Financial Services and Markets Bill

Lord Sharkey Excerpts

Committee stage
Monday 6th February 2023 Grand Committee

Moved by

[Lord Sharkey]

76: After Clause 26, insert the following new Clause—
“Duty of the FCA to make rules introducing a duty of care to replace the Consumer Duty
(1) After section 137C of FSMA 2000, insert—“137CA FCA general rules: duty of care and replacement of the consumer duty(1) The power of the FCA to make general rules incudes the power to replace the consumer duty with a duty of care owed by authorised persons to consumers in carrying out regulated activities under this Act.(2) In this section—“consumer” has the meaning given in section 2(3) of the Consumer Rights Act 2015 (key definitions);“consumer duty” means the rules and guidance contained in the FCA’s Policy Statement PS22/9 and in the FCA’s Final Guidance FG22/5 of July 2022;“duty of care” means an obligation to act in consumers’ best interests and to exercise reasonable care and skill when providing a product or service.”(2) The FCA must make rules in accordance with section 137CA of FSMA 2000 which come into force no later than six months after the day on which this Act is passed.(3) In section 138D of FSMA 2000 (action for damages), omit subsection (3).(4) The FCA may not make rules which change or qualify the definition of “duty of care” as provided for by virtue of subsection (2), reduce its scope of applicability, or disapply or fetter the private right of action afforded to consumers by section 138D of FSMA 2000.”Member’s explanatory statement
This is a probing amendment to allow debate on the FCA’s new Consumer Duty and a replacement Duty of Care and on a Private Right of Action.

[Lord Sharkey (LD)]

My Lords, Amendment 76 in my name and that of my noble friend Lady Tyler of Enfield—I am very grateful for her support and look forward to hearing her speak later on in our debate—would require the FCA to make rules replacing the new consumer duty that it has devised with a duty of care. This duty of care would be

“owed by authorised persons to consumers in carrying out regulated activities under”

FSMA 2000. The amendment also makes provision for redress via a private right of action; it does this by removing the barrier contained in Section 138D of FSMA. Finally, the amendment contains provisions to prevent the FCA using its rule-making powers to

“change … the definition of ‘duty of care’ … reduce its scope of applicability, or disapply or fetter the private right of action afforded to consumers by section 138D of FSMA 2000.”

This last bit is to ensure that Parliament’s intentions are rigorously carried out and reduce the opportunities for dilution.

The questions of imposing a duty of care on financial services providers and creating a private right of action have been debated in this place many times. The last time was during the passage of what is now the Financial Services Act 2021. In Committee on that Bill, I proposed the introduction of a duty of care in terms that were very similar to the text of the amendment before us; that amendment had strong support. I closed the debate by setting out the five key reasons for adopting a duty of care:

“The first is that FSMA does not protect consumers adequately; the second is that the FCA is always playing catch-up. The third reason is that poor behaviour by firms continues … The fourth is that getting redress after the event is time-consuming and very stressful, and the fifth is the incentive for real and lasting cultural change in our financial services industry.”—[Official Report, 22/2/21; col. GC 120.]


All those points remain valid today. Indeed, the FCA has openly acknowledged the need for significant improvement in how consumers are treated.

At the Report stage of the same Bill, in March 2021, the noble Lord, Lord Stevenson of Balmacara, put forward a duty of care amendment in terms nearly identical to the one that we debated in Committee and nearly identical to the text now before us. All the speakers in that debate—apart from the Minister, the noble Baroness, Lady Penn—were in favour of the amendment, which was passed in the House by 296 votes to 255—a majority of 41. The Commons removed our amendment and, in ping-pong, proposed an amendment in lieu. This amendment required, among other things, the FCA to carry out

“a public consultation about whether it should make general rules providing that authorised persons owe a duty of care to consumers.”

It was also required to consult on whether it

“should make other provision in general rules about the level of care that must be provided to consumers by authorised persons, either instead of or in addition to a duty of care.”

Whether that actually happened in any meaningful way is strongly contested. The Transparency Task Force has long argued that the consultation was deeply flawed. It has argued, and continues to argue, that the FCA only ever really consulted on its proposed new consumer duty and not, since the 2021 Act was passed, on a duty of care. It is a contentious area, but there is merit in these criticisms. At the very least, I understand how the impression might form that the FCA had it regulatory thumb firmly on the scales.

This matters because the FCA’s new consumer duty is not a duty of care; it is significantly different and significantly weaker. These differences can be summarised as follows. First, there is no private right of action for breaches of the consumer duty. This means that the FCA will not be able to implement a redress scheme using its powers under FSMA if there are breaches of the consumer duty. This lack of a power to order redress will weaken the incentive to comply with the consumer duty.

The second flaw in the consumer duty is the lack of disclosure of information about how firms are complying with it. A firm’s board is required to assess only annually whether the required outcomes under the consumer duty are being achieved and agree any actions needed for compliance, but the firm will be able to keep that assessment secret from its customers and shareholders and will not have to publicly disclose any action it has taken. That is hardly transparent. For example, Which? has noted that:

“Without some kind of compulsory form of publication, it’s very hard to see how industry commentators, stakeholders and consumer representatives will gain an insight into the impact of the consumer duty.”


The third flaw in the consumer duty is that the standard required by firms to comply with its terms is based on the “reasonable expectation” of consumers. All this brings to mind the Equitable Life debacle and the difficulty of imposing a regulatory standard based on the reasonable expectations of consumers. In 2001, Sir Howard Davies described the concept as having a “chequered history” and as

“lacking in clarity and definition.”

The concept was also described by the then Treasury Minister as “nebulous”. The concept was eventually removed from the FSA’s regulatory framework in 2001-02. With the new consumer duty, it will be impossible to measure what the “reasonable expectations” of consumers are in any particular case. There would be obvious problems if the FCA or firms believed that consumers could be treated poorly because they had low expectations.

When the Government proposed the reintroduction of the concept of “reasonable expectations” during the passage of what became the Financial Services Act 2012, the Joint Committee that examined the Bill noted that the concept would make it difficult for the regulator to be clear on the meaning of its duties and near to impossible for consumers and Parliament to hold the regulator to account. The Joint Committee described the concept as “problematic” and concluded that its reintroduction would be unwise. Yet here it is again.

The final flaw is that the fair value assessment that firms are required to do under the consumer duty allows them to consider

“The market rates and charges for comparable products or services and whether the product is a significant outlier compared to these”.


There is a significant risk that this will allow firms to continue to exploit trapped customers as long as other firms are doing it at the same time. For example, in the case of mortgage prisoners who are trapped with their existing lender, a firm will say that they are being offered the “market rate” because they are being charged a similar rate to other mortgage prisoners at other vulture funds. All the customers across many firms are being exploited, but it is not a breach of the consumer duty.

The FCA’s proposed new consumer duty is deeply flawed and is not a duty of care. It is an enormous addition to the box-ticking culture and the antithesis of an aid to judgment. The new rules and feedback run to 161 pages with a further 121 pages of guidance to help. Diligent application of all these rules and guidance notes will not produce the required consumer benefits, nor drive a change of culture in the regulator or the firms it regulates.

The fact is that FSMA does not adequately protect consumers. Malfeasance continues and is unlikely to be much influenced by the new consumer duty. Under the new duty, redress is patchy, lengthy, uncertain and not really available to those who need it most. We should return to what this House originally voted for: a statutory duty of care. I beg to move.

--- Later in debate ---

[Baroness Penn (Con)]

If I may, I will come on to address the noble Baroness’s point and the questions from the noble Baroness, Lady Tyler, on why the FCA took the approach it did in selecting the consumer duty approach rather than a duty of care. It is the FCA’s view that it provides not a weaker response but a stronger one; I will set that out in more detail.

The consumer duty sets a higher and clearer standard of care that firms owe their customers than now, and includes a new principle requiring firms to act to deliver good outcomes for customers. It is a package of measures comprising an overarching principle, cross-cutting rules and four “outcome rules”. It is also accompanied by extensive guidance, as noble Lords have noted, to provide clarity for firms on what is expected from them.

The FCA developed the consumer duty following extensive consultation with a wide range of stakeholders, including consumer representatives. Noble Lords may be aware that, in its consumer duty consultations, the FCA specifically sought views on whether the new principle should instead require firms to act in customers’ best interests. On balance, the FCA concluded that requiring firms to act to deliver “good outcomes” was the most appropriate approach. The FCA explained that “good outcomes” best reflects the outcomes-focused nature of the consumer duty and underlines that firms should not focus simply on processes but on the impact of their actions on consumers. The FCA also noted concerns raised by some stakeholders that “best interests” language could be confused with a fiduciary duty or a policy that required the best outcome to be achieved for each consumer, potentially resulting in unintended consequences concerning the availability of products and services to some consumers.

I hope noble Lords are therefore assured that the FCA carefully considered the wording of its consumer duty in the manner proposed by Amendment 76 and concluded that a different approach would deliver better outcomes. As the UK’s independent conduct regulator for financial services, it is responsible for developing its rules independently of the Government.

The noble Baroness, Lady Kramer, asked about the potential for the consumer duty to operate in the context of past problems. She highlighted the mis-selling of PPI and interest rate hedging products. As I said, the consumer duty sets clearer and higher standards for firms to follow, and that means clearer and higher standards for the FCA to supervise and enforce, which will enable the FCA to act more quickly and assertively where it identifies poor practice. However, within this system, even the best regulators doing everything right will not be able to, and cannot be expected to, ensure a zero-failure regime.

In respect of the two specific cases of PPI and interest rate hedging products, the Government have always been clear that mis-selling financial products is unacceptable. That is why we supported unequivocally the FCA’s work on PPI to ensure that consumers who were mis-sold PPI receive appropriate redress, and the review process into the mis-selling of interest rate hedging products, which saw over £2.2 billion of redress being paid out to almost 14,000 businesses.

[Lord Sharkey (LD)]

Before the Minister moves on, what are her views on the point I made about “reasonable expectations” for consumers, which is the standard required by firms to comply with the terms of the new consumer duty? The Minister will have heard the historical criticisms of the notion of reasonable expectations for consumers. How would she feel about having this concept at the heart of this new duty?

[Baroness Penn (Con)]

The noble Lord gave other examples of the concept in the past, but it is important to root it in this particular context. Perhaps I can write to the Committee to expand on that point.

--- Later in debate ---

[Baroness Penn (Con)]

I think I said directly what was required of the FCA, and the FCA has fulfilled its obligations under that Act. Furthermore, the FCA is not of the view that it has diluted the approach; it has taken a different approach from the duty of care. I have attempted to set out some of the reasoning and thinking behind the approach it has chosen to take versus the alternatives that were put to it. I am happy to write further.

[Lord Sharkey (LD)]

I am afraid to say that I am not sure I take much comfort from the FCA saying that it is right. Mandy Rice-Davies would know how to deal with that. My next question is about the lack of redress provided by the new consumer duty.

[Baroness Penn (Con)]

With apologies, the lack of redress is around the right to private action. I will come to that point and, when I have said my piece, the noble Lord can intervene, if it is not sufficient.

Amendment 231 from the noble Lord, Lord Sikka, is similar in intention and would introduce a statutory duty of care owed by authorised persons to consumers. Again, this proposal was considered by the FCA, and it sought views from stakeholders through its consultations. As noble Lords have noted, this issue has been under consideration for some time. In its 2019 feedback statement on a duty of care and potential alternative approaches, the FCA explained that most respondents, including industry stakeholders and a number of consumer groups, did not support a statutory duty of care. Of course, the two subsequent consultations were undertaken by the FCA in response to the amendment put down by Parliament and included in the Financial Services Act 2021.

The new consumer duty comes into force on 31 July for new and existing products. It represents a significant shift in regulatory expectations, and there is a large programme of work under way within the sector to implement it. It would be wrong to seek to replace it now or seek to duplicate it with an additional statutory duty of care before it has been given a chance to succeed.

Amendment 229, along with Amendment 76, seeks to attach a private right of action to the consumer duty. This is an issue that the FCA has considered and consulted on extensively as it developed the consumer duty.

--- Later in debate ---

I draw my remarks to a close there. I know I have a number of points to follow up for noble Lords, in particular in response to their duty of care amendment, but with that I hope that the noble Lord, Lord Sharkey, will withdraw his amendment.

[Lord Sharkey (LD)]

I thank the Minister for that reply. It is hard to understand exactly what the defence of the new consumer duty is, and why the private right of action is not included. I am very grateful for all the contributions made. I note that the Minister did not really address the defects of the consumer duty that we set out in detail, and I hope she will write to me and explain her views on that.

I close by saying that there is a slight Alice in Wonderland quality to this argument because, essentially, it boils down to something that we have discussed before: that it is not in the consumer’s best interests that financial service providers act in their best interests. That simply cannot be right. There is something fundamentally wrong with all this, and I look forward to having more time on Report to return to the issues.

Amendment 76 withdrawn.