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Could there be consumer duty failure claims within your distribution chain?

The Commercial Disputes team considers the potential for consumer duty claims across financial services supply chains.

1 minute read

Published 12 October 2023

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  • Financial services

The consumer duty came into effect on July 31 and has far-reaching implications for both new and existing financial products or services that are open to sale and renewal. It marks a significant shift in the regulatory landscape and introduces several key considerations for firms operating within this space.

What constitutes a serious breach?

The severity of a breach is contingent on multiple factors, including the number of customers affected or at risk, the financial loss incurred, customer vulnerability, and the extent to which customers were misled by the firm. Additionally, the seriousness of a breach is likely to be sector-specific, recognising that a one-size-fits-all approach may not be suitable for diverse financial products and services.

Could there be a private right of action?

The FCA possesses the authority to create a private right of action (PROA), but it has not yet established one concerning the consumer duty principle. The rationale for not creating a PROA at this stage is multifaceted. Firstly, the consumer duty represents a significant shift in the regulatory landscape, and its implementation is expected to be iterative. Both firms and consumers will gain a more comprehensive understanding of the duty over time through FCA communications, supervisory action, and complaints. Allowing the industry sufficient time to incorporate the consumer duty, without the prospect of private actions, is deemed essential for realizing the full benefits for consumers.

Could there be claims as between companies within a distribution chain, relating to the consumer duty?

The FCA clearly states that the duty extends across the distribution chain, encompassing all firms involved in the manufacture, provision, sale, and ongoing administration of financial products or services to end retail customers. This implies that each firm in the distribution chain is responsible for its own compliance with the consumer duty.

However, there are complexities when one firm’s non-compliance leads to adverse outcomes for another firm’s customers. In such cases, it is anticipated that the FCA will assess each firm’s compliance individually. A firm will not be penalized for another firm’s non-compliance unless it knew of the non-compliance and failed to notify the FCA. This signifies the FCA’s intention to address compliance on a case-by-case basis.

In conclusion…

It will take some time to see how the consumer duty will work in practice and how the FCA will choose to implement it. In the meantime, firms are advised to prepare themselves as best they can by following the FCA guidance and considering whether their contractual arrangements with other firms in their distribution claim provide them with the maximum possible protection.

The full article was first published by the FT Adviser on 11 October 2023.

For more information, please visit our Commercial Disputes lawyers page.

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Longer Reads

Could there be consumer duty failure claims within your distribution chain?

The Commercial Disputes team considers the potential for consumer duty claims across financial services supply chains.

Published 12 October 2023

Associated sectors / services

  • Banking & financial disputes
  • Financial services

Authors

The consumer duty came into effect on July 31 and has far-reaching implications for both new and existing financial products or services that are open to sale and renewal. It marks a significant shift in the regulatory landscape and introduces several key considerations for firms operating within this space.

What constitutes a serious breach?

The severity of a breach is contingent on multiple factors, including the number of customers affected or at risk, the financial loss incurred, customer vulnerability, and the extent to which customers were misled by the firm. Additionally, the seriousness of a breach is likely to be sector-specific, recognising that a one-size-fits-all approach may not be suitable for diverse financial products and services.

Could there be a private right of action?

The FCA possesses the authority to create a private right of action (PROA), but it has not yet established one concerning the consumer duty principle. The rationale for not creating a PROA at this stage is multifaceted. Firstly, the consumer duty represents a significant shift in the regulatory landscape, and its implementation is expected to be iterative. Both firms and consumers will gain a more comprehensive understanding of the duty over time through FCA communications, supervisory action, and complaints. Allowing the industry sufficient time to incorporate the consumer duty, without the prospect of private actions, is deemed essential for realizing the full benefits for consumers.

Could there be claims as between companies within a distribution chain, relating to the consumer duty?

The FCA clearly states that the duty extends across the distribution chain, encompassing all firms involved in the manufacture, provision, sale, and ongoing administration of financial products or services to end retail customers. This implies that each firm in the distribution chain is responsible for its own compliance with the consumer duty.

However, there are complexities when one firm’s non-compliance leads to adverse outcomes for another firm’s customers. In such cases, it is anticipated that the FCA will assess each firm’s compliance individually. A firm will not be penalized for another firm’s non-compliance unless it knew of the non-compliance and failed to notify the FCA. This signifies the FCA’s intention to address compliance on a case-by-case basis.

In conclusion…

It will take some time to see how the consumer duty will work in practice and how the FCA will choose to implement it. In the meantime, firms are advised to prepare themselves as best they can by following the FCA guidance and considering whether their contractual arrangements with other firms in their distribution claim provide them with the maximum possible protection.

The full article was first published by the FT Adviser on 11 October 2023.

For more information, please visit our Commercial Disputes lawyers page.

Associated sectors / services

  • Banking & financial disputes
  • Financial services

Authors

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