News & Views

More or better regulation – or both?

Regulatory comment for Financial Advisers and Paraplanners

5 Sep 2018

More or better regulation – or both?

The FCA have released some interesting papers recently, and generally seem to be demonstrating a more interventionist approach, or at least earlier intervention. For example the FCA have looked atP2P platforms and decided that they need to impose much more detailed regulation and governance on such platforms as the market is currently putting consumers at risk of serious detriment. The FCA are also considering more intervention on cash savings, as that market also appears not to be working for consumers.

In amongst all this, the FCA released DP18/5 in which they consider whether introducing an overriding duty of care on firms "...could reduce harm by requiring firms to avoid conflicts of interest, as well as supporting longer-term cultural change within firms."

Essentially the FCA are asking whether there is a gap in the existing regulatory framework which, if filled by a duty of care, would result in better consumer outcomes. The existing framework comprises statute, rules, guidance and the Principles. Recent years have seen the FCA take more enforcement action based on breach of Principles for the simple reason that it is difficult to cover all possible circumstances with detailed rules and the Principles give the FCA the ability to take action where there is no obvious rule breach but it is clear that a firm's conduct has fallen below the expected standard and that consumers have suffered as a result.

Some of the FCA's rules are also drafted in very broad terms, for example the "Client's best interests" rule. The FCA is also introducing the Senior Managers & Certification Regime, imposing more individual accountability within firms, and issues detailed guidance on the application of rules and Principles (eg The Responsibilities of Providers and Distributors for the Fair Treatment of Customers (RPPD)) designed to provide more clarity to firms on their approach in particular areas.

Given the broad nature of the Principles and the FCA's willingness to use them, it is questionable what additional benefit imposing a duty of care on regulated firms would have. The Principles already include the following:

  • Principle 2 Skill, care and diligence – A firm must conduct its business with due skill, care and diligence.

  • Principle 6 Customers' interests – A firm must pay due regard to the interests of its customers and treat them fairly.

  • Principle 7 Communications with clients - A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.

  • Principle 8 Conflicts of interest – A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.

  • Principle 9 Customers: relationships of trust – A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.

    Surely the above are sufficient to already, in effect, impose a wide-ranging duty on regulated firms to put their clients' interests first, and to expect to be held accountable if they do not do so. Adding a further duty of care on top of the above would potentially create confusion for both consumers and firms as to exactly what the duty of care means and it is likely that it would end up being the FCA and/or the Courts who had to interpret that on a case-by-case basis as any such duty is likely to be couched in very broad terms.

    In my view the addition of such a duty would therefore be a mistake and a waste of the regulator's resources. Those resources would be better spent producing additional guidance for firms on how the FCA understands that their Principles, in particular, apply to different firm. That type of clarity would be welcomed by firms without adding a new layer of regulation to deal with which itself is uncertain in its application and effect.

It appears that the FCA is considering the imposition of a new duty of care in response to feedback on their Mission 2017 where stakeholders expressed concern about the ability of the existing regulatory framework to protect consumers. The FCA consider that they have a responsibility to consider new and alternative approaches that address such concerns, but it is difficult to see from the content of DP18/5 what a new duty of care would add and it is to be hoped that the FCA reach the same conclusion and instead concentrate on operating the existing regulatory framework more effectively to achieve this objective.

Alan Hughes


+44 (0) 1392 685266


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