Written evidence submitted by the Financial Services Consumer Panel (FCA0001)

This is the Financial Services Consumer Panel’s response to the Treasury Select Committee’s request for information on the Panel’s proposal for a statutory duty of care on financial services firms.

The Financial Services Consumer Panel is an independent statutory body, set up to represent the interests of consumers in the development of policy for the regulation of financial services. It does this primarily by advising, supporting and, where appropriate, challenging the Financial Conduct Authority.

The Panel has for many years been calling for the introduction of a statutory duty of care to be owed by financial services providers to their customers. This duty would be similar to that owed by other professionals, such as doctors and lawyers, to consumers of their services.[1]

The Panel makes this call in the context of striking a fair and proper balance between, on the one hand, the view that consumers should take responsibility for their decisions (principle 4 of the FCA’s principles of good regulation) and, on the other hand, the responsibility of financial services firms to treat their customers fairly, communicate with them clearly and avoid conflicts of interest (principles 6, 7 and 8 of the FCA’s principles for businesses[2]).

In striking this balance the Panel takes the view that consumers of financial services can only be expected to take responsibility where firms have complied with their fundamental obligations contained in the principles for business. Regrettably there is ample evidence of the FCA failing to act because firms aren’t technically breaching any rules, but where it is clear that they are not complying with the principles for business (see examples in annex below and position paper[3]). The complexity of financial services products and the long and complicated terms and conditions attached to them give rise to massive asymmetries of knowledge, understanding and bargaining power between financial services firms and their customers.

A statutory duty of care would strengthen the principles for businesses by making it a legal rather than regulatory obligation on firms to avoid conflicts of interest and have due regard to the best interests of their customers. In this way asymmetries would be addressed and a fair and proper balance between the responsibilities of firms and their customers established.

The FCA’s Mission document emphasises the regulator’s role in identifying potential harm and focussing on prevention rather than cure - an approach which the Panel wholeheartedly supports. A statutory duty of care could support this approach by encouraging firms to develop business models that were compliant with the principles for businesses. While the FCA’s Mission contained a commitment to issuing a discussion paper on a duty of care, it did not set out a clear timetable for this.

From its engagement this year with a wide range of interested parties, the Panel has discerned a clear appetite to see the merits of a statutory duty of care openly debated as the FCA intends. Proponents of a debate include stakeholders as diverse as Macmillan Cancer Care and the House of Lords Select Committee on Financial Exclusion. The Select Committee even went so far as to echo the Panel’s call for a statutory duty of care in its recent report.[4]

Through its close and valuable contact with the FCA, the Panel is only too aware of the challenges the regulator faces in dealing both with its business as usual activities and the additional burden of the work required by the UK’s exit from the European Union. The “lifting and shifting” of existing EU legislation could well lead to gaps in consumer protection. There is also the potential for harm in imminent developments such as Open Banking, the implementation of the second Payment Services Directive and wider market activity in the data-driven economy. These developments are an opportunity for the FCA to take a preventative approach, rather than play ‘catch up’ by imposing rules once the harm is done.

The Panel applauds the FCA for its plans to consult on the various ‘approach’ documents trailed in the FCA Mission. However, it does not believe that it is possible to have a debate on the ‘approach to consumers’ without consideration of the issues outlined above. The FCA needs to spell out now how it will address firms’ poor treatment of customers, either through a duty of care or through measures that will achieve the same outcomes for consumers. Market developments and the UK’s exit from the European Union strengthen the need to have that debate now.

The Panel is interested to hear the views of the Treasury Select Committee and its members on its proposals for a statutory duty of care.

October 2017

Annex: Examples of breaches of the principles for businesses that have not broken FCA rules

Governance

• Banks continue to promote and reward staff on the basis of sales made to customers. PPI is the most egregious example of this.

Savings

• Banks can reduce interest rates on customers’ accounts by declaring an account “obsolete”. FCA rules only requires banks to tell customers about changes to the interest rates on their account range. Equally, rules on disclosure of interest rates are not being applied to “obsolete” accounts (which are of course not obsolete from the customer’s perspective).

Investments

• Banks and other types of firm offer online investment services that are ‘execution only’, ie the consumer makes the choice of investment rather than receiving a personal recommendation. Many of these services fail to make costs and charges, or liability, clear.

Retail banking

• If a customer tries to withdraw funds beyond their overdraft limit, a bank can allow the withdrawal without telling the customer at the point of making the decision what charges will result. As long as the customer has been told the charging structure, this is considered within the rules.

Consumer Credit

• Credit card companies frequently offer inappropriate products with unaffordable credit limits to consumers, and fees and charges are not always transparent and proportionate.

Savings and Long-term investments

• Investment management firms launch better value fund share classes with lower charges but leave loyal customers in older more expensive share classes and do not inform them that cheaper share classes are available.

General Insurance

• Customers who have been with their home insurance provider for five years pay 70% higher premiums than new customers, despite evidence they do not pose any higher risk.

Mortgages

• Mortgage firms keep captive customers on higher SVRs and fail to offer them the ability to move to cheaper fixed rates.

A more detailed list of examples is available in the Panel’s position paper: https://www.fs-cp.org.uk/sites/default/files/duty_of_care_briefing_-_jan_2017_2.pdf