Indicators of well-functioning markets for retail consumers
The FCA outlined the following indicators:
- Consumers are able to buy the products and services they need. The environment in which they are sold is clear, fair and not misleading with a good choice architecture[4].
- High-quality, good value products and services that meet consumers' needs.
- Everyone is able to access the financial products they need (inclusion), and the needs of vulnerable consumers are taken into account.
- Consumers are appropriately protected from harm.
Consumer and firm responsibility
The FCA stated that it will base interventions on how individuals in markets behave in practice, rather than theory. The regulator generally expects consumers to take reasonable responsibility for their choices and decisions – this will be determined by the circumstances e.g. a consumer who has taken regulated advice should be able to rely on it being appropriate. However, the FCA acknowledges that several factors might limit consumers ability to do so – as a result, the FCA expects firms to create choice architecture that is based on real world behaviour and that does not exploit behavioural biases. The FCA expects extra care to be taken by firms where consumers may be vulnerable.
Keeping pace with a changing environment
The FCA intends to strike a balance between regulation that takes account of consumers changing characteristics and that gives enough certainty to market participants. The FCA plans to build on their understanding of concepts such as behavioural economics and Big Data to adapt their approach to regulation over time. The FCA considers the ways consumers, from different generations, use debt (and how this is affected by wider macro-economic trends); the ageing population and retirement income choices; and technological advances as some of the many factors that shape their approach.
Regulating for vulnerable consumers
The FCA, firms, and other stakeholders will be involved in creating an approach to regulation that helps and protects vulnerable consumers while still allowing them to participate in the same markets as everyone else. The FCA believes that vulnerable consumers may be less equipped to represent their own best interests and may be more likely to suffer harm. The FCA stressed that any consumer can become vulnerable at any time in their life, for example through serious illness, loss of income or bereavement. The FCA expects firms to pay attention to possible indicators of vulnerability and have policies in place to deal with consumers who may be at greater risk of harm. However, the FCA also acknowledges that it may be challenging for firms to identify vulnerability in some cases, e.g. where consumers do not recognise that they are experiencing difficulties or are reluctant to divulge personal information.
Access and exclusion[5]
Some consumers - based on circumstances or characteristics[6] - may face barriers to accessing financial services, which has ramifications for their financial stability. The FCA does not have a specific mandate to ensure that all consumers have access to financial services. However, the FCA’s competition objective does mean that they must consider how easy it is for consumers to access these services, and how FCA policy/processes affects different groups of the UK population[7].
The FCA’s focus will be on cases where markets do not provide access to certain kinds of services, or to certain groups of consumers. The FCA aims to work alongside firms and other key stakeholders to develop strategies to address access issues. This will include reviewing FCA rules and the way in which they are interpreted. It goes beyond FCA’s remit to impose economic obligations to ensure access for all consumers – this will be a matter for Parliament to consider.
Delivering better outcomes for all consumers
The FCA has a range of tools to diagnose and remedy harms. This ranges from harder, more prescriptive interventions (imposing new rules on firms) to less formal interventions (communications to consumers/firms). The FCA, firms, and other stakeholders can also work together to resolve an issue rather than turning to formal regulatory intervention.
The FCA notes that it has seen improvements – especially in relation to firms’ treatment and consideration of issues such as vulnerability, access, and the ageing population – owing to less prescriptive intervention (such as Occasional Papers). The FCA will consider the balance between formal and informal interventions.
Duty of care
The Financial Services Consumer Panel has flagged the potential need for a new duty of care rule to be imposed on firms by the FCA. Currently, the FCA Handbook (which applies to most authorised firms) has the principle of ‘treating customers fairly’ and firms are required to act in the best interests of their customers. The proposed duty of care would be an additional obligation to exercise reasonable skill and care in the provision of services to consumers. Currently, the FCA has powers under general consumer law to protect consumers from harm caused by misleading contract terms, poor sales practices or where services are not delivered with appropriate care and skill.
The FCA has committed to producing a discussion paper on the introduction of a duty of care obligation on firms after the UK has exited from the EU and the relevant parts of the acquis are ported into UK legislation/ regulators’ rulebooks.
Next steps
The deadline for responses is 5 February 2018. The FCA will publish its final Approach to Consumers in 2018.
[1] FCA Mission: Our Future Approach to Consumers
[2] This document outlines the FCA’s decision-making framework in more detail (identification of harm; diagnostic tools; remedies; and evaluation).
[3] This approach aligns with the FCA’s three statutory objectives: to protect consumers; to enhance the integrity of the UK’s financial system; and to promote competition in the interest of consumers.
[4] The FCA describes the way in which firms frame decisions for customers as ‘choice architecture’.
[5] The FCA's work on vulnerability, access, and exclusion dovetails with wider public discussion on social policy and consumer issues. See, for example, the House of Lords’ report regarding financial exclusion, the National Audit Office’s review of regulators’ work on vulnerability and access, and the Financial Services Consumer Panel’s research on competition.
[6] Protected characteristics are characteristics such as age, race, gender, etc. under the Equality Act 2000.
[7] Under the Equality Act 2010, the FCA’s Public Sector Equality Duty also requires the regulator to have due regard to “the need to eliminate discrimination, advance equality of opportunity and foster good relations between people who share a protected characteristic and those who do not while carrying out our activities. This may include considering any impact on different consumers’ ability to fairly access financial services.”
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