Higher bank standards aim to reduce customer harm - Erin Sculthorpe
It's been almost 10 years since the UK financial services regulatory system was overhauled and the Financial Services Authority (FSA) was restructured to form the FCA Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA).
This July, the FCA announced new rules which will hold UK financial services (FS) firms to a new higher standard. Firms will be expected to put themselves in the shoes of the consumer at all times, and consider whether their respective products and services achieve "good outcomes" for consumers. What does this mean therefore for consumers and FS organisations?
In the wake of the 2008 financial crash, the FSA was criticised for failing to act before the big banks collapsed. People had lost faith in the UK regulatory system, banks and financial services more generally. The 2013 overhaul of the FS regulatory system was intended to restore public faith in financial services.
The FCA was established with three core outcomes in mind. The first being that consumers should get financial services and products that meet their needs, from firms they can trust. A further six consumer-focused outcomes were set out in the FCA's Treating Customer's Fairly (TCF) initiative. FS firms have been required to comply with rules and principles aimed at achieving these outcomes for many years. So, why therefore do we need the new consumer duty?
Despite the 2013 changes, stakeholders have voiced concerns over the way the regulatory framework is applied and the levels of consumer harm in retail markets. The move to digitisation, rise in use of social media platforms and fast-paced change to a cashless society during the Covid-19 pandemic have all been key factors which have influenced the potential for consumer harm. The FCA's view is that difficult or complicated customer journeys containing lots of small print and/or friction could result in poor customer outcomes.
Whilst TCF required firms to "pay regard" to customer's interests, it was argued that the levels of consumer harm in the FS sector were unacceptably high and more needed to be done to protect consumers. Firms were still seen to be prioritising profit over consumer outcomes. Therefore, the FCA began to consult on the introduction of a new higher standard to reduce harm and support a culture change across the sector.
From July 2023, FS firms and many of their employees will be required to "act to deliver good outcomes for retail customers". This is the new high-level principle and it’s underpinned by detailed rules and guidance. The FCA has made it very clear that all FS firms regulated by the FCA will have to make changes internally to "shift the mindset" and shift their culture to focus on good consumer outcomes. We’re now in a period of implementation where the FCA will be checking on firms to make sure that they’re taking steps to embed the duty across their business.
The FCA consulted on introducing a new statutory duty of care in legislation that would provide consumers with a right to take court action where firms breached that duty (private right of action).
The discussion around the statutory duty of care and private right of action became increasingly contentious with strong opposing arguments presented. Final rules didn’t include the private right of action and, whilst the FCA has said that it will keep this decision under review, stakeholders have argued that this decision undermines the impact of the new duty. At this stage, we don't know how this decision will impact the effectiveness of the new duty. However, consumers will still have a right of action where they suffer loss as a result of a breach of any FCA rule (not including the new principle – which is not a rule in itself).
FS firms are now under an immense amount of pressure and time constraint to implement changes to their business before July 2023. Whilst there are firms that already demonstrate many of the behaviours associated with the new duty, the FCA has made clear its intentions to be more assertive and act where firms are not doing the right thing. Firms therefore need to ask themselves: "Am I treating my customers as I would expect to be treated in their circumstances?".
Erin Sculthorpe is a lawyer in DLA Piper’s Litigation and Regulatory practice
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