A New Duty of Care for Financial Services Firms?
Earlier this month the Financial Conduct Authority (“FCA”) updated its website with its plans to announce in Spring 2019 the next stage in its ongoing consultation on the introduction of a new duty of care for financial services firms (“New Duty”).
This update follows the FCA’s publication in July 2018 of the Discussion Paper on this topic (with the period for feedback ending on 2 November 2018). The FCA now plans to review the range of responses that it received from stakeholders and use these findings to inform the future direction of any potential New Duty.
The Discussion Paper
The Discussion Paper considered the current regulatory and legal regime relevant to a duty of care. The FCA has gathered views on whether the current rules provide adequate protection for consumers. If the FCA considers that the legal framework does not go far enough, the regulator may need to consider what form the New Duty might take and how to implement this into the existing body of regulation or otherwise.
The FCA’s Principles for Businesses already provide firms with an obligation of ‘reasonableness’ and ‘fairness’ in areas one might anticipate any New Duty to address. For example, Principle 9 says: ‘A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment‘ and Principle 6 specifically concerns firms’ obligations to treat customers fairly.
The FCA outlines in the Discussion Paper that a simple way to amplify a duty of care already inherent in these Principles could be to amend the Principles themselves.
Impact and Enforceability
One problem with amending the Principles themselves could be the issue of impact and enforceability, as the industry tends to view the Principles more like guidelines. One of the main aims for the FCA is to protect consumers by using their enforcement powers and enabling customers to seek redress.
It should be pointed out that the FCA Rules do allow for a range of disciplinary sanctions against firms, both criminal and civil, for breach of the Principles. Indeed, the regulator has hit many firms with multi-million pound fines for breaches of the Principles in the past.
However, the Discussion Paper considered whether a newly codified statutory duty could have more of a deterrent impact on firms. Any new legislation would of course need to come from Parliament and there could well be a period of uncertainty while awaiting clarity from test cases in Court.
This consultation on a New Duty comes alongside recent FCA intervention in this area. By December 2019, all FSMA-authorised firms will have to abide by a new accountability system as the Senior Managers and Certification Regime takes force.
If the FCA also decides to create a New Duty, this will represent another significant change. Firms will need to reassess their internal procedures, rules and processes to ensure that they comply with any New Duty obligations.