Do Consumers Really Need More Financial Protections? The UK Government Says Yes!
By Judith Rinearson and Kai Zhang
In May 2021, the UK‘s Financial conduct authority (FCA) published a consultation paper proposing there would be a “new consumer duty“. The central proposition is that a firm must deliver “good outcomes” for consumers which is then supplemented by additional requirements.
In particular, the FCA noted in its May consultation:
“We want to see a higher level of consumer protection in retail financial markets, where firms compete vigorously in the interests of consumers. We are proposing to introduce a new “Consumer Duty“ that would set higher expectations for the standard of care that firms provide to consumers. For many firms this would require a significant shift in culture and behavior, where they consistently focus on consumer outcomes, and put customers in a position where they can act and make decisions in their interests.”
After receiving input from 235 stakeholders, the FCA issued a second consultation paper in December, which confirmed the original high-level proposals and set out the draft detailed rules. The deadline for providing feedback on the second consultation is 15 February 2022.
The key reason for having the new rules, as argued by the FCA, is that firms “are not consistently and sufficiently prioritising good consumer outcomes” which leads to consumer harm.
The new Consumer Duty has 3 elements:
- A Consumer Principle that “a firm must act to deliver good outcomes for retail customers”;
- “Cross cutting rules” (essentially the “content” of the Consumer Principle, i.e. how firms should act) that require firms to:
- act in good faith toward consumers,
- avoid foreseeable harm to consumers, and
- 3. enable and support consumers to pursue their financial objectives.
- Four outcomes regarding:
- the products and services (i.e. designed to meet consumers’ needs),
- the price and value (i.e. giving fair value to consumers),
- the consumer understanding (i.e. helping consumers making informed decisions),
- the consumer support (i.e. ongoing support throughout customer relationship).
These new requirements would apply to regulated firms including banks, electronic money institutions, broker dealers, asset managers and payment service providers. In addition, these would also apply proportionally to firms throughout the distribution “chain” (i.e. intermediaries not directly facing consumers).
As this new Consumer Duty would be “outcome-based regulation“, this would appear to require that firms to go further than complying with the letter of the law, by ensuring the customer gets the outcome they seek. These are definitely broad and aggressive goals that will impact considerably on the provision of retail financial services/products to consumers, and would place yet another significant obligation on financial service providers.
While the FCA insists that the Consumer Duty “does not remove consumers’ responsibility for their choices and decisions,” there is still concern that consumers will place the blame for poor outcomes (such as their poor investment results or credit losses) on their financial institutions. Certainly, the new Consumer Duty will increase the costs of providing consumer financial services and may at the same time raise the risk of consumer fraud. Those of us who work with retail financial services in the US strongly hope that this aspirational but perhaps impractical new duty does not make its way across the pond and into US laws and regulations. However, note that UK firms distributing US (and other non-UK) products and services would still need to comply with certain requirements and therefore US firms may be indirectly impacted.
 Note: in the UK and EU, a consultation paper is similar to an advance notice of proposed rulemaking in the US. It is the way regulators set forth goals and seek input from the industry, academics, consumer groups and other stakeholders. The consultation paper is an early indication of the government’s intention to institute new laws or regulations.