Close collaboration with financial ombudsman needed on FCA consumer duty

Financial firms have raised concerns that the FOS may adopt a much broader interpretation of the consumer duty in its decision-making, or at least one broader than that adopted by the FCA, thereby creating uncertainty, according to market feedback recently published by the FCA as part of its ongoing consultation process into the creation of the new duty.

While the precise extent and nuance of the duty has yet to be determined, the FCA, in its latest paper, has reaffirmed its intention to establish a fairer, more consumer focused and level playing field. It believes the consumer duty will achieve this by: explicitly setting a higher standard of care across all retail markets; extending rules focused on product governance and fair value; focusing on matters of market practice that interfere in consumer decision making; ensuring firms consider the needs of their customers – including those with characteristics of vulnerability  – at every stage of the product or service lifecycle; and requiring all firms to focus on good customer outcomes and monitoring whether those outcomes are met.

Set against that backdrop, how the new duty will be interpreted and applied by the Financial Ombudsman Service (FOS) is of particular interest given the key role it plays in resolving individual disputes between consumers and financial firms.

As the duty is not yet in force, there are no published FOS decisions illustrating how it might be applied ‘on the ground’ in relation to consumer complaints. However, the FCA has sought to allay firms’ concerns around inconsistency by making it clear that it will work closely with the FOS to ensure that it is aware of FCA expectations of firms, as well as sharing its work with the FOS in respect of producing examples of behaviour for firms that the FCA considers to be more or less likely to satisfy the consumer duty. The FCA also emphasised the importance of working together closely on issues identified through FOS casework where the consumer duty may be particularly relevant, and which may help inform future understanding and guidance for firms.

Co-operation and collaboration between FOS and FCA will be crucial to ensure consistency in the consumer duty’s application. However, as the FCA recognises, the consumer duty is centred on outcomes-based regulation, rather than a model that is unduly prescriptive and exhaustively defines what firms should do. That invariably requires a wide range of value judgments to be made which can create greater risk of inconsistency – particularly in the context of the FOS where there are hundreds of individual ombudsmen who decide cases across several different business sectors and multiple products. No amount of FCA examples can eradicate that risk. But the hope is that the FOS and FCA will be rigorous in the way they ‘compare notes’ with each other on this.

The FCA has also sought to assuage firms’ apprehensions as to the scope of the duty by indicating that it cannot be applied retrospectively. But while on the face of it those assurances may provide some comfort, it is not difficult to envisage the FOS getting round arguments on retrospectivity by suggesting that the consumer duty embodies and extends pre-existing principles of fairness that have operated for many years – pointing to FCA TCF principles, for example. Indeed, this is the approach it has taken with regard to FCA guidance and policy papers in SIPP transfer cases where FCA thematic reviews and ‘Dear CEO’ letters which post-date the act or omission complained about are still relied on as part of the FOS’s decision-making.

Ultimately, it is an open question as to whether the FOS will take a broader interpretation of the consumer duty when it finally comes into effect. But what can be said with more certainty is that the consumer duty will likely provide a further ’hook’ on which an ombudsman can ‘hang’ their decision when deciding a complaint – in addition to the various other regulatory ‘hooks’ that have emerged in recent years including vulnerable customer guidance.

Accordingly, firms will have to approach the consumer duty with real care and rigour in their own complaints-handling to ensure that it mitigates a potentially more expansive FOS approach. Doing otherwise may risk a higher FOS uphold rate against a firm and increased regulator scrutiny.

That prospect is all the more acute given the FCA’s indication in the consultation paper that it does not intend to apply a private right of action with respect to the consumer duty – making the FOS the most likely forum in which such complaints will be considered, rather than the courts, who may be expected to take a more narrow, legalistic approach.

Co-written with Anthony Harrison and Christopher Tan of Pinsent Masons