The FCA Opens Up a Discussion on Introducing a New Duty of Care

Posted on 25 September 2018

FCA publishes its Business Plan

In response to concerns that the current regulatory framework fails to adequately incentivise firms (particularly those in the retail sector) to change culture, to look after customers' interests and to facilitate legitimate claims to redress, the FCA published a discussion paper on 17 July 2018 on the introduction of a new wide-ranging duty of care.  Any such duty would be a radical move for the FCA, as the paper itself recognises, and any actual reforms in this area are likely to be a long way off.  That said, the discussion, and what has prompted it, gives an interesting snapshot of concerns about the adequacy of the existing regulatory framework and the FCA's own view of how it is getting on.

The current discussion has arisen in the context of the FCA's 2017 consultation on its Mission, see Enforcement Watch 21 "FCA Consults on its Mission". In that paper, the FCA asked whether a duty of care would help ensure that financial markets functioned well.  Whilst many supported the proposal (for the reasons given above), there was also resistance from some respondents who noted that such a duty would be difficult to articulate without detailed and developed jurisprudence, and that it may result in firms becoming cautious around innovation or firms passing the costs of any resulting litigation risk on to consumers.  Many respondents also commented that the combined effect of statute, common law and the Senior Managers and Certification Regime (SMCR), effectively bring about the same end result as any new duty. 

The FCA sets out in the paper that its approach to dealing with any perceived lacuna in its regulatory framework is to either rely on its Principles for Businesses in order to take action, or to consider new rules and guidance.  In the context of any new duty, the FCA rightly identifies that the gap that any such duty would plug has not yet been adequately identified.  This requires not only a clear articulation of the harm that such a duty would be designed to prevent, but also why existing provisions and powers are inadequate.  There is plainly a real possibility that discontent about the existing regulatory framework is in fact properly characterised as dissatisfaction with how the regulator uses its existing powers and how existing dispute resolution mechanisms (whether the Courts, the Ombudsman or schemes of redress) function in practice.  There is also a risk that any new duty would further complicate the regulatory regime and duplicate existing provisions, such as those in the Principles for Businesses and in specific provisions of the FCA rule book (for example the "best interests" of the client rule in COBS 2.1.1R). 

Whilst it is plainly appropriate that this proposal is given proper time, there is palpable caution on the part of the FCA about the introduction of a new duty.  Much of this high-level discussion paper is given over to an explanation by the FCA of existing provisions and powers and how they are used.  The key question (and one repeatedly posed by the FCA in the paper) is whether and how any new duty would actually improve customer outcomes and reduce the risk of loss.  Supporters of the new duty will need to clearly set out in response to this paper in what respects the existing arrangements fail, precisely how a new duty (whether in the form of a new legislative duty or otherwise) would improve matters and balance this against the risk of confusion or adverse reaction on the part of industry.  On the face of it that is a tall order.

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