The past few years have witnessed a debate in the field of banking and broader financial services law: should the law relating to the duty of care owed by financial services firms to their customers be reformed? The Financial Services Consumer Panel (FSCP) argues that the answer to this question is yes; the current law does not provide consumers with adequate levels of protection, and thus the law needs to be. The current regulatory regime requires firms to treat their customers fairly, however the FSCP believes that banks and other financial services firms should be held to a higher standard and for this reason have advanced reform proposals to address this issue.
The purpose of this blog post is to analyse the content of the reform proposals and assess the viability of any reform, in light of the existing legal regime. It will be argued that, as indicated by the Parliamentary Commission on Banking Standards (PCBS) and the Financial Conduct Authority (FCA), the proposal advanced by the FSCP is unlikely to improve the law in this area.
The FSCP is an independent body set up under s.1Q Financial Services and Markets Act 2000 (FSMA 2000) to represent the interests of consumers in financial regulation, through engaging with the sector’s conduct regulator, the Financial Conduct Authority (FCA). In recent years, the FSCP has become increasingly concerned about the way that banks and other financial services firms treat their customers. Research commissioned by the FSCP has indicated that: consumers experience issues accessing bank services; they feel that profits are put ahead of their needs; they do not believe that banks treat consumers as individuals, and consumers perceive that banks fail to take responsibility when things go wrong. The FSCP is of the opinion that ‘misconduct in the sector remains rife and customers are frequently not treated fairly’. The negative press coverage of the activities of banking and financial services institutions in recent years only serves to reinforce this perspective.
This is an argument that the FSCP have advanced for a number of years. For example, in 2012, the FSCP submitted evidence to the Parliamentary Commission on Banking Standards (PCBS) arguing for reforms to the duty of care in this area, stating that reform ‘will signal a clear message from Parliament that it is no longer acceptable for a bank to unfairly profit at the expense of its customers’. In 2015, the FSCP published a report entitled ‘Incorporating a Duty of Care into the Financial Services and Markets Act’. Further information supporting their argument for reform was published in January 2017.
The argument advanced over the course of the last five years by the FSCP has largely worked along the same lines: the current legal regime continues to permit banks to enhance their profits by treating consumers unfairly, and, therefore, the FCA should be under a statutory duty to introduce rules ‘specifying what constitutes a reasonable duty of care that financial services providers should owe towards their customers’. The concerns on the part of the FSCP arise from historical bank practices, The FSCP believes that the introduction of a duty of care would level the playing field between institutions and their customers, and ‘would rebalance the information and bargaining position asymmetries between firms and consumers and would operate to prevent poor conduct’.
As indicated above, the FSCP has submitted evidence to numerous bodies expressing their belief that a change in the law is required. Their recommendations have received varying levels of support. The PCBS did not advance the proposals made by FSCP in 2012, and the FCA have indicated that they do not believe that such reform will enhance the regulatory tools available to them. The Law Commission have also considered reform in this area, yet declined to pursue the issue on the basis of responses received to their consultation on the topic, stating in correspondence with the authors of this blog that ‘discussions with stakeholders revealed strong opposition to this project, and suggested that there is no realistic prospect of us being able to reform the law in this area.’ The House of Lords Select Committee on Financial Exclusion (HLSCFE) does, however, support the proposal and has recommended that FSMA 2000 should be reformed to require the ‘FCA to make rules setting out a reasonable duty of care for financial services providers to exercise towards their customers’. Both the FSCP and the HLSCFE are supportive of the idea that reform in this manner can lead to an improvement in the conduct standards of those working within the financial services sector. Despite the FCA’s lack of enthusiasm for reform in this area, they have stated that they will publish a Discussion Paper on the topic in due course, as part of their . This will start once the FCA’s work relating to the UK’s exit from the European Union has been completed.
As the FCA has noted ‘there are different opinions about the merits of introducing ’. Despite various bodies responsible for regulation and reform in the financial services field considering the proposal, it has not yet been incorporated into any of the introduced in the last ten years.
The Proposal: Substance and Linguistics
Problems that customers experience when they engage with banks, or other financial services firms, have been an issue at the forefront of discussions surrounding the behaviour of staff within these institutions. However, it must be asked whether the can tackle the issues the FSCP has identified, and whether these proposals are an appropriate way to enact reform if changes to the duty of care are deemed to be required. In order to assess the proposals advanced by the FSCP, one needs to understand what it is that the proposals amount to. This is where the issue becomes slightly more complicated. At surface level, the logic behind the proposals is clear: reforming the duty of care will improve the customer experience. However, the FSCP’s reform proposal presents several challenges in terms of operation and application within the current legal regime.
First, the FSCP’s formulation of the reform proposal confusing. The way in which the FSCP intend to reform FSMA 2000 to introduce the new duty of care is convoluted and unclear. Given that the objective behind such reform is to improve levels of consumer protection, such an amendment is unlikely to enhance the operation of the current legal regime or produce an obligation which consumers can easily access, understand or enforce.
To demonstrate, it is useful to state the detail of what is being proposed. The FSCP propose an amendment to s.1C(2)(e) FSMA 2000. s.1C relates to the FCA’s statutory consumer protection objective. Currently, s.1C(2) and s.1C(2)(e) state:
‘s.1C(2) In considering what degree of protection for consumers may be appropriate, the FCA must have regard to –
(e) the general principle that those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate having regard to the degree of risk involved in relation to the investment or other transaction and the capabilities of the consumers in question.’
The FSCP’s reform proposals would result in the addition of the phrase ‘having to the general duty to provide these services honestly, fairly and professionally in accordance with the best interests of the customers in question’ at the end of s.1C(2)(e).
However, there are several linguistic difficulties with the current formulation of the FSCP’s proposal. The FSCP uses the phrase ‘duty of care’, yet they do not propose the introduction of a duty of care as recognised at common law. As the PCBS highlighted, the notion of a ‘duty of care’ is already well developed at common law – both in tort and contract law. The extension of a ‘duty of care’ that covers ‘best interests’ is not consistent with the case law here, and raises questions over the relationship between this new proposal and any existing fiduciary duties.
Questions also need to be raised over exactly who the FSCP intends the reform to attach to. The literature advanced by the FSCP on the topic uses the broad term of ‘financial services providers’, however the research on which the FSCP appears to base their assertion that the duty of care requires reform is largely related to issues specific to the banking sector. The examples that the FSCP detail as to how the current law is failing consumers also mainly relate to banker-customer issues. In some instances, these examples move beyond retail banking and attach to problems experienced by SMEs, however they are problems that still arise in the banking context. The FSCP’s reform would affect a section of FSMA 2000 that would require the FCA to introduce rules to cover all financial services firms. This inconsistency is a further demonstration of the confused nature of the proposal. Given the differences in the way that business is conducted by different types of financial services institutions, as well as the differences in the regulatory regimes applied to these institutions, the FSCP needs to clarify whether they intend for the reform to apply to all financial services firms, or to only apply in the banking context. This is an important distinction that will have a significant impact on the operation and workability of any reform in this area. It is not enough to identify a problem in one sector as justification for reform across the entire industry.
There are also questions surrounding the substance of any reform. An amendment to FSMA 2000 as proposed by the FSCP would place a requirement on the FCA to consider the new duty in the course of advancing their consumer protection objective. This would place the FCA under a statutory duty to add new rules to their Handbook setting out what banks and other financial services providers need to do to demonstrate that they have acted in the ‘best interests’ of their customers. Yet, to provide a solution to the problems identified by the FSCP, these rules would have to have a significant breadth and would potentially encroach upon areas of bank management (for example, branch opening hours) that have previously fallen within the purview of commercial and business management, rather than an area with which regulation should engage. It must be asked whether it is desirable (or even possible) to introduce rules covering these issues given the burden regulation already places on .
Whilst the FSCP acknowledges that this reform will require the FCA to make new rules, the FSCP does not provide any guidance as to the content of these new rules, or indicate where they should be placed within the FCA’s Handbook. This is an oversight given the broad problems the FSCP envisage could be addressed by the introduction of this new duty. Additionally, the FSCP seems to advance a somewhat illogical view that the introduction of these new rules could ultimately lead to the reduction of rules in the Handbook overall. Given the fact that the new rules will form the crux of the duty the FSCP advocates so strongly for, it is surprising that the FSCP does not provide any further information as to how rules covering this duty should be drafted, or on what might be required to improve the law in this area.
Enforcement and Remedies
Questions also arise when one considers how this new duty would be enforced, and what the remedy should be. The FSCP have indicated that they believe a new duty would work in a preventative manner, with consumers using the Financial Ombudsman Service (FOS) to resolve complaints. Yet, the thrust of the FSCP literature on the topic seems to indicate that they want consumers to be able to take action when they feel that a product or service provided by their bank is unsatisfactory. Reform in the manner proposed would have a number of legal consequences not all of which would give damaged customers an enforceable remedy.
First, this reform would enable the FCA itself to take action to enforce any new rules in the event that a breach was identified. But resource issues must be taken into account when considering the regulator’s ability to take action in such cases. As with all regulators, the FCA experiences resource challenges and therefore has to direct enforcement work to the cases demonstrating the most serious threat to its objectives. . In terms of remedies for consumers through this route, while the FCA would have the ability to fine firms in breach of the new rules, consumers would not be awarded compensation unless a settlement provided for redress to be paid or the FCA deemed it necessary to set up a bespoke compensation scheme to provide redress to wronged customers (using s.404 FSMA 2000). Creating a new obligation that is reliant upon the regulator enforcing does not, therefore, necessarily solve all of the problem the FSCP is seeking to address: only the most serious cases are likely to yield redress by means of FCA action.
Further, this approach arguably ignores the significant powers the FCA already has (and the enforcement work already conducted) in relation to taking action against firms that are not engaging with their consumers to an appropriate standard. It is useful to note here that Principle 6 of the FCA’s high level Principles for Businesses states that firms must ‘treat customers fairly’, and the FCA has issued (and continues to do so) significant fines against institutions that have breached this Principle. In 2015 Lloyds Banking Group was fined £117.43 million by the FCA for breach of Principle 6 when its PPI redress scheme was found to be defective because complaints handlers had been instructed to assume that sales processes had been ‘compliant and robust.’ This was unfair to customers in creating a presumption that their complaints were groundless.
If individual consumers wanted to enforce any new rules against their institution, they would have to do so by virtue of s.138D FSMA 2000 – which provides that rules (and only rules – not guidance or principles) contained in the FCA Handbook are legally enforceable by a private person. However, this route also presents several problems. It is litigation: a time-consuming and expensive option that may well not be justified by the value of the losses incurred by the customer. Low value claims will be heard in the small claims court where the customer is unlikely to have access to legal representation. The ‘private person’ limitation in s.138D also excludes businesses (extending to small and medium sized enterprises), meaning that these firms are excluded from being able to enforce FCA rules against their financial services institution. Businesses would therefore have to hope that the FCA decides to take regulatory action for the breach of the rule (as above). Alternatively, they could fall back on a common law claim in negligence. The FSCP has acknowledged that recourse to the courts should be a last resort.
A third option for consumers is to bring a complaint against the financial institution using the Financial Ombudsman Service (FOS). The FOS is a free and impartial dispute resolution service for consumers of regulated firms. The FOS is empowered by s.228(2) FSMA 2000 to make decisions on the basis of what it determines to be ‘fair and reasonable in all the circumstances’ and thus has wide discretion to look at all of the relevant information in determining how to resolve the complaint. The FOS can utilise the common law, FCA rules and guidance and best industry practice (among other sources) in the course of dealing with consumer complaints. In fact, the FCA’s Handbook already contains detailed rules designed to protect consumers and address the imbalances in the relationship between financial services firms and their consumers, and consumers are able to use these rules to access redress through the FOS, with the possibility of compensation being awarded up to the value of £150,000. The FOS’ broad remit in terms of determining acceptable behaviour when dealing with complaints, which can extend beyond existing FCA Handbook rules, therefore provides a significant level of protection to financial services consumers.
Examples are recorded of banks being held liable to customers for not having acted in their ‘best interests’ and for selling unsuitable products. This service is likely to be the common option used by consumers to deal with problems that they experience when dealing with their bank (as recognised by the FSCP), but given the broad remit of the FOS already, it must be asked whether new rules in this area will truly improve the position for bank customers. Further, as above, some businesses will experience difficulties using this option – the FOS’ remit extends wider than s 138D but only covers consumers and micro-businesses (those with an annual turnover of up to £2 million, and less than 10 employees). Whilst this provides greater coverage, and is much more accessible, than the litigation route, it still serves to exclude some businesses that have experienced problems in the past.
Are the proposals capable of addressing the problems the FSCP have identified? On the basis of this analysis, it does not appear that they are, and further, it does not appear that the reforms proposed would add to the protections already available to consumers of financial products and services. This is not to say that there are not problems, or examples of consumer detriment, but the FSCP needs to be more specific about the problem it is seeking to tackle and needs to engage with the current legal position in much more detail to advance coherent reform proposals. Further, some of the problems identified by the FSCP are already being addressed by other measures being introduced: for example, the Competition and Markets Authority (CMA) is taking action with regards to the transparency of bank charges for retail consumers, surcharges for payment by bank card are to be banned from January 2018, and there is already evidence of banks changing their practices to minimise, and clarify, costs for consumers.
The FSCP believes that reform to the duty of care will ‘engender long-term cultural change’, but this appears to overlook the significant work being conducted by the FCA, and its prudential counterpart, the Prudential Regulation Authority, to improve standards across the financial sector. While there are concerns over the lasting success of such initiatives, the FCA has indicated that they are already seeing improvements in terms of conduct within authorised institutions. It would, therefore, be useful for the FSCP to take this work into account when determining how to solve the problems it has identified.
It does, however, appear that the FSCP’s research has inadvertently identified an area in which the protection regime is weaker: in relation to businesses experiencing problems with their financial service provider. There have been several high profile examples in recent years of SMEs not being treated fairly by their institutions (see, for example, the problems surrounding Interest Rate Hedging Products, the saga regarding RBS’s Global Restructuring Group and the fraud at HBOS’s Reading branch). The analysis here demonstrates that there are limited routes for SMEs to gain redress if they believe they have been treated unfairly. Unfortunately, the FSCP’s current proposals do not present a solution to this problem. While an improvement in standards across the sector might result in better treatment of SMEs, in the event of a breach, enforcement of any new rules will have to be conducted through the existing channels. This is where SMEs have limited access. The lack of clarity surrounding this proposal only compounds the difficulties in understanding whether or not this is an issue the FSCP intends to target. While the aims of the FSCP are laudable, their proposal requires further consideration if it is to impact, and improve, the operation of the law in this area.
 See for example, Financial Ombudsman Service decision number: DRN0588016 applying the customer’s ‘best interests’ test in MCOBS 2.5A R to a banks’ refusal to extend the term of a mortgage
 See, Financial Ombudsman Service decision number: DRN6013870.