What’s in a definition? How different options for the FCA’s consumer principle would impact firms

by Archie Vickers Trainee Solicitor

Email +44 (0)7483 915447

Consider these two statements:

“A firm must act to deliver good outcomes for retail clients.”

“A firm must act in the best interests of retail clients.”

The FCA’s suggestions for a new consumer Principle - part of its Consumer Duty suite, and intended to create better outcomes for consumers - may look similar, but they present differing impacts for firms and consumers and we don’t believe either quite hits the mark.

“A firm must act to deliver good outcomes for retail clients”

This first option has the potential to be more onerous for firms than the existing duty to act in customers’ best interests. Delivering a “good outcome” for a customer is incredibly subjective and near impossible to quantify. It is not difficult to imagine that customers, and claims management companies, may seek a right of action (under section 138D FSMA) where a “good outcome” was not achieved.

For example, if a customer made a loss on a suitable investment, the customer would not consider that a “good outcome”. Should firms be held responsible for investment activities generating losses, provided the consumer is made aware of the risks beforehand? Arguably not.

There is also some confusion to iron out. Under this option, the FCA says consumers would remain responsible for the decisions they make, but at the same time wants firms to consider more closely the impact of their actions on consumers. A requirement to ‘deliver good outcomes’, then, may pose challenges for firms, at least until an enforcement pathway is established.

“A firm must act in the best interests of retail clients”

Acting in the best interests of retail clients is perhaps a better fit for firms than the first option, and appears to reinforce existing FCA Principles. The wording mimics the “best interest” rules for firms contained in the FCA Handbook, so some firms will be familiar with this kind of consumer duty. However, the statement remains abstract and has the potential to create conflict for regulated firms.

The FCA states that it does not intend to introduce a fiduciary duty into firms’ relationships with customers, while the common law duty of care is something the courts already consider when dealing with regulated firms and consumers. Whether or not a fiduciary duty occurs may depend on what the enforcement process is for the new consumer duty and who is to determine the definition of ‘duty’.

For example, if there is a private right of action enforceable through the courts, the legal interpretation becomes more important and the courts may decide a fiduciary duty is appropriate, despite the FCA’s intentions. However, if the FCA is to enforce against breaches of the duty itself, its own policy stances would remain paramount.

A fiduciary duty to consumers is also potentially inconsistent with commercial enterprise, and conflicts of interest are likely to arise as a company has a duty to act in the best interests of its shareholders. Raising the question of whether this option creates unnecessary conflicts?

Finding a balance

While option two appears to be more in line with existing FCA expectations, we don’t think either achieves the right balance or fairness for firms and consumers. Both iterations are ambiguous, and there is a possibility of unintended consequences for firms and consumers, ranging from significant time wastage to potentially unnecessary FOS, FSCS and court procedures.

As such, we would encourage the FCA to think again and ensure the next iteration of the Principle finds a balance between ethical and commercial considerations.

by Archie Vickers Trainee Solicitor

Email +44 (0)7483 915447

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