The Financial Conduct Authority (FCA) is to consider introducing rules to allow consumers to take private legal action against firms which breach its principles.
The regulator may also overhaul its principles to strengthen and clarify firms’ duties to customers.
It will review how it applies the regulatory framework, particularly around authorisations, supervisory and enforcement functions, and how transparently it communicates with firms.
However, the FCA stopped short of recommending a statutory duty of care for customers through parliamentary legislation.
“We know that consumer harm can be caused by different things, so there is unlikely to be a one-size-fits-all solution to any weaknesses in consumer protection,” the FCA said.
“We also need to consider how existing protections might already address some of the perceived gaps in consumer protection.”
As a result of the feedback and early analysis, the FCA said it has identified options for change that are most likely to address potential deficiencies in consumer protection. These are:
- reviewing how it applies the regulatory framework – in particular, its application of the principles in its authorisations, supervisory and enforcement functions, and how transparently it communicates with firms about this
- new/revised principles to strengthen and clarify firms’ duties to consumers, including considering a potential private right of action for principles breaches
Mortgage industry rejected
The announcement came as part of the regulator’s response to its Duty of Care discussion paper published last summer, which intended to ensure there were no gaps in protection for consumers in the financial sector.
But the mortgage industry unanimously rejected the proposed regulations.
Representatives from six major trade bodies agreed that the rules would add nothing new to what was already covered under existing legislation and would simply complicate the situation further.
It appears that the FCA has paid some attention to these and other similar warnings from the financial services industry, by choosing to review how it applies the existing framework itself.
Regulator should act more readily
“Although stakeholders calling for change disagree about whether a New Duty is needed, most feel that, as the regulator, we should consider changes to the way we use the existing regulatory framework,” the FCA said.
Chiefly, it was asked to:
- Apply the principles more broadly by acting more readily. This is particularly the case in its supervisory function, where there is misconduct which results in poor consumer outcomes and that may be in breach of a principle even if not of another detailed rule.
- Be more transparent about what its standards for good customer treatment are and how it acts to secure these. This will help firms feel confident and incentivised to improve their practices based on a clear understanding of expectations, how they translate to day-to-day business, and how the FCA will enforce them.
“Some told us our current approach, which they described as prescriptive and overly rules-based, encourages firms to adopt a ‘tick-box’ compliance approach – where some firms wait until they are ‘found out’ by the regulator instead of making their own informed evaluation of whether a course of action is best for consumers,” the FCA added.
Statutory duty rejected
A small group of respondents strongly believed that a statutory duty was the right answer arguing that this would re-set the context in which financial services were delivered and regulated.
They also felt this was a critical step towards restoring consumer trust and that it would drive change by providing an overarching, legislative standard of care above the rest of the regulatory and legal framework.
However, the FCA rejected these calls, saying: “We do not consider that this is a sufficient basis for making changes to primary legislation, which parliament would need to make.
“However, if, as part of our analysis, we take the view that there are substantive reasons for supporting a statutory duty, we will consider this further.
“We will do further internal work to examine the options that are likely to be the most effective and proportionate, so we can understand their likely impact on all areas of our operation, industry and consumers,” it added.
Reworking Principles of Business
A further paper will be published in autumn 2019 seeking detailed views on specific options for change and the regulator said it would also continue its work on culture in financial services.
FCA chief executive Andrew Bailey said: “I’m pleased that so many people shared their views with us as part of this process. Inevitably, there were a range of opinions about what would secure the right level of protection for consumers.
“Given their long-lasting impact, we now want to weigh-up possible changes, including whether reworking our Principles of Business is the right way forward.
“I will continue to push this forward as getting the right answer on this question is essential to the FCA delivering on its Mission.”