to them in a way
which is clear, fair and not misleading.
17
Increasing transparency and engagement at renewal in general insurance markets: PS16/21, March 2017,
and Insurance Conduct of Business (ICOBS) rule 6.1.12AR (3).
18
See PRIN 3.1.1R and 3.2.1AR which notes that they can also apply in some other circumstances. Their
application is also subject to exemptions and modifications, such as compliance with EU law.
11
• Principle 8 Conflicts of interest – A firm must manage conflicts of interest fairly,
both between itself and its customers and between a customer and another
client.
• Principle 9 Customers: relationships of trust – A firm must take reasonable care
to ensure the suitability of its advice and discretionary decisions for any customer
who is entitled to rely upon its judgment.
The FCA expects firms to exercise judgment about and take responsibility for what the
Principles mean for them in terms of how they conduct their business. A breach of a
Principle will make a firm liable to disciplinary action
19
. Where the FCA considers it
appropriate, it will take enforcement action against a firm on the basis of the Principles
alone
20
, as described in Section 3 below.
Some of the Principles described above, together with the detailed rules and guidance (the
effect of which we describe below), could be said to address many of the issues that are
cited as reasons for introducing a New Duty. For example, Principle 2 addresses the
standard of care that firms must adopt, Principle 6 deals with fair treatment of consumers
and Principle 8 requires firms to manage conflicts of interest fairly.
‘Client’s best interests’ and other rules
The Principles are amplified by a large number of rules in the Handbook, some are
detailed and others are more high level. In particular, there are a number of high-level
rules in the FCA Handbook which require a firm to ’act honestly, fairly and professionally
in accordance with the best interests of its client‘. These ’client’s best interests‘ rules
derive from EU directives and apply to: designated investment business
21
, mortgage
activities
22
and, from implementation of the Insurance Distribution Directive in October
2018, insurance distribution
23
. There are also more specific ’best interests‘ rules in our
Consumer Credit Sourcebook (CONC)
24
. The main regulated areas where there are no
such ’client’s best interests‘ rules are accepting deposits and carrying out contracts of
insurance.
There are also a number of FCA rules that contain an obligation on firms to take
‘reasonable care’ for certain activities
25
.
Guidance and other supporting materials
In some cases, the Principles and detailed rules are amplified by guidance. Guidance can
be used to explain the implications of other provisions or recommend a particular course
of action.
26
This may be supplemented by other supporting materials, such as case
19
PRIN 1.1.7G.
20
EG 2.8.2 and DEPP 6.2.14G.
21
COBS 2.1.1R, there is also an obligation in COLL 6.6A in relation to duties of Authorised Fund Managers
22
MCOB 2.5A.1R
23
COBS 2.1.1 and ICOBS 2.5.-1R from implementation of the Insurance Distribution Directive on 1 October
2018.
24
For example, at CONC 2.5.8R, 3.8.3G, 6.7.19R, 8.3.2R and 8.6.1R.
25
For example, ICOBS 5.3.1R which requires a firm to take reasonable care to ensure the suitability of its
advice for any customer who is entitled to rely upon its judgment.
26
Guidance is not binding and need not be followed to comply with the relevant rule or requirement, but if a
person acts in accordance with general guidance they are treated as having complied with the rule or
requirement to which it relates, see www.fca.org.uk/publication/handbook/readers-guide.pdf
12
studies showing good or bad practice, FCA speeches, and generic letters written by the
FCA to chief executive officers in particular regulated sectors. All of these materials are
intended to improve firm conduct and compliance with the regulations.
As an example of supporting material, Principle 6 on ‘treating customers fairly’ is
supported by 6 customer outcomes (set out in Annex 2). Our predecessor, the Financial
Services Authority (FSA), introduced these outcomes in 2006 to explain this long-
standing Principle and help ensure that firms focus on what it is intended to deliver. The
FSA subsequently provided examples of good and bad practice, a guide to help firms
develop management information and measured firms’ progress on this Principle and the
associated outcomes (which became embedded in our core supervisory work). Our
Approach to Consumers document explains that these outcomes still set the baseline of
our expectations of how firms should treat consumers and what consumers can expect to
see when firms are treating them fairly.
Another example of guidance on fair treatment is provided in ‘The Responsibilities of
Providers and Distributors for the Fair Treatment of Customers’ (RPPD)
27
. In this
guidance we give our view on what the combination of Principles and detailed rules
require of providers and distributors in certain circumstances to treat customers fairly. It
looks particularly to Principles 2 (due skill, care and diligence), 3 (management and
control), 6 (treating customers fairly) and 7 (client communications) in describing the
respective responsibilities of providers and distributors in various stages of the product
life-cycle or the provision of a service.
Consumer protection legislation
In addition to the powers given to us in FSMA, we are given certain powers under the
Consumer Rights Act 2015 (‘CRA’) and under other legislation. This includes under Part 8
of the Enterprise Act 2002, the power to enforce breaches of certain consumer protection
laws (including in respect of the Consumer Protection from Unfair Trading Regulations
2008, the ‘CPRs’).
The CRA implies into every contract for a trader supplying a service to a consumer a
term saying that the trader must perform the service with reasonable care and skill
28
.
This cannot be excluded by the trader and is enforceable by the consumer either under
general law or specifically under the CRA. We discuss remedies available to the
consumer in Section 4 below. The ‘reasonable care and skill’ requirement could be said
to be similar to the requirements of a duty of care (as described in Annex 1).
The CRA also provides that in contracts between a trader and a consumer, an unfair
term or notice is not binding on a consumer. The test for unfairness is whether, contrary
to the requirement of good faith, the term or notice causes a significant imbalance in the
parties' rights and obligations to the detriment of the consumer
29
.
The CPRs prohibit unfair commercial practices, such as misleading consumers or
aggressive commercial practices. They apply to commercial practices before, during and
after a commercial transaction. With the exception of some consumer credit matters,
27
FCA regulatory guide at www.handbook.fca.org.uk/handbook/document/RPPD_FCA_20130401.pdf
28
Section 49 of the CRA.
29
Part 2 of the CRA.
13
consumers do not have rights to claim redress for breach of the CPRs arising from
regulated activities
30
.
Competition law
Under FSMA we can investigate markets where competition may not be working well for
consumers, and intervene where appropriate, for example, by making rules for firms
that we regulate.
The FCA has also been given concurrent competition powers with the Competition and
Markets Authority (CMA) in relation to the provision of financial services. This means we
also have powers under the Enterprise Act 2002 to investigate whether competition in
any market for financial services is working well, expanding our powers beyond those
firms and activities that we currently regulate. This allows us, for example, to require
firms to provide information and to make a market investigation reference (MIR) to the
CMA to investigate a particular market or sector in more depth.
Under our concurrent powers we also have powers to investigate and enforce against
breaches of the major prohibitions under the Competition Act 1998 (CA98) and
equivalent EU provisions in relation to the provision of financial services
31
. We discuss
with the CMA who is best placed to do so and seek to reach agreement as to which
authority the case should be allocated to, but ultimately the decision rests with them.
Culture and accountability and the Senior Managers & Certification Regime
(SM&CR)
Alongside these powers and tools, culture and governance is a continuing priority for us
across all sectors, helping us to guide our work and prioritise our interventions in order
to deliver our operational objectives.
Firms’ culture and governance can either drive or mitigate harm to consumers and
markets, leading to either negative or positive outcomes. One reason that has been put
forward for a New Duty is that it would improve culture in firms, driving better practices
and behaviours.
The SM&CR marks an important change to our framework and a key tool to improve the
culture of authorised firms and raise the standard of conduct in financial services.
We introduced the SM&CR for deposit takers in March 2016
32
. This followed
recommendations from the Parliamentary Commission on Banking Standards, which was
tasked with reviewing standards of behaviour in the industry following the financial crisis
in 2008
33
. Parliament recommended that we develop a new accountability system that
was more focused on senior managers and individual responsibility. From these
recommendations, we created the SM&CR, which we applied to banks, building societies,
30
Regulation 27D of the CPRs.
31
The prohibition of anti-competitive agreements under section 2(1) CA98 and Article 101 of the Treaty on the
Functioning of the European Union (TFEU); and the prohibition of abuse of a dominant position under s.18(1)
CA98 and Article 102 TFEU.
32
www.fca.org.uk/firms/senior-managers-certification-regime, this replaced the Approved Persons Regime
(APR) for banks, building societies, credit unions and dual-regulated (FCA and PRA regulated) investment
firms.
33
Individual Accountability: Extending the Senior Managers & Certification Regime to all FCA firms, CP 17/25,
FCA, July 2017.
14
credit unions and investment firms designated by the Prudential Regulation Authority
from March 2016.
The SM&CR places obligations on individuals as well as firms, and its aim is to make all
financial services employees more accountable for their conduct and competence. In 2017,
we consulted to extend the SM&CR to all FSMA-authorised firms. The Treasury has
confirmed it will apply to insurers from 10 December 2018. It will apply to all other FSMA-
authorised firms from 9 December 2019
34
.
For those firms to whom the SM&CR applies, we have set out our expectations of firms
and the behaviour of their employees. As part of this, most employees will be subject to
5 conduct rules that represent minimum standards of behaviour.
Employees must
35
:
act with integrity
act with due care, skill and diligence
be open and co-operative with regulators
pay due regard to the interests of customers and treat them fairly
observe proper standards of market conduct
Firms need to train their staff on the requirements and notify us where disciplinary action
has been taken against a person in the event of a breach of these rules. Under the SM&CR,
given the decision-making role they have, senior managers are subject to 4 additional
conduct rules relating to effective control, regulatory compliance, appropriate delegation
and appropriate disclosure to regulators
36
.
We expect its introduction to bring a necessary and significant change, improving culture
and accountability. For these reasons, while the regime has only recently been
implemented for deposit-takers (and will be implemented later in 2018 for insurers and in
2019 for all other FSMA-authorised firms), the additional obligations it places on
individuals in firms could help to address some of the key cultural and governance concerns
that lie behind calls for a New Duty.
As the regime embeds, we hope and expect to see positive change and we will continue
to evaluate its long-term impact. We are keen to understand whether it could address the
outcomes that a New Duty has been said to achieve. If respondents feel this is insufficient,
we are keen to understand why and what further regulation respondents may feel is
needed to enhance good conduct and culture in firms and influence positive customer
outcomes.
34
PS18/14: Extending the Senior Managers and Certification Regime to FCA firms – Feedback to CP17/25 and
CP17/40, and near-final rules, FCA, July 2018. The rules published are near-final as they are subject to
commencement regulations to be made by the Treasury.
35
Code of Conduct (COCON) 2.1.
36
Code of Conduct (COCON) 2.2.
15
Further information on the SM&CR is outlined in our Approach to Supervision
37
. We also
explain in Section 3 below our focus on culture and governance in our authorisations and
supervisory work.
Regulating for changing consumer needs
We collect a large range of insight, information and evidence to help assess whether our
tools are working effectively to protect consumers and identify areas where further
intervention may be required to prioritise and inform our work.
Research projects, such as our Financial Lives Survey 2017
38
and Occasional Papers on
subjects such as Vulnerability
39
, Access to Financial Services
40
and the Ageing Population
and Financial Services
41
, provide us with insights and information about who might be
vulnerable and where harm may be occurring.
We publish our Sector Views annually
42
, providing the latest information and analysis of
what has been happening in the external environment. We use these and other
intelligence sources to identify emerging issues and areas where we need to intervene.
This helps us to identify instances where financial services markets or firms have the
potential to harm users, or where they are working poorly and not providing sufficient
benefit.
Keeping our standards under review
Our Approach to Consumers, published alongside this paper, sets out our vision for well-
functioning markets for consumers. This explains that we will address harm or potential
harm by using the most effective powers and tools in the circumstances. We will also
continue to review and adapt how we use our powers and tools, including our rules and
guidance, to ensure we deliver good outcomes for consumers.
Where we identify areas of harm (for example through research, market studies or our
supervisory work) which are not adequately covered by our existing detailed rules, we
may either rely on the Principles to take supervision or enforcement action, or we may
introduce new detailed rules, or develop guidance to clarify our expectations.
The decision to rely on the Principles or make new rules will depend on a number of
factors. This includes whether the Principles alone will be effective in preventing the
identified harm or whether more detailed rules are required to achieve this.
Alternatively, where the conduct causing the harm is closely linked to existing rules
(either Principles or more detailed rules), then guidance may be sufficient to prevent
further harm.
37
Our Approach to Supervision, www.fca.org.uk/publication/corporate/our-approach-supervision.pdf
38
www.fca.org.uk/publication/research/financial-lives-survey-2017.pdf
39
FCA, Occasional Paper No. 8: Consumer Vulnerability, February 2015 www.fca.org.uk/publication/occasional-
papers/occasional-paper-8.pdf
40
FCA, Occasional Paper No. 17: Access to Financial Services in the UK, May 2016
www.fca.org.uk/publication/occasional-papers/occasional-paper-17.pdf
41
DP16/1 Ageing Population and Financial Services - www.fca.org.uk/news/dp16-01-ageing-population
42
FCA, Sector views, 2017 www.fca.org.uk/publication/corporate/sector-views-2017.pdf
16
For example, following the ‘General Insurance Add-ons Market Study’ in 2016, we
introduced a ban on opt-out selling of add-ons and issued guidance to clarify our
requirements and encourage improved selling practices
43
.
Following the Asset Management Market Study in 2017
44
we brought in new rules to
strengthen the requirement for authorised fund managers to act in the best interests of
investors. This is through a combination of introducing independent members to the
governing boards of these firms and introducing a new responsibility under the SM&CR.
We believe that these rules will influence the culture of authorised fund managers in a
way that leads to better results for investors.
A duty of care in other sectors and internationally
We have discussed above the framework within which we operate and the standards that
we apply to firms. There are also a number of other sectors and jurisdictions in which a
duty of care or similar obligations currently apply. We set out some examples below.
Other professional sectors
Similar duties currently exist for legal and medical professionals:
Principle 4 of the Solicitors Regulation Authority’s Principles
45
requires a solicitor
to ‘act in the best interests of each client’.
The General Medical Council’s Good Medical Practice guidance
46
says that doctors
should ‘Make the care of your patient your first concern’.
Financial services in other countries
In the Netherlands, providers of financial services
are subject to a duty of care
requiring them to take the appropriate level of care when providing their
services
47
.
In the United States, the Securities and Exchange Commission (SEC) has recently
proposed new rules which would affect the relationship between investment
advisers and broker-dealers and their clients
48
. These aim to harmonise the
standards applicable to investment advisers and broker-dealers and include
requiring broker-dealers to act in the best interest of retail investors when
making investment recommendations.
43
www.fca.org.uk/publications/policy-statements/ps15-22-general-insurance-add-ons-market-study-
%E2%80%93-remedies-banning-opt
44
www.fca.org.uk/publication/market-studies/ms15-2-3.pdf
45
The SRA Handbook sets out the standards and requirements applicable to
solicitors.www.sra.org.uk/solicitors/handbook/code/part2/content.page
46
www.gmc-uk.org/ethical-guidance/ethical-guidance-for-doctors/good-medical-practice
47
The overall duty of care provision is laid down in article 4:24a of the WFT (the Financial Supervision Act,
overseen by the Dutch Authority for the Financial Markets, or AFM). Under this article, only those financial
services are in scope that – broadly – advise, distribute or manufacture/offer financial products other than
financial instruments (for instance insurance products and credit products). A separate duty of care article
applies to MiFID-regulated activities.
48
See the speech by SEC Chairman Jay Clayton on 2 May 2018, ‘The Evolving Market for Retail Investment
Services and Forward-Looking Regulation – Adding Clarity and Investor Protection while Ensuring Access and
Choice’ at www.sec.gov/news/speech/speech-clayton-2018-05-02.
17
In Australia, a financial services licensee must ‘do all things necessary to ensure
that the financial services … are provided efficiently, honestly and fairly’ and have
adequate arrangements for the management of conflicts of interest
49
. Where
personal advice is provided to a retail client, the provider must act in the best
interests of the client, provide appropriate advice and prioritise the client’s
interests over their own
50
.
These regulatory provisions cannot of course be read in isolation. In considering the case
for enhancing our current regulatory framework with a New Duty, it is important to
ensure any proposed solutions are suitable for the regime and framework we have in
operation in the financial services sector in the UK.
We are keen to understand further what benefits additional duties for firms currently
provide in other sectors or internationally, and whether these deliver outcomes in those
regulatory regimes that the current UK regime for financial services does not.
Views on potential changes to our regulatory and legal framework, through a
New Duty
We have described above how our regulatory framework acts to protect consumers. We
want to understand however where any ‘gap’ may lie which leads to consumers having
inadequate protection from actual or potential harm. We also seek views on whether a
New Duty could reduce complexity and bring greater clarity, or whether it could result in
an additional layer of regulation and make it more complex, and, if so, how.
As well as seeking views on the merits and practicalities of introducing a New Duty, we
wish to understand possible alternative approaches that might address stakeholders’
concerns. We set out below some potential options for change and invite views on how
these could operate in practice.
Rules introducing a New Duty
We could introduce a New Duty by making a rule, subject to the requirements in FSMA
that apply to the exercise of our rule-making powers. We wish to understand what
benefits and outcomes stakeholders believe it would achieve, over and above the
existing regulatory framework set out above. Also, whether stakeholders believe there
would be potential downsides.
We wish to understand how it would differ in content and effect from the existing high-
level regulatory standards. Particularly, whether a new level of regulatory duty would
bring greater clarity to firms’ obligations or have a greater impact on their practices. We
also want to understand whether it would simplify or add complexity to the current
regime.
We also need to consider the consequences of introducing a New Duty. For example,
whether this would be readily understood or whether it would need to be clarified
49
Sections 912A(1)(a) and (aa) of the Corporations Act 2001 (Cth)
50
Part 7.7A, in particular sections 961B(1), 961G and 961J, of the Corporations Act 2001 (Cth).
18
through guidance or other means, and how it would sit with the current regime, in
particular the Principles.
A statutory New Duty
Some stakeholders have called for a ‘statutory duty of care’. It has been suggested that
a new statutory duty would have greater status than the Principles so that it would be
taken more seriously by firms and improve their culture and treatment of customers.
In considering what degree of protection is appropriate for consumers, we are already
required to have regard to the principle that ‘… those providing regulated financial
services should be expected to provide consumers with a level of care that is appropriate
…’
51
. A statutory New Duty, however, would go further than this and could take a
number of forms.
Legislation could require us to make rules introducing a New Duty (as has been
suggested by some stakeholders). Alternatively, the New Duty could itself be set out in
legislation, in which case it could potentially be supplemented by more detailed FCA rules
or guidance.
We have no power to introduce a statutory New Duty; any form of statutory New Duty
would require a change to primary legislation in Parliament. This is in contrast to us
making a rule of our own initiative, as described above.
Extending the client’s best interests rule
One option available to us would be to extend the scope of the ‘client’s best interests’
rules (as described above) to cover all regulated activities.
An extension would primarily affect accepting deposits and carrying out contracts of
insurance. It could only apply to regulated activities, not non-FSMA regimes or
unregulated activities. It would also be subject to EU law constraints for so long as the
FCA’s rule-making powers remain subject to EU law, in particular the maximum
harmonising effects of the Payment Services Directive 2 (PSD 2) and the Consumer
Credit Directive
52
. This means, for example, that the effect of the rule may be limited in
respect of payment services (such as execution of payment transactions) in many
circumstances as such services are governed by detailed requirements in the Payment
Services Regulations 2017.
For example, this could be done through an amendment to Principle 6. Arguably an
obligation to ‘act honestly, fairly and professionally in accordance with the best interests
of its client’ is a higher standard than Principle 6 which requires a firm to ‘pay due regard
to the interests of its customers and treat them fairly’. We are not aware, however, of
51
Section 1C(2)(e) of FSMA which says, in full, ‘the general principle that those providing regulated financial
services should be expected to provide consumers with a level of care that is appropriate having regard to the
degree of risk involved in relation to the investment or other transaction and the capabilities of the consumers
in question’.
52
There are other areas where we are constrained by EU law, if we wanted to effect change. For example, the
Consumer Credit Directive means it is not currently possible for us to make rules requiring current account
providers to give costs information at the point at which they go into an unarranged overdraft.
19
any judgment of a court or tribunal that has made this distinction. Alternatively (or in
addition), an amendment could be made to Principle 9 to require firms to act in the best
interests of its customers when providing advice or when making decisions on their
behalf as it is arguably in these circumstances that the case for applying a ‘best
interests’ obligation is strongest.
Additional detailed rules or guidance on a New Duty
Some stakeholders have suggested that a New Duty would be flexible and its application
would depend on the complexity and risk of the product or service, perhaps being most
stringent for retail investment products. To deliver the specific outcomes that
stakeholders are calling for, any New Duty might need to be underpinned by more
detailed rules and guidance in specific areas.
We would welcome views on whether a New Duty would require additional detailed rules
and/or guidance in order to achieve the desired outcomes.
Additional detailed rules or guidance on the Principles
We would welcome further discussion on whether the ‘treating customers fairly’ and
other Principles could be enhanced by new rules or guidance (which could be monitored
and mitigated through supervisory or enforcement action, as appropriate) and whether
that might achieve the outcomes intended by a New Duty.
For example, firms already have an obligation under the ‘treating customers fairly’
Principle to support consumers and treat them fairly. To clarify our expectations of firms
and ensure good outcomes for consumers, particularly the vulnerable, we plan to consult
early next year on guidance for firms on the identification and treatment of vulnerable
consumers.
Conflicts of Interest
Some stakeholders have suggested that a New Duty would remove conflicts of interest.
Conflicts of interest are inherent in many financial services. They can arise in a range of
situations from the original design of a product to the giving of advice. At a more
fundamental level, where a commercial relationship between a firm and a consumer
exists, some degree of conflict of interest will be present. For example, firms have an
interest in making a profit through their pricing or by increasing sales, which will be
likely to conflict with the interests of their customers.
Our current regime includes a range of obligations on firms designed to deal with the
problems which these conflicts can give rise to. At a high level, Principle 8 (referred to
above) requires firms to manage conflicts of interest fairly, both between itself and its
customers and between a customer and another client. There are also more detailed
requirements such as those in the Senior Management Arrangements, Systems and
Controls part of our Handbook which set out how firms should identify, manage and
disclose conflicts of interest. For example, firms are required to ‘maintain and operate
effective organisational and administrative arrangements with a view to taking all
reasonable steps to prevent conflicts of interest’
53
. Other rules also deal with particular
53
SYSC 10.1.7R.
20
types of conflicts. For example, there are detailed rules on matters such as inducements
and adviser charging
54
. These rules prohibit certain conduct such as paying or receiving
fees or commissions in particular circumstances.
We would welcome views on how a New Duty, whether a duty of care or other change,
would add to the current regime and assist in mitigating or removing conflicts of
interest, both across the financial services sector or with focus on particular markets.
Question 1
Do you believe there is a gap in the FCA’s existing regulatory framework that could be
addressed by introducing a New Duty, whether through a duty of care or other
change(s)?
If you believe that there is, please explain what change(s) you want to see.
We are particularly interested in your views on:
i. The types of harm and/or misconduct any changes would address.
ii. Whether a New Duty should be introduced and, if so, what form it should take.
iii. What additional consumer protection and benefit this would provide, above the
current regime (including over and above the existing implied term in the CRA for
reasonable care and skill).
iv. How a New Duty could and should act to mitigate or remove conflicts of interest,
including the types of conflicts which exist in the provision of financial services?
v. Whether a New Duty could reduce complexity and bring greater clarity, or
whether it could result in an additional layer of regulation and make it more
complex, and, if so, how?
vi. Whether other alternatives could help address any gaps, for example, extending
the clients’ best interests rule to different activities.
vii. Whether we should introduce more detailed rules and guidance, and, if so, what
specific rules and guidance are required?
viii. Whether the scope of any changes should differ between markets and whether it
should include wholesale transactions.
Question 2
What might a New Duty for firms in financial services do to enhance positive behaviour
and conduct from firms in the financial services market, and incentivise good consumer
outcomes?
54
See COBS 2.3, 2.3A, 2.3B and 6.1A.
21
3. How we regulate in practice
Overview
Having set out the framework within which we operate, the standards that we apply to
firms and the powers we have to protect consumers, we want to understand whether the
way we apply these in practice does enough to prevent harm and achieve good
outcomes for consumers.
Some stakeholders have said that the way we apply our rules and powers in practice is
insufficient to deter firms from acting in a way that leads to negative outcomes for
consumers. They explain that a New Duty could benefit consumers by encouraging firms
to promote positive outcomes from the outset.
In this section, we set out how we regulate in practice. We give examples of the wide
range of tools and approaches we apply across our core functions to protect consumers
by preventing harm occurring in the first place, and reducing or stopping it when it does
occur.
We are keen to understand whether the way we regulate results in a gap that a New
Duty could address and whether a New Duty would improve our effectiveness in
preventing and tackling harm and in achieving good outcomes for consumers.
How we ensure that firms meet our standards
We set out below some of the main tools we use to protect consumers, including our
authorisation, supervision, enforcement, competition and policy functions, as well as how
we keep them under review.
This section illustrates how we aim to use the most appropriate tool for each type of
harm, using the combination of Principles, other rules and guidance described in Section
2 above.
Authorisation
We use authorisation to protect consumers from harm by ensuring that firms and
individuals meet minimum standards. For firms that wish to be authorised under FSMA
these are referred to as the Threshold Conditions
55
. If a firm wishes to appoint
individuals into certain key roles they must meet a separate set of minimum standards
known as the Fit and Proper Test.
Firms and individuals must demonstrate to us that they meet the minimum standards
and will continue to meet them for as long as they are authorised.
55
Equivalent standards apply for firms seeking authorisation under other regulations, such as the Payment
Services or Electronic Money Regulations.
22
We look at a wide range of factors, including the way the firm is organised, its
business strategy and model and the integrity, financial soundness and
competence of individuals
Individuals must demonstrate honesty and integrity, they must be financially
sound, and they must have the necessary competence and capability to carry out
the role
Authorisation and supervision are key tools we use to improve conduct and culture in
firms. We do this by testing the most significant drivers of behaviour that can create
cultures which lead to harm. We look at a number of factors, including the firm’s
purpose, attitude, behaviour, its approach to managing and rewarding people and the
firm’s governance arrangements, controls and key processes (for example, for
whistleblowing or complaint handling).
We will refuse to authorise a firm if it does not satisfy us that it meets and will continue
to meet the minimum standards.
Improving the quality of debt management advice
Following our 2015 thematic review on the Quality of debt management advice
56
, we
assessed the risk of harm posed by many firms as high, particularly as many of their
customers were vulnerable. We refused to authorise those firms which would not
satisfy, and continue to satisfy, our Threshold Conditions; others chose to leave the
market.
Our Approach to Authorisation provides more detail on how we authorise firms.
57
Supervision
Once firms are authorised, our supervisory function protects consumers by maintaining
continuous oversight of regulated firms and individuals to identify, reduce or prevent
harm to consumers and markets.
We apply our judgment using the framework of the Principles and other rules as
described in Section 2 above, which represent minimum standards of conduct. We have
developed key supervisory principles which guide our work and help us prioritise our
interventions to deliver our objectives; these are complementary to the Principles for
Businesses.
Our approach includes pre-emptive identification of harm and quick and efficient action
to address the root causes of harm when it is occurring. We use data, intelligence and
analytical tools to build a picture of perceived harms. This drives our proactive,
preventative supervisory activities.
56
TR15/8: Quality of debt management advice, FCA, 2015.
57
www.fca.org.uk/publication/corporate/our-approach-authorisation.pdf
23
Where our supervision function identifies issues that require wider solutions (say, across
a whole market through rule changes) or more intensive investigation and remedial
action, we may then use other regulatory tools such as policy development or opening
an enforcement investigation.
Fair treatment of interest-only mortgage customers
Following our 2013 thematic review of the Fair treatment of existing interest-only
mortgage customers, we issued guidance setting out our views on how firms could act
in accordance with our treating customers fairly Principle to achieve a fair outcome for
their customers who risk being unable to repay their loan
58
.
We recently conducted further work to see what changes had been made since we
published our guidance
59
. We found that all the lenders in our sample have made
progress in the fair treatment of these customers and that engagement between
lender and customer earlier in the mortgage term may achieve fairer outcomes.
Assessing the drivers of culture is central to our pre-emptive identification of harm. This
allows us to anticipate potential problems in firms and markets. We explained in Section
2 above how the SM&CR now acts as a key tool in our framework to improve the drivers
of culture in authorised firms and raise the standard of conduct of individuals.
Alongside this, we use the CRA as part of our supervisory work. Where we identify unfair
terms, we have the power to apply for an order from the court to prevent a firm relying
on the term or to accept an undertaking given to us by a firm in lieu of seeking an order.
In 2017, we published 2 undertakings under the CRA, from London General
60
and
PPRO
61
.
Our Approach to Supervision provides more detail on how we supervise firms.
62
Enforcement
Our enforcement function protects consumers by making it clear there are real and
meaningful consequences for firms and individuals who do not follow the rules. We use a
wide range of enforcement powers – criminal, civil and regulatory – to protect
consumers and to take action against firms and individuals that do not meet our
standards. This includes, where possible, seeking redress or remedy for those harmed.
Through publication of enforcement outcomes, we also act transparently to raise
awareness of regulatory standards more widely, so others can use this to improve their
own conduct.
58
FG13/7 - Dealing fairly with interest-only mortgage customers who risk being unable to repay their loan,
FCA, 2013.
59
The fair treatment of existing interest-only mortgage customers (TR18/1), FCA Thematic Review, January
2018.
60
Notice of Undertaking: London General Insurance Company Limited, FCA 2017.
61
Notice of Undertaking: PPRO Financial Limited, FCA 2017.
62
Our Approach to Supervision www.fca.org.uk/publication/corporate/our-approach-supervision.pdf
24
To prevent harm, our enforcement division works closely with our authorisation,
supervision, and strategy and competition divisions, as well as other regulators and law
enforcement. This means we can identify and act early when enforcement action is
necessary.
To prevent harm, we can open an enforcement investigation against firms for breach of
the Principles. These can be used as the sole basis for enforcement action and include
cases where we have taken action for failing to treat customers fairly, in breach of
Principle 6.
Enforcement of the Principles including treating customers fairly
In February 2018, we imposed a fine of £1,976,000 on Vanquis Bank for breaches of
Principles 6 (treating customers fairly) and 7 (Communications with customers) of our
Principles for Businesses, after the firm failed to disclose the full price of an add-on
product to its credit cards.
63
Alongside this, we - including our Unregulated Business Department (UBD) - prevent
harm to consumers through education and awareness campaigns such as our
ScamSmart campaign to help consumers avoid investment and pension scams
64
.
Our Approach to Enforcement
65
and Enforcement Guide (‘EG’)
66
provide more
information on our enforcement activities.
Competition
We use our competition powers to protect consumers by ensuring markets work well. We
are one of the few financial regulators with a core objective to promote competition.
Effective competition in financial services benefits consumers and the economy.
Our work across wholesale and retail markets aims to keep markets open to entry and
innovation. We tackle anti-competitive conduct and intervene to ensure competitive
forces drive good outcomes for consumers. Part of our work is about supporting
consumer choice, including moving from an unsatisfactory supplier to a better one. We
give particular attention to areas where customers’ and firms’ interests are not well
aligned.
As discussed in Section 2, we may undertake an investigation under the CA98 and
equivalent EU provisions and, following that, take action to fine individual firms who
have breached the law. Or we may conduct a market study which is an in-depth,
evidence-driven investigation that can propose solutions. We typically undertake a
market study where we believe that the drivers of harm might go further than firm
conduct and may arise from how the market itself functions. The primary aim is to
63
See our Final Notice of 27 February 2018.
64
www.fca.org.uk/scamsmart
65
www.fca.org.uk/publications/corporate-documents/our-approach-enforcement
66
See the EG pages in the FCA’s Handbook on our website.
25
identify if and/or how a market could be made to work better, rather than focusing on
past firm conduct and firms’ adherence to our rules. The remedies that flow from market
studies can go beyond applying current rules to putting in place remedies that seek to
change firm or consumer behaviour and as a result, achieve better consumer outcomes.
Encouraging fair treatment of customers
In our Mortgage Market Study Interim Report
67
, we encourage firms to consider the
fair treatment of consumers who stay on relatively expensive reversion rates (the
interest rate payable once an introductory rate ends) for an extended period. Such
customers who cannot switch are sometimes referred to as ‘mortgage prisoners’.
In insurance, following the publication of our Market Study on general insurance add-
ons
68
, we are piloting the publication of value measures data. This includes claims
frequencies and average claims pay-out by insurer. It seeks to help consumers make
informed decisions about insurance needs, improve transparency and act as a
reputational incentive on firms
69
.
Our Approach to Competition provides more information on our competition activities.
70
Policy
We protect consumers by putting in place the necessary rules and guidance. We use our
powers to maintain and implement a framework of rules and guidance that reduces harm
and makes markets work better.
We make policy interventions to protect consumers from practices that cause actual
harm or carry a high risk of harm. This can include rule changes, publishing Guidance, or
communications with firms or customers such as sending ‘Dear CEO’ letters
71
or issuing
customer warnings about particular products.
Protecting consumers from unfair practices in insurance
As an example of rule changes, following our 2015 Market Study on General Insurance
add-ons, we made new rules which banned opt-out selling and improved the information
to customers buying add-ons.
We also found consumers were significantly overpaying for Guaranteed Asset Protection
(GAP) insurance sold alongside motor vehicles. Motor dealers had a strong point of sale
advantage and consumers were unaware of lower priced products elsewhere. To improve
consumer outcomes and help consumers make more considered purchasing decisions,
we introduced rules requiring a deferral between the introduction and sale of the GAP
67
Mortgages Market Study Interim Report, Market Study, MS16/2.2, May 2018.
68
General Insurance Add-Ons: Final Report – Confirmed Findings of the Market Study, July 2014.
69
General Insurance value measures pilot, FCA website as updated on 2 March 2018.
70
www.fca.org.uk/publication/corporate/our-approach-competition.pdf
71
A ‘Dear CEO’ letter is a letter addressed to CEOs of firms outlining our particular concerns about the market
or industry they operate in.
26
product. We also introduced mandatory information disclosure by add-on sellers to
consumers.
While work evaluating the impact of our GAP intervention is ongoing, current evidence
suggests that add-on GAP sales are much lower than they would have been had we not
intervened.
Policy changes have helped bolster work by our other core functions described above,
such as supervision and enforcement. They have worked closely together to challenge
firms’ business models to tackle existing harm and where we believe there to be a risk of
future harm.
Tackling harm in consumer credit
Across the FCA, we have already taken significant action where consumer credit firms
fail to meet our standards, using the authorisation process, supervision and, where
appropriate, enforcement. Firms have made substantial improvements, particularly in
their creditworthiness assessments and dealing with consumers in financial difficulty. By
February 2018, we had also secured £901 million redress (write downs and payments)
for over 1.7 million consumer credit customers. We also have an important role in
promoting competition and innovation, and in working with others to influence demand
in credit markets.
Looking to the future
In this section, we have explained the way we regulate in practice, using our full suite of
powers and tools to prevent harm to consumers.
We have set out how we use authorisation and supervision to ensure that we maintain
continuous oversight of regulated firms and that they meet common sets of entry
requirements at the start. We have also explained how we use our enforcement function
to achieve fair and just outcomes in response to misconduct, while ensuring competition
is working effectively for consumers in the markets we regulate. We have also explained
how we can modify rules where necessary and make policy interventions to protect
consumers from practices that carry a high risk of harm.
We seek to be a pro-active regulator by identifying and reducing harm for consumers
before it occurs and dealing with harm when it occurs to achieve fair outcomes. Through
our examples, we have shown how we apply our Principles, rules and guidance in
practice, looking at markets thematically and in market studies to help lay the basis for
wider change.
Having set out some practical examples of the way in which we act to protect
consumers, we want to understand what a New Duty might add to the way in which we
operate.
27
Question 3
How would a New Duty increase our effectiveness in preventing and tackling harm and
achieving good outcomes for consumers? Do you believe that the way we regulate
results in a gap that a New Duty would address?
28
4. Consumer outcomes, including redress
Having discussed the way we regulate in practice, we want to understand whether a New
Duty would be more effective in preventing harm occurring in the first place for
consumers. We also want to understand whether complaint mechanisms and redress
would need to be relied on less.
In this section, we explain the various routes by which consumers can currently obtain
redress (that is, the payment of money or other action by a firm to remedy harm done).
We also consider whether a New Duty would provide an additional route by which
consumers could secure redress, and whether that is needed.
Routes to redress provide an important source of market confidence and integrity.
Consumers are likely to be more willing to engage with financial services if they are
confident that they can challenge unfair treatment and obtain a remedy. This can help
deter firms from treating consumers unfairly in the first place.
The best consumer outcome is to prevent harm from occurring in the first place.
However, in financial markets, as with any other market, sometimes things go wrong
and a customer feels that a promise has not been kept or they have been unfairly
treated. In such cases, suitable routes to redress are necessary to provide a good
outcome for affected consumers.
The principal, current mechanisms for a consumer to obtain redress are:
Making a complaint to the firm and, if it is not satisfactorily resolved, referring
that complaint to the Financial Ombudsman Service.
Taking action against the firm in court.
As a result of action taken by the FCA.
Complaints
Effective, accessible and trusted internal complaints systems operated by firms
themselves are of fundamental importance to treating consumers fairly
72
. They remove
the need for consumers, firms and regulators to use large amounts of resource on more
formal and binding redress mechanisms. Where firms identify recurring or systemic
problems, they are required to identify their root causes and correct them, and consider
what actions may be needed for customers who have not complained
73
. A New Duty
would be relevant to how firms assess complaints.
72
We set the rules for how firms must handle complaints, see DISP 1.
73
Dispute Resolution part of the Handbook DISP 1.3.3R and DISP 1.3.6G.
29
The Financial Ombudsman Service
If a consumer makes a complaint through a firm’s internal complaints process and they
are unhappy with the firm’s final response
74
the consumer can bring a complaint to the
Financial Ombudsman Service for consideration.
The scheme is designed to resolve disputes independently, quickly and with minimum
formality at no charge to consumers. The FCA determines which disputes the
ombudsman can deal with
75
. The ombudsman can make an award (currently a maximum
of £150,000
76
) or a direction, both of which are enforceable in court
77
.
Complaints are determined by reference to ‘what is, in the opinion of the ombudsman,
fair and reasonable in all the circumstances of the case’
78
. The ombudsman takes into
account relevant law and regulations, regulators’ rules, guidance and standards, codes of
practice and (where appropriate) what is considered to have been good industry practice
at the time.
79
The ombudsman is therefore not bound to resolve the dispute in
accordance with the law. The ombudsman would need to take into account a New Duty
in the same way as the existing regulatory framework.
The ‘fair and reasonable’ test applied by the ombudsman is, like the Principles, drafted at
a high-level and both refer to the concept of fairness. To that extent, we consider that
the tests involve the FCA and the ombudsman applying very similar considerations to the
issues in front of them. The ombudsman’s test, however, necessarily takes into account
the specifics of particular cases, recognising its role in resolving individual complaints.
This differs from the FCA’s role in setting, supervising and enforcing standards for firms
generally.
The FCA and the Financial Ombudsman Service co-operate with each other in the
exercise of their respective functions
80
. This is particularly important where the FCA is
taking supervisory or regulatory action and, at the same time, the Financial Ombudsman
Service is receiving a significant number of cases concerning the same issue. Outcomes
for consumers as a result of FCA action and ombudsman decisions will generally be
broadly similar. However, this will not always be the case. This is because the Financial
Ombudsman Service is operationally independent from the FCA, and makes individual
decisions which are fair and reasonable in all the circumstances of a particular case.
Court Action
Consumers can also take action against a firm in court in certain circumstances,
although this can be very costly. Actions include breach of contract, tort (for example,
misrepresentation) or an action to enforce the implied contractual duty of care under the
74
Firms are required to issue within 8 weeks – less for payment services complaints
75
The Ombudsman can also settle some other disputes as agreed with firms. See DISP 2.3 and 2.5 for more
information.
76
We are considering increasing this, see CP18/3 paragraphs 4.14-4.33.
77
DISP 3.7.13G.
78
See section 228(2) of FSMA and DISP 3.6.1R.
79
DISP 3.6.4R.
80
See the Memorandum of Understanding between the FCA and the Financial Ombudsman Service dated 18
December 2015 for further details.
30
CRA
81
. Where a term or notice is unfair under the CRA, a consumer could rely on the fact
that it is not binding on them in any court action against a firm. We are keen to
understand what additional consumer benefit a New Duty would provide if it were to give
consumers an actionable claim.
In addition, FSMA allows
82
us to determine, for each of our rules, whether certain people
who are ‘private persons’
83
have a right of action for damages in the case of loss caused
by a breach of that rule (subject to some limited exceptions). As the definition of
‘private person’ is set out in a regulation made under FSMA, any extension would be a
matter for the Treasury and Parliament, not the FCA. For a breach of the Principles, we
do not allow consumers such a right of action against a firm,
84
nor can we impose a
consumer redress scheme for such a breach (see below).
In contrast, the ability of a ‘private person’ to take action for a breach of the ‘best
interests’ rules, discussed in Section 2, has been retained. Where such a rule applies,
consumers would generally be able to take action in court if they suffered a loss as a
result of a breach of such a rule by a firm.
We would need to consider whether breach of any New Duty should give rise to a right of
action for damages in court. The rationale for not allowing rights of action in relation to
the Principles was set out in the FSA’s original consultation paper on the Principles in
1998
85
.
In summary, the rationale is that the risk of civil litigation driving the interpretation and
application of the Principles outweighs the benefit to consumers of being able to take
action against firms, given that consumers can take action in respect of other, more
specific rules. Nevertheless, it is open to the FCA to re-visit this issue and consider again
what the potential benefit and detriment would be of making breaches of the Principles
actionable by private persons.
In practice, the number of decided court actions based on a breach of FCA rules where
the right of action already exists has been relatively small. We believe that this reflects a
relatively small number of court cases initiated.
86
The FCA has a right to make
representations to the court in such cases on the meaning of our rules
87
and we have
exercised this right in some cases.
The Law Commission consulted on extending rights of action for breaches of FCA rules in
2014
88
. This was both for expanding the ability of businesses to sue and to enable
actions on the basis of breaches of the Principles. The Law Commission did not feel able
81
Opt-out class actions cannot currently be brought in the UK except for breach of competition law.
82
Section 138D of FSMA.
83
Broadly, under the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 this includes
individuals but excludes businesses.
84
PRIN 3.4.4R.
85
Para. 23 of the FSA’s CP13 entitled ‘The FSA Principles for Businesses’, October 1998
(www.fsa.gov.uk/library/policy/cp/1998/13.shtml).
86
We should be aware of the number of court cases, as firms are required to notify us of any action brought
against them for breach of the rules, although in our experience they do not always do so. SUP 15.3.15R(2).
87
Practice Direction 8A paragraph 21.4 of the Civil Procedure Rules 1998.
88
Fiduciary Duties of Investment Intermediaries (Law Com No 350, 30 June 2014), paragraphs 11.10 to 11.35.
31
to recommend such a change at that stage. On balance, it concluded that the effects of
the change are uncertain and that:
It could be disruptive and add to costs, while encouraging defensive rather than
beneficial behaviour.
It is also extremely controversial, with most financial intermediaries opposed to
the change.
On the other hand, providing a right to sue for a failure to treat customers fairly
would underline the importance that all participants in financial markets ‘should
act in the best long-term interests of their clients or beneficiaries’.
It is possible that a limited extension, subject to suitable defences, could be
implemented without undue costs.
Our role in providing redress
It has been argued that we over rely on redress schemes after the event, rather than
doing enough to prevent harm and that a New Duty would help prevention. In this
section, we set out the various routes by which consumers can currently obtain redress.
We have a number of ways of providing redress to consumers:
Making rules and guidance on how particular types of complaints should be dealt
with by firms (for example, PPI).
Specific statutory powers exercisable against an individual firm, such as under the
CRA relating to unfair terms, and FSMA powers to order restitution.
A power to order an industry-wide consumer redress scheme, where there has
been widespread or regular failure by firms.
Voluntary schemes which can apply to regulated or unregulated activities of
firms, and may be industry-wide or specific to an individual firm (and might
include a scheme of arrangement under the Companies Act 2006).
The power to order an industry-wide consumer redress scheme is only available in
specific circumstances. That is where it appears that there may have been widespread or
regular failure by firms to comply with applicable requirements and where it appears
that, as a result, consumers have, or may, suffer loss or damage that, if they brought
legal proceedings, a remedy or relief would be available
89
. Such a scheme is not available
for a breach of the Principles as consumers cannot obtain a remedy in court in this
situation.
We will generally consider exercising our redress powers where there has been
widespread or regular failure by an individual firm or group of firms to comply with
requirements. Our actions will depend on the particular circumstances and a
consideration of how best to advance our objectives having regard to relevant principles.
This includes that the burden of the redress scheme should be proportionate to the
benefits.
89
See section 404 of FSMA.
32
We agree that prevention is better than redress. But we nevertheless believe that the
use of our redress powers is important both as a deterrent and to provide redress where
problems occur in the financial services market.
We seek views on whether breaching the Principles, or a New Duty, should be actionable
by consumers. We also want to understand whether, and if so how, a New Duty would
mean that consumers would need to rely less on redress.
Question 4
Should the FCA reconsider whether breaches of the Principles should give rise to a
private right for damages in court? Or should breaching a New Duty give this right?
Question 5
Do you believe that a New Duty would be more effective in preventing harm and would
therefore mean that redress would need to be relied on less?
If so, please set out the ways in which a New Duty would improve the current regime.
33
5. Questions
Questions – our call for views
We want to understand the reasons for introducing any New Duty: whether there is a
gap in our legal and regulatory framework, and whether this relates to its scope, the way
we apply it in practice, or both.
We ask below specific questions to support our thinking on this topic. We seek specific
examples and evidence to support your answers wherever possible.
Section 2: Our regulatory and legal framework
Question 1
Do you believe there is a gap in the FCA’s existing regulatory framework that could be
addressed by introducing a New Duty, whether through a duty of care or other
change(s)?
If you believe that there is, please explain what change(s) you want to see.
We are particularly interested in your views on:
i. The types of harm and/or misconduct any changes would address.
ii. Whether a New Duty should be introduced and, if so, what form it should take.
iii. What additional consumer protection and benefit this would provide, above the
current regime (including over and above the existing implied term in the CRA for
reasonable care and skill).
iv. How a New Duty could and should act to mitigate or remove conflicts of interest,
including the types of conflicts which exist in the provision of financial services?
v. Whether a New Duty could reduce complexity and bring greater clarity, or
whether it could result in an additional layer of regulation and make it more
complex, and, if so, how?
vi. Whether other alternatives could help address any gaps, for example, extending
the clients’ best interests rule to different activities.
vii. Whether we should introduce more detailed rules and guidance, and, if so, what
specific rules and guidance are required?
viii. Whether the scope of any changes should differ between markets and whether it
should include wholesale transactions.
Question 2
What might a New Duty for firms in financial services do to enhance positive behaviour
and conduct from firms in the financial services market, and incentivise good consumer
outcomes?
34
Section 3: How we regulate
Question 3
How would a New Duty increase our effectiveness in preventing and tackling harm and
achieving good outcomes for consumers? Do you believe that the way we regulate
results in a gap that a New Duty would address?
Section 4: Consumer outcomes, including redress
Question 4
Should the FCA reconsider whether breaches of the Principles should give rise to a
private right for damages in court? Or should breaching a New Duty give this right?
Question 5
Do you believe that a New Duty would be more effective in preventing harm and would
therefore mean that redress would need to be relied on less?
If so, please set out the ways in which a New Duty would improve the current regime.
How to respond
We are asking for responses to these questions and comments on the paper by 2
November 2018.
You can send them to us using the form on our website at: www.fca.org.uk/dp18-05-
response-form
Or in writing to: Consumer Insight, Financial Conduct Authority, 12 Endeavour Square,
London E20 1JN
Or by e-mail to: dutyofc[email protected]
35
ANNEX 1 – THE CONCEPTS OF DUTY OF CARE AND FIDUCIARY DUTY
Duty of care
‘Duty of care’ refers, broadly, to a legal obligation to take care which, when breached,
will make the person at fault liable to compensate the victim for the loss they have
suffered.
A duty of care can arise in a range of circumstances, including:
in a tort, such as negligence, where there is a duty to take reasonable care
in contract, where such a duty may be express or implied (and may take the form
of reasonable care or could be a different standard)
the duty owed by a trustee to a beneficiary
as a result of statute, for example, section 49 of the CRA (discussed above) and
section 1 of the Trustee Act 2000
To recover a loss it is also necessary to show, depending on the nature of the duty (for
example, tort or contract), other matters such that the duty was breached, that the
breach caused the loss and that the loss was foreseeable and not too remote.
So, a ‘duty of care’ is a positive obligation on a person to ensure that their conduct
meets a set standard. In the context of firms dealing with consumers, this normally
means an obligation to exercise reasonable care and skill when providing a product or
service.
Fiduciary duty
The concept of a ‘fiduciary duty’ is one that the courts have developed over time. It is
complex and challenging to define. The key questions are when somebody will be a
fiduciary and, when they are, what duties will they owe?
Who is a fiduciary?
There are certain categories of relationship which have been established by the courts as
giving rise to a fiduciary relationship. For example, fiduciary duties are owed by trustees
to beneficiaries and by solicitors (and other advisers) to their clients.
The court will look at the substance of a relationship to determine whether a fiduciary
duty exists. While the case law is not clear on precisely how this will be done it appears
to turn largely on whether there is a legitimate expectation that one party (the fiduciary)
will act in another’s interest. Factors that are likely to be relevant include whether the
fiduciary exercises discretion, has the power to act on behalf of the other party and the
vulnerability of that other party
90
.
90
Fiduciary Duties of Investment Intermediaries (Law Com No 350, 30 June 2014), paragraphs 3.23-3.24.
36
What duties does a fiduciary owe?
These are also somewhat uncertain and will vary depending on the type of relationship.
However, in general, a fiduciary
91
:
must act in good faith
must not make a profit out of his trust (other than with the consent of the client)
must avoid conflicts of interest (either between its own interests and those of the
client or between the interests of different clients)
A fiduciary may, of course, owe other duties to a client as a result of an agreement
(either express of implied terms), in tort (for example, misrepresentation) or as a result
of regulation (for example, primary legislation or the FCA Handbook). Fiduciary duties
may generally be altered or restricted by agreement between the parties.
It has been said that fiduciary duties are about what a fiduciary cannot do, rather than
imposing a positive duty to act (although many fiduciaries may separately be under such
duties).
92
Comparison of the duties
A duty of care and a fiduciary duty, therefore, have somewhat different purposes. A duty
of care is a positive obligation that aims to ensure that people are not reckless or
incompetent whereas a fiduciary duty is largely a prohibition on acting in a way that is
somehow disloyal or improper.
93
This picture is complicated by the fact that in many, if not most, cases, a person who
has fiduciary duties is also subject to a duty of care. Fiduciaries duties apply in much
more limited circumstances than a duty of care. This makes it tempting to think of a
fiduciary duty as being a stricter standard than a duty of care.
91
Bristol & West Building Society v Mothew [1998] Ch 1 at 18
92
Fiduciary Duties of Investment Intermediaries (Law Com No 350, 30 June 2014), paragraphs 3.41-3.42.
93
See, for example, Fiduciary Duties of Investment Intermediaries, A Consultation Paper (Law Com CP No 215,
22 October 2013) at paragraph 6.34.
37
ANNEX 2 - OUR CUSTOMER OUTCOMES FOR TREATING CUSTOMERS
FAIRLY
There are 6 consumer outcomes that firms should strive to achieve to ensure fair
treatment of customers. These remain core to what we expect of firms
94
:
1. Outcome 1: Consumers can be confident they are dealing with firms where the fair
treatment of customers is central to the corporate culture.
2. Outcome 2: Products and services marketed and sold in the retail market are
designed to meet the needs of identified consumer groups and are targeted
accordingly.
3. Outcome 3: Consumers are provided with clear information and are kept
appropriately informed before, during and after the point of sale.
4. Outcome 4: Where consumers receive advice, the advice is suitable and takes
account of their circumstances.
5. Outcome 5: Consumers are provided with products that perform as firms have led
them to expect, and the associated service is of an acceptable standard and as they
have been led to expect.
6. Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms
to change product, switch provider, submit a claim or make a complaint.
94
www.fca.org.uk/firms/fair-treatment-customers
