FCA feedback statement on a new duty of care

The new ‘‘statutory duty of care’’ for financial services firms: where are we now?

Given the potential consequences for firms, there has been a great deal of anticipation and interest in the FCA’s direction of travel in connection with the introduction of a potential new duty of care or fiduciary duty which they must observe in all dealings with their customers. In April this year, the FCA published their feedback following their initial discussion paper in July 2018. Whilst the regulator leaves open a range of possible outcomes in due course, the trajectory at this stage appears to be away from the introduction of such a duty and toward a program of reform of existing regulatory rules and obligations. This short article explores some of these potential future reforms.

What is the background?

One of the FCA’s own operational objectives, established in the Financial Services and Markets Act 2000 is to secure an appropriate degree of protection for consumers. As part of a holistic assessment of its performance against its statutory objective and three operational objectives, the FCA examined mechanisms for delivering this objective. One of these was to recommend that Parliament legislate to introduce a new statutory duty of care on financial services firms, as a new and separate duty from those which already exist in English law. The prevalence of several different, thematic issues of customer detriment have led some stakeholders to call for the introduction of a new ‘duty of care’ or ‘fiduciary duty.’ The FCA responded to these calls with an open discussion paper (DP18/5) in which these ideas were explored. This strand of work on a possible ‘New Duty¹’ is the latest example of the FCA’s sharp focus on consumer protection in the conduct of financial services firms, which is addressed by the regulator from a number of perspectives, including its extensive research and subsequent guidance on vulnerability.

Much of the discussion surrounding possible reform in this area necessarily involves an assessment of the ways in which the current legal and regulatory framework operates to secure an appropriate degree of protection for consumers. In that context, it is relevant to consider the range and scope of the FCA’s Principles for Businesses (the Principles), and in particular the requirement that an authorised firm must pay due regard to the interests of its customers and treat them fairly. It is important for firms to bear in mind both that this core obligation is wide and extends beyond the firm’s customers who are ‘consumers,’ but also that ‘consumers’ are a particular type of customer with whom a firm may deal, and to whom particular obligations are owed under wider regulatory provisions and also pursuant to statute.

In its discussion paper, the FCA invited contributions from stakeholders on the introduction of a ‘New Duty,’ defined either as a duty of care, fiduciary duty or an alternative approach to deliver effective consumer protection. A new duty of care would necessarily form part of the existing, advanced corpus of English tort law which developed a common law duty to exercise reasonable care and skill when providing a product or service. Meanwhile, a fiduciary duty appeared to the FCA to be harder to frame and generally considered this to be defined as prohibitions on placing personal interests above those of the client, conflicts of interest and profiting from the firm’s position without the client’s knowledge and consent. Although the legal complexity attendant on a decision to develop tort law through statutory intervention in this area was not fully exposed in the FCA’s discussion paper, which focused instead on the ways in which the current legal and regulatory framework work to secure an appropriate degree of protection for consumers, it did explain some of the nuances concerned with the formulation of this ‘New Duty’ given that (for example) the requirements of a ‘fiduciary duty’ are necessarily driven by the facts of the relevant relationship between the parties.

The principles behind the ‘New Duty’ (or the Principles ahead of it?)

Following feedback from a variety of stakeholders, from academics through to authorised firms, the FCA helpfully summarised the range of contributions received and provided an outline of its thinking at this stage. In considering feedback surrounding a new ‘duty of care’ or ‘fiduciary duty’, the FCA noted that those in support of a ‘New Duty’ in some form considered it would be likely to clarify regulatory conduct expectations, and could also address a perceived gap in the Principles, by requiring positive action by the firm to ‘prevent harm.’ Weighed against this, however the FCA summarised the core message ‘against’ the introduction of a ‘New Duty’ to be the step-change in personal accountability which will take effect through expansion of the Senior Managers and Certification Regime (SM&CR) this year, which may close some of the gaps in the regulatory framework surrounding consumer protection. The FCA’s overall decision to effectively postpone a final decision on its proposed approach in this area could be seen as a recognition of the impact on firms from the continued challenge of running multiple regulatory reform projects (to say nothing of Brexit contingency planning), and the overall coherence of the reform agenda.

In an acknowledgement of the significance of the impact of reform in this area, the FCA will seek to understand the panoply of circumstances in which consumer harm might arise so as to ensure that proposed consumer protection measures are effectively calibrated. At this stage, and on the basis of the feedback received following publication of the discussion paper, the FCA’s priority workstreams will be to:

• Review the ways in which the FCA applies the regulatory framework at present. In particular, how each of the core divisions at the regulator applies the Principles in their mission; from authorisations, through supervision to enforcement.
• Consider the introduction of new, or revised Principles to strengthen and clarify firms’ duties to consumers, including an assessment of reform to deliver a private right of action for breaches of these, and what the unintended consequences of this might be.

Some market commentators have seen the FCA’s response to its earlier discussion paper as abandoning enthusiasm for a new statutory duty of care, or proposals for legislative reform of the law relating to fiduciary duties. However, it seems to us that the story is not yet over, and the FCA has, rather reserved its position as to the nature of future recommendations pending a more fundamental assessment of the role which it intends the proposed measures to play in the overall framework of consumer protection. Indeed, a closer inspection of the FCA’s statements surrounding possible reform of current duties reveals a potentially more dramatic picture. In particular, the mooted introduction of a private right of action for consumers against firms in connection with a breach of the Principles, may be a similarly significant adjustment to the regulatory environment for firms with consumer customers, as the introduction of a new statutory duty of care. When taking enforcement action in connection with instances of customer detriment, the FCA frequently frames firm failure in terms of a breach of the Principles, given their capacity for application to almost all aspects of a firm’s business. Firms are therefore likely to have a number of important questions surrounding the impact of introducing such a right for consumers, and how this right would interact with wider complaint resolution mechanisms currently in place. Given this, and the possibility that there may yet be a role for legislative as well as regulatory reform in this area, firms with consumer customers should continue to keep a close eye on these important developments, and examine the FCA’s further report this autumn in detail.