Click here to read more - CP21/13: A new Consumer Duty

What is the FCA’s consultation about?

In CP21/13, the FCA has proposed the creation of a new Consumer Principle, supported by a set of “cross-cutting” Rules and four Outcomes. You can find our summary of the FCA’s proposals here, and our companion article on the key issues that we see arising out of the FCA’s proposals here. Together, these are intended to set higher expectations for the standard of care that financial services firms provide to consumers.

The FCA’s proposals represent a paradigm shift in the FCA’s expectations of firms. Although the FCA does recognise that many firms are already working within the regulatory framework to deliver good outcomes for customers, the FCA has made it clear that, for many firms, their proposals require a significant shift in culture and behaviour, consistently focusing on consumer outcomes and putting customers in a position where they can act and make decisions in their interests.

Litigation Risk: Enforcement action by the FCA

It may be (although it is by no means guaranteed in CP21/13) that the FCA will give firms a grace period after implementation to embed changes to organisational structures, processes and behaviours that the Consumer Duty proposals require . But firms will nevertheless need to adapt quickly given the anticipated level of focus from the FCA on firms’ compliance with the new requirements and the real risk of enforcement action if firms get it wrong. Firms will only be able to adapt quickly, however, if it is clear what the new requirements actually are. Firms should consider whether they would benefit from further guidance from the FCA: for example, the FCA has indicated that the Consumer Duty provisions will not apply retrospectively to past business, but how does this apply to products which have been marketed and sold before the Consumer Duty comes into effect? Will firms nevertheless need to monitor such products going forward in order to identify any harm to consumers? If firms foresee that a significant implementation period is required, or determine that these questions (among the many raised in CP21/13) are difficult to answer, they  should strongly consider responding to CP21/13 to make their views known and request any relevant guidance. 

It is also worth noting that, under the Senior Managers & Certification Regime, a firm’s senior managers with responsibility for areas of the business where the Consumer Duty is applicable could be personally at risk of enforcement action if they do not discharge those responsibilities. Firms will therefore need to ensure that their senior managers are fully apprised of the increased expectations on firms (and their personnel) under the Consumer Duty.

Litigation Risk: Complaints handling

It is easy to see how the Consumer Duty, once implemented, could trigger new waves of complaints to firms where customers feel they have not been treated in accordance with the standards of the new Consumer Duty and/or have suffered losses¹ - even where there has been no breach of a rule or regulatory requirement. In particular, the FCA’s stated objective to achieve good outcomes for customers is likely to raise consumers’ expectations for their interactions and dealings with firms.

Firms’ complaints handling processes and teams therefore need to be prepared to deal with complaints alleging a breach of the Consumer Duty. The FCA’s proposals for each layer of the Consumer Duty will need to be considered, and complaints handling teams will need to understand their firm’s approach to satisfying each of the requirements. Some of the concepts in CP21/13 which will go to the determination of a firm’s obligations to its customers are currently unclear: for example, in CP21/13 the FCA noted that “best interests” (which features in one of the possible formulations of the Consumer Principle²) is sometimes used in the context of fiduciary relationships, but states it is not intended that the Consumer Principle would give rise to such a relationship, and indicates that the embedding of a concept of reasonableness in the Consumer Duty would clarify the objective standard of conduct that firms would need to meet. However, granular guidance has not yet been provided: in the absence of such guidance, it may not be straightforward to arrive at a “house view” to guide complaints determinations. As such, it seems that firms will need to offer a significant level of training and oversight to their complaints processes, both in preparation for and after implementation.

Litigation Risk: the FOS and the BBRS

Firms may also face complaints about failures to comply with the Consumer Duty before the Financial Ombudsman Service (“FOS”) or the Business Banking Resolution Service (“BBRS”).

The Consumer Duty proposals would not inherently alter the way that the FOS reaches decisions: it will continue to judge complaints by reference to what is fair and reasonable in the circumstances. However, it seems that the positive imposition of a regime requiring higher standards of firms in their dealings with customers by the FCA could influence the FOS’ own perception of the standards by which firms should behave. Furthermore, whilst the Consumer Duty proposals are applicable to consumers and products in the regulated sector, the wider jurisdiction of the FOS could see the same standards applied by analogy across the non-regulated sector. It will also be interesting to see whether the FCA’s indication that the Consumer Duty provisions will not apply retrospectively to past business will be taken into account, and applied, by the FOS. In our view, it would be helpful for the FCA to work closely with the FOS on this aspect.

The BBRS was formally launched on 17 February 2021 and offers an alternative dispute mechanism for larger SMEs who do not qualify for the FOS. The BBRS is mandated to decide cases on a fair and reasonable basis – so the concerns outlined above could equally apply to the BBRS’ decision-making.  

Litigation Risk: A Private Right of Action?

In CP21/13, the FCA makes no specific proposals for a private right of action to attach to the Consumer Duty proposals, but has sought stakeholder input as it further considers this issue. It is clear that the door on this proposal remains open.

The FCA’s Principles for Business are not currently subject to a private right of action, and have not been drafted with a private right of action in mind: rather, the responsibility for enforcing them rests with the FCA, as regulator. As with the FCA’s other Principles, the two potential formulations of the Consumer Principle are high level in nature and it could be argued that it would be inappropriate for such high level principles to form the basis for a private right of action.

It has been argued that a private right of action would mainly provide a deterrent effect to firms and, in that way, would encourage compliance with the Consumer Duty without giving rise to a tide of court claims. However, a private right of action would nevertheless open the door to courtroom disputes about the Consumer Duty.  Such litigation could be complex and costly for all parties.

Firms could also face an increased risk of collective actions, in circumstances where complaints about a breach of the Consumer Duty could readily arise across entire product or consumer classes. The court may then need to think creatively about case management – or parties might consider using the Financial Markets Test Case Scheme where immediate guidance is needed.

Next steps

In conclusion, it is evident that firms may face proceedings in relation to the Consumer Duty in a number of different forums which each present particular challenges. It is therefore important for firms to think now about the practical implications of the Consumer Duty on their businesses, and use these to inform their responses to CP21/13.