Controlling bank misconduct: how to improve consumer protection?  

By Dr Holly Powley, Lecturer in Law and Prof Keith Stanton, Emeritus Professor of Law (University of Bristol Law School).

Background

In April the Financial Conduct Authority issued a Feedback Statement (FS19/2) on its Discussion Paper (DP18 /5) ‘A duty of care and potential alternative approaches’ affecting the financial services industry. The Feedback Statement reports on the outcomes of the consultation and summarises the views of those who responded to the consultation. This is a topic that has been on the regulatory agenda for several years, originally initiated by the Financial Services Consumer Panel (FSCP), but also considered by the Law Commission and the House of Lords Select Committee on Financial Exclusion, with varying degrees of support. The authors have assessed these reform proposals in an earlier blog post. Whilst it is difficult to draw any firm conclusions from this round of discussions as to the FCA’s future policy in this area, it does indicate how the FCA’s work on this topic is developing.

What has the consultation shown?

Possibly the most interesting fact to emerge from the consultation is that there is a widespread belief that the working of the financial services industry is causing harm to consumers, although few firm examples of such harm are offered. It is not clear whether this criticism is directed exclusively at banks or extends to the whole of the financial services industry. The FCA has called for respondents to the survey to provide evidence supporting this assertion.

Despite the work in this area being structured around the suggestion of a new ‘duty of care’, there is no reference in the paper to the traditional ‘tort’ style duty of care. The decision which was made earlier to widen the scope of the discussion has left that approach way behind. In line with the focus of the Discussion Paper, the FCA references a ‘New Duty’ to discuss the various options for reform, however the discussion must now be seen as one on the creation of new consumer protection duties within the financial services industry, rather than one concerning new duties of care. The title of the Feedback paper is therefore misleading.

However, there is little enthusiasm for a solution which would require legislation. The FCA does not currently feel that there are compelling reasons for legislative reform and the majority of respondents opposed the creation of a statutory duty of care. The reasons given for this were that such a duty would be vague, would duplicate existing provisions and would raise issues of consistency between various remedies. Litigation based on breach of such a duty would take a long time to produce useful guidance, would produce stress for those pursuing a remedy and could be prohibitively expensive in many cases. The fear was expressed that such a duty would have a negative impact on the industry.

There is no explicit reference to SMEs at any point in the Statement, but the reluctance to support new litigation remedies suggests strongly that the recent reforms to the Financial Ombudsman Service (which mean that a greater number of SMEs now receive the FOS protection previously confined to private persons and micro-businesses and that there is a higher limit on awards) are taken to be sufficient to protect their interests. There is no suggestion that the FCA is considering the creation of a Financial Services Tribunal as a way of improving the protection of consumers. The clamour in favour of the creation of such a tribunal seems to be waning.

There is also considerable opposition, although it is not unanimous, to the solution of making a breach of the FCA’s Principles for Businesses actionable by those who have been harmed. This opposition is linked to support for the view that the FOS is a more suitable forum for the resolution of consumer claims than litigation.

The FCA’s apparent rejection of a ‘one size fits all’ solution suggests that it is accepted that this debate has been centred on the behaviour of banks and that the impact of changes on the wider financial services industry needs to be taken into account. It also acknowledges the complexity of the challenges faced when tackling the question of reform in this area: any additional obligations placed on firms needs to be proportionate to the harm posed and different products can cause different types of harm to different groups of consumers.

There is little enthusiasm for a solution which would place a fiduciary standard, such as to avoid all conflicts of interest, on the industry and only passing reference is made to levels of duty stricter than those of reasonable care, such as a requirement to act in the customer’s ‘best interests.’ Given the importance of such standards in the FCA’s current Handbook, it is strange that a discussion of this did not feature more prominently in the Statement. It creates a complex web of differing duties targeted at specific functions which wide ranging general duties must take into account. For example, a financial adviser who recommends an investment to a private client is concerned with satisfying the detailed MiFID ‘suitability’ requirements, not with a general obligation to take reasonable care. This demonstrates how different standards are being utilised within the existing FCA Handbook and could inform the discussion surrounding any reform in this area.

While there is a degree of consensus on what a ‘New Duty’ should not be, there does appear to be widespread support for the view that improvements need to be made in the regulatory system. It is felt that the FCA should act more rapidly when regulatory breaches occur and that the Authority needs to be more transparent about the standards which it expects the industry to meet: it needs to be clearer about what comprises good practice. Some commentators are of the view that the current regulatory system remains a rule based one which encourages a ‘tick box’ approach to compliance. This seems to indicate that the concerns surrounding consumer treatment in the financial services sector are the result of regulatory failings and poor enforcement, rather than of those in the regulated sector.

Where are we going on this?

The FCA has committed itself to concentrating the next phase of its work on two issues: the way in which it applies the regulatory framework and the development of new or revised Principles for Businesses. Consumer protection remains central to these issues. It is these areas which will be the primary focus of the Authority as it takes this work forward. This approach is a considerable way distant from the original proposals for a new duty of care which emerged a few years ago. As there is considerable opposition to the creation of new litigation remedies and to making the Principles for Businesses actionable, it is now unlikely that this project will lead to any new rights for those damaged by bank misconduct.

For this discussion to arrive at sensible conclusions as to potential reform, the FCA needs to provide clarity as to the type of consumers they are concerned about and the harm they are seeking to address. Currently, it appears that ‘consumers’ is widely defined, thus incorporating a variety of interests affecting all consumer types. It would be useful for confirmation from the FCA as to whether or not this work is intended to increase protection for SMEs given the historical challenges they have faced.

But, the substance of what is being proposed remains undefined. The nature of the harm being suffered is not spelt out and no clear solutions have emerged. Indeed, the FCA accepts that one of the key things which it must do in taking this project forwards is to understand the different kinds of harm suffered by consumers. If changes in this area are to be effective, it is important to distinguish between areas of harm where the FCA has, or is, taking action to remedy problems faced by consumers and new areas of harm that do not fall within the current legal or regulatory framework. It also needs to be asked whether problems identified are actually covered by existing controls. Identifying the underlying problems will enable an assessment as to whether or not these problems fall within the existing regulatory framework and there has been a failure of regulation or in the enforcement of existing regulation. Currently, however, the only examples provided in the Statement are those of bank branch closures and the removal of ATMs. These examples are particularly problematic ones: they are areas of commercial decisions which impact customers, not misconduct by banks. Indeed, they illustrate a problem that can arise when a commercial company (in this case a retail bank) provides a public service (access to the payments system) which ceases to be commercially viable. Whether any reform should impact the bank’s ability to make decisions as to their commercial strategy needs to be considered. The tension between the interests of the bank and the customer in this situation is clear. Yet, in this context, the recent Treasury Committee publication on Consumers’ Access to Financial Services has indicated that if the number of bank closures does not decrease, steps should be taken to mitigate the impact of these closures.

Although it is planned to consider possible revisions, as yet no gap in the Principles for Businesses has been identified. Indeed, they seem to be relatively comprehensive. Some suggestions for revising the Principles are noted, but all, such as the introduction of a reasonable foreseeability test, would seem likely to introduce new vagueness into a system which is being criticised for its lack of clarity. Any changes to the Principles would also require the FCA to consider its principles for good regulation in the course of doing so. A key feature of these principles that has arisen throughout this debate is the requirement that the Authority consider the general principle that consumers take responsibility for their own actions. Getting the balance right between introducing changes to the Principles for Businesses whilst ensuring that consumers take responsibility where it is appropriate for them to do so will be challenging in an industry as diverse as the financial services sector. The FCA have committed to initiate work assessing the operation of their Principles for Businesses, but as the majority view in the consultation has opposed making the Principles actionable any revisions would only operate at regulatory level or in claims made to FOS.

It must also remain doubtful whether any changes in the Principles for Businesses will have a substantial impact on the culture in the industry. Indeed, nothing emerges in the feedback which suggests that there is a consensus on how the culture in the industry can be improved. Considerable faith appears to be being placed on the Senior Managers and Certification Regime achieving significant cultural changes. However, there does not seem to be an obvious way forward if that development is unsuccessful.

It is likely that the attention which is to be paid to the FCA’s enforcement strategy will emerge as the most significant element of this exercise. In their ‘Approach to Enforcement’ document, the FCA emphasises that there needs to be serious misconduct for the FCA to decide to act with regards to misconduct. It is, therefore, questionable what impact any changes on the Principles for Businesses will have without changes to this enforcement approach too. The reality is that the FCA’s enforcement work is bound to be limited both by the resources available to it and by practical issues concerning the rights of those individuals whose conduct is being investigated. The Authority may be able to improve its performance, but it has to be recognised that it is regulating a complex and devolved industry.

Conclusion

This debate has brought several significant questions regarding the regulation of the financial services sector to the fore. To what extent does the current regulatory regime need to be reformed to improve the protection available to consumers? This discussion has moved the debate forward and helped to clarify potential routes the regulator might pursue to improve consumer protection. However, it remains to be seen exactly what is going to come out of this particular project; it is possible that the focus on enforcement and the Principles for Businesses will feature in the future. It is also possible that changes in this area will have very little impact.

It is expected that this debate will continue. Since the publication of the FCA’s Feedback Statement, the Treasury Committee have reported on consumer access to financial services, indicating in this report that if the FCA is unable to resolve the difficulties in this area through the use of their existing powers, they would support the introduction of a legal duty of care. It is hoped the FCA’s planned Autumn 2019 publication on the duty of care work will produce some firm conclusions as to the future of this area of regulation.

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