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Is a "Duty of Care" required for financial services firms?

23 July 2018. Published by Katie Fry-Paul, Trainee Solicitor

On 17 July 2018, the Financial Conduct Authority (FCA) released DP18/5 – its discussion paper on a duty of care and potential alternative approaches. In this article we summarise the discussion paper and then examine briefly whether a new duty is required.

Summary of FCA Discussion Paper DP18/5

The discussion paper delivers on a promise the FCA made in the feedback statement to its 2017 Mission Statement, to address calls for an overarching "duty of care" for financial services firms.

The discussion paper sets out the FCA's regulatory and legal framework, its practical approach to regulation and its views on consumer outcomes (including redress) as background, and asks a number of questions of stakeholders:

  1. whether there is a gap in its existing regulatory framework that could be addressed by a "new duty";

  2. what such a new duty might do to enhance positive behaviours from firms, and incentivise good customer outcomes;

  3. how a new duty would increase the FCA's effectiveness in tackling harms and achieving positive outcomes for consumers;

  4. if the FCA should reconsider whether breaches of the FCA Principles should give rise to private rights for damages in court (or whether a new duty might give this right); and

  5. whether a new duty would be more effective in preventing harm, meaning that redress might need to be relied upon less.

The FCA does not make any representations as to what a new duty might consist of or how it might be created, but gives a number of options: a rule introducing a new duty, a statutory new duty, extending existing "best interests" rules, or enhancing the existing principles with new rules or guidance.

The FCA recognises that this is an "important and complex" debate. Firms' views, and responses to its questions, are requested by 2 November 2018.

Is a new Duty of Care required?

Under the Financial Services and Markets Act 2000 (FSMA), the FCA has a single strategic objective: to ensure that the relevant markets function well. One of its operational objectives is to secure an "appropriate degree" of protection for consumers. Both FSMA and the FCA's principles of good regulation recognise that a consumer is required take responsibility for its decisions. So any regulatory intervention must be based on a balance between those two requirements.

In examining whether there is a gap in the regulatory framework, and potentially therefore a need for a new duty, this balance (or rather any imbalance), is the starting point. A new duty, whether framed as a duty of care or fiduciary duty, would be a significant burden on firms and it could swing the balance in favour of the consumer in many respects. 

In a statement made in 2009, it was made clear that the principle of treating consumers fairly (TCF) was seen as meeting that balance. A number of stakeholders who responded to the FCA's 2017 Mission Statement agreed with this analysis, and the Association for Financial Markets in Europe (AFME) made reference to a number of successful enforcement actions under TCF. However there were stakeholders, most notably the Financial Services Consumer Panel (FSCP), who believed that a wider duty of care was required.

Arguably, stakeholders are not best placed to answer the first question posed by the FCA. In order to consider where there are imbalances, regulation, enforcement and redress should be considered in the round, taking into account the wider regulatory environment, including stakeholder organisations, and involving the Financial Ombudsman Service (FOS). Are there consistent complaints to FOS which are not addressed by FCA regulation? Equally, are there areas of the FCA Handbook where enforcement is not successful or where mistakes are repeatedly made by firms? Are there areas of financial services where it is considered that consumers should be able to seek redress, but are unable to? These questions can only be answered with significant input from the FCA and FOS, and require a level of gap analysis that neither organisation is likely to have the bandwidth to complete in the current climate.

Development of effective regulation is an iterative process – the regulator cannot account for unknown future wrongs. It must, however, have some method of identifying where improvements can and (more importantly) should be made. With the Senior Managers and Certification Regime (SMCR) being implemented in the coming months there is a danger that, in its rush to change culture in the industry, the balance could be tipped too far. This would be very difficult to unwind, especially where words like "duty" are used.