Financial consumer protections in the UK

In May 2021, the UK Financial Conduct Authority (FCA) published a consultation document proposing that there is a “new consumer duty”.[1] The central proposition is that a company must deliver “good results” for consumers, which is then supplemented by additional requirements.

In particular, the FCA noted in its May consultation:

“We want to see a higher level of consumer protection in retail financial markets, where companies compete vigorously for the benefit of consumers. We are proposing to introduce a new “consumer requirement” that would set higher expectations for the standard of care businesses provide to consumers. For many companies, this would require a significant shift in culture and behavior, where they consistently focus on consumer outcomes and put customers in a position where they can act and make decisions in their best interests.

After receiving feedback from 235 stakeholders, the FCA published a second consultation paper in December, which confirmed the initial high-level proposals and defined the draft detailed rules. The deadline to provide feedback on the second consultation is February 15, 2022.

The main reason for having the new rules, as the FCA argued, is that companies “fail to consistently and sufficiently prioritize good outcomes for consumers”, resulting in consumer harm.

The new Consumer Duty has 3 elements:

  • A consumer principle that “a business should act to deliver good results to retail customers”;

  • “Cross-cutting rules” (essentially the “content” of the consumer principle, i.e. how businesses must act) that require businesses to:

    • act in good faith towards consumers,

    • avoid foreseeable harm to consumers, and

    • 3. Enable and support consumers in pursuing their financial goals.

  • Four results concerning:

    • products and services (i.e. designed to meet consumer needs),

    • price and value (i.e. giving fair value to consumers),

    • consumer understanding (i.e. helping consumers make informed decisions),

    • customer support (i.e. ongoing support throughout the customer relationship).

These new requirements would apply to regulated businesses, including banks, electronic money institutions, brokers, asset managers and payment service providers. In addition, these would also apply proportionately to businesses along the distribution ‘chain’ (ie to intermediaries who are not directly in contact with consumers).

As this new consumer obligation would be “outcome-based regulation”, it would appear to require companies to go beyond complying with the letter of the law, ensuring that the customer gets the result they are looking for. . These are certainly broad and aggressive objectives which will have a significant impact on the provision of retail financial services/products to consumers and which would impose another important obligation on financial service providers.

Although the FCA insists that the consumer requirement “does not remove responsibility from consumers for their choices and decisions”, there are still concerns that consumers will blame themselves for poor outcomes (such as their poor performance in investment or their credit losses) on their financial institutions. . Certainly, the new consumer obligation will increase the costs of providing financial services to consumers and could at the same time increase the risk of consumer fraud. Those of us who work with retail financial services in the United States are very hopeful that this ambitious but possibly unachievable new obligation does not make its way across the pond and into US laws and regulations. However, note that UK businesses distributing US (and non-UK) products and services will still need to comply with certain requirements and therefore US businesses may be indirectly affected.

[1] Note: In the UK and EU, a Consultation Paper is similar to a Notice of Proposed Rulemaking in the US. This is how regulators set targets and seek input from industry, academics, consumer groups and other stakeholders. The consultation document is a first indication of the government’s intention to introduce new laws or regulations.

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