FCA's Recent Discussion Paper on a Potential 'Duty of Care'
In July of this year, the Financial Conduct Authority (FCA) published a Discussion Paper on a potential ‘Duty of Care’, which some of the FCA’s stakeholders have suggested could fill a gap in the current regulatory framework. Some argue that this regulatory gap does not sufficiently protect consumers from harm resulting from conflicts of interest and inadequate application of the current framework by the FCA. Responses to the consultation on the FCA’s Mission 2017 indicate that the subject polarises opinion, but the FCA say that the discussion will help the regulator understand what outcomes a ‘New Duty’ would achieve and how it could enhance behaviour in the financial services market.
The argument for a Duty of Care suggests that having a defined Duty could potentially reduce harm to consumers by requiring firms to avoid conflicts of interest, and would likely lead to longer term cultural change within firms. The FCA says that some have expressed concerns that the existing Principles do not oblige firms to avoid conflicts of interest, and are insufficient to deter firms from mis-selling products. However, many firms within the industry and other stakeholders argue that the existing rules and guidance and common and statute law are comprehensive, provide sufficient protections for consumers as they stand, and that the addition of a new rule would add a layer of unnecessary complexity, if the definition of a new Duty could be achieved at all.
The actual formulation of the ‘New Duty’ would depend upon the FCA’s consideration of the feedback to the Discussion Paper, but there are currently two likely modes that the Duty could take; a ‘Fiduciary Duty’ and a ‘Duty of Care’. The Duty of Care would be an ‘obligation to exercise reasonable care and skill when providing a product or service’ and would, therefore, be a positive obligation. A fiduciary duty, more difficult to define, would mean that firms would be required 'not to put personal interests above those of the client, to avoid conflicts of interest and not to profit from the firm’s position without the client’s knowledge and consent’, in other words, it would take the form of a set of prohibitions.
The Discussion Paper also highlights that the introduction of a New Duty or any expansion to the current framework would be limited by the extent of their rule making powers, and could not address concerns about areas that they do not regulate; such intervention would require Government legislation.
The FCA argue that the current outcomes-based approach provides detailed rules which firms must abide by, supported by a set of Principles which deal with situations or issues that are not covered by the rules. This means, in practice, both that firms must ensure their practices meet the FCA’s broad expectations, and that the FCA are able to rely on the Principles to take supervision or enforcement action when harm is identified. The Paper, however, seeks to understand whether the right Principles are in place, as well as the merits of a new rule, and any appropriate alternative approaches; if it is the case that the current framework requires updating.
Many firms within the industry, however, argue that the current framework is fit for purpose, and a New Duty would be complicated to formulate, to enforce, and could lead to a rise in legal challenges which could be costly to both firms and consumers.
The FCA argue that some of the current Principles, together with detailed rules and guidance, could be ‘said to address many of the issues that are cited as reasons for introducing a New Duty’. They specifically cite the example that the Principles are amplified by a large number of rules in the Handbook, some of which require a firm to ‘act honestly, fairly, and professionally in accordance with the best interests of its client’, plus specific ‘best interests’ rules in CONC.
Much of the concern expressed by those arguing for a duty of care is focused on the idea that the current framework has not led to sufficient cultural change. Those who argue against a new rule highlight that the roll-out of the Senior Managers and Certification Regime to most regulated firms will support continued cultural changes and that the Regime represents, in practice, the same requirements on firms as a Duty of Care.
The Discussion Paper acknowledges the complexity of the debate, and seeks to understand whether their existing regulatory framework is fit for purpose in delivering the right outcomes for consumers, consider the potential merits of a new rule, consider alternative approaches that may address concerns, and understand the consequences of any changes. The discussion closed in early November, we’ll report on the next stage of the discussion in due course.