With just a few days to go until the Consumer Duty comes into effect, we have considered the role that the Financial Ombudsman Service (‘FOS’) will play in the consumer protection landscape, how it will deal with complaints involving the Consumer Duty and how the financial services industry are responding to its approach.
Approach of the FOS
As set out in a speech made by Abby Thomas, Chief Executive and Chief Ombudsman of the FOS on 20 June 2023, the FOS will continue to resolve complaints in accordance with its statutory duties: fairly, reasonably, and with minimum formality considering all the circumstances of the case. The FOS considers that this remit gives it a clear position in the consumer protection landscape to help financial businesses navigate changes in the law and regulation, like the Consumer Duty.
The Consumer Duty is underpinned by the higher standard of care in Principle 12 that ‘firms must act to deliver good outcomes to retail customers’. It is supported by the three cross-cutting rules that explain how firms should act to deliver good outcomes, and four outcomes setting out rules and guidance for firm conduct in four areas that represent key elements of the firm-consumer relationship:
- Governance of products and services;
- Price and value;
- Consumer understanding and
- Consumer support.
As the Consumer Duty is governed by concepts of fairness and reasonableness, the FOS does not think it will significantly change the way it looks at complaints, nor does it anticipate a big impact on complaint volumes. However, it has acknowledged that it may take time for complaints to filter down, which could lead to a temporary spike once the regulation is introduced as consumers become more aware of their rights. It does expect to receive more complaints about the use of products and services (over and above typical complaints about sale and cancellation) as consumers might consider that firms should have done more to check that they were using them as intended. It also anticipates more ‘price and value’ related complaints (already a large source of complaints for the FOS), particularly in relation to products and services that don’t appear to represent good value to the customer, or where the pricing seems arbitrary, and it is likely to ask firms for their fair value assessments to explain why their proposition is fair to customers overall.
It has highlighted some of the key challenges for businesses in relation to this ‘fair value’ outcome:
- how firms evidence fair value (i.e. the data gathered and assessments carried out);
- sharing information with the customer when they complain so that the customer understands what happened, how the complaint is being dealt with and why firms charge what they charge; and
- thinking about wider considerations, as the Consumer Duty is just one factor when looking at cases – for example, in a complaint about the price of a financial product or service, there may be other legal or regulatory considerations, including the question of whether contract terms are fair and / or have been validly incorporated.
The FOS does not consider that the principles-based duty will cause it significant issues as it has already navigated similar legal and regulatory developments, as well as other principle-based regulations such as the requirement on firms to ‘pay due regard to the interests of its customers and treat them fairly’. However, the Consumer Duty regulation is fundamentally in a more conceptual and less prescriptive style to current regulations, despite these also being ‘principles-based’, and as such is new territory for the FOS. The FOS is intending to use examples and case studies to inform it on the approach to be taken moving forward and it will share these case studies once the Consumer Duty has come into force. There is no retrospectivity to the regulations, so things will only start to become clearer after the implementation date, once complaints are made regarding conduct occurring after 31 July 2023.
Working with the FCA
Both the FOS and the FCA have given reassurance that they will be closely aligned and are developing specialist ‘directorates’ linked to key industry sectors (including investments, insurance and banking) in preparation for the complaints that are going to come in. Some examples of the work they have been carrying out together include:
- through the Wider Implications Framework which provides a process for structured collaboration between key organisations including the FOS, FCA and the FSCS, as well as providing transparency for stakeholders through the publication of minutes of meetings, an annual review, and a central log of issues. The members of the framework have been working together to ensure they have a shared understanding of the Consumer Duty whilst respecting the different statutory roles each member delivers, in order to give clarity and greater certainty to stakeholders;
- providing regular feedback to the FCA during the consultation stage and implementation period to ensure that FOS-related issues are being continuously considered in the context of Consumer Duty;
- once the Consumer Duty is in force as part of the wider system of rules and guidance, where complaints have any potential wider implications, the FOS will share issues identified through its casework and the FCA will ensure the FOS is aware of its expectations for firms; and
- the FOS has and will continue to engage directly with businesses, trade bodies and other stakeholders to hear views and concerns regarding the introduction of the Duty, for example speaking at the Association of British Insurer’s Conduct Regulation event to respond to queries from delegates about the Consumer Duty.
Nevertheless, as addressed directly in PS22/9, there are still concerns in the financial services industry that the subjectivity of the Consumer Duty may lead to ‘misalignment’ between the FCA and the FOS, particularly in relation to how the fair value rules might apply and the interpretation of what the ‘good’ in ‘good outcomes’ actually means. Some of the respondents to the Consumer Duty consultation paper (CP21/36) felt that the term ‘good outcomes’ was too subjective and that, as a result, the FOS might take a different view to the FCA, leading to penalties for unintentional, minor errors by firms and overall lack of clarity on the requirements firms have to meet.
Others suggested that consumers would interpret ‘good’ as synonymous with ‘favourable’ which may lead to confusion with things like investment products where there cannot be a guarantee of increased value for customers on their investments. The FCA’s response was that it ‘will continue to work with firms, consumer organisations and the ombudsman service to ensure that there is a consistent interpretation of requirements under the Duty, and that it is properly understood and embedded during the implementation period’.
Despite the FOS expressing assurance that there would not be a significant increase in complaints, it is reported that City of London minister Andrew Griffith raised concerns about the Consumer Duty encouraging ‘compensation culture’ in the industry, and thereby placing an unnecessary financial and regulatory burden on firms. Some respondents to the consultation considered that even if the rules themselves were not retrospective, decisions about past conduct by the FCA or the FOS could in practice be informed by the new standards introduced by the Consumer Duty. These respondents also said that activity by claims management companies could exacerbate the likelihood of this happening.
The FCA has made clear that the Consumer Duty applies only to existing products and services on a forward-looking basis, and that both the FCA and the FOS work on the basis that firms should be held accountable against the standards that prevailed at the time of the problem. The FOS has further sought to address concerns by confirming that it has ‘no interest’ in pursuing spurious compensation claims and that if there did appear to be an issue with people exploiting possible ‘loopholes’ it would always communicate with the FCA first to understand their perspective before taking action on these claims.
These concerns form part of a landscape in which financial services firms are subject to an increasing regulatory burden, ranging from the protection of vulnerable customers to the prevention of fraud. Where FOS examples and case studies - effectively a body of precedent indicating its approach on implementation of the Consumer Duty – will only emerge once the Duty comes into force, and where there is the prospect that the FOS and the FCA may take different approaches, firms may be concerned about inconsistency or lack of clarity in the requirements they are to meet. Since the guidance is conceptual rather than prescriptive, firms will need to closely watch emerging decisions to gain a deeper understanding of how they may best evidence compliance.
In the interim, clear evidence of the measures taken to implement and comply with the Duty should be kept – a starting point would be to document how the FCA’s "ten key questions" have been considered and addressed. Records should be kept of how processes and procedures have in practice been followed, keeping in mind that these may be subject to external scrutiny in the event of any challenge. Similarly, a record of how any complaint has been dealt with, including any communications with the customer in question, should be retained.
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‘Resolving disputes fairly’ doesn’t necessarily mean an answer in the consumer’s favour. Our duty is to resolve complaints based on what we think is fair and reasonable in all the circumstances of the case.