Top financial services enforcement trends: retail conduct
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Cases involving potential retail misconduct account for just under a third of the UK Financial Conduct Authority’s (FCA) enforcement caseload. Whilst only one of the FCA’s 2021 fines focused entirely on retail conduct issues (customer communications), more than 50% of the cases where the FCA took enforcement action during 2020 involved retail issues.
With the FCA reporting a high number of open investigations relating to retail conduct and its clear focus on issues affecting retail customers, we are expecting a steady flow of FCA enforcement action in this area throughout 2022 and beyond.
In addition to fines, firms that are subject to FCA enforcement action for retail conduct issues often find themselves paying out significant sums in respect of customer redress. According to published figures, such firms have paid out almost GBP1 billion in redress to customers since the start of 2018, dwarfing by some margin, the financial penalties imposed on these firms by the FCA.
In some of these cases, the FCA has been willing to reduce fines where a significant, thorough and proactive redress exercise is undertaken; in one case, by 30%. However, other firms have fared less well, with the FCA declining to reduce fines where redress exercises went no further than what the FCA felt firms were obliged to do in order to compensate customers.
Protecting consumers is a fundamental pillar of the FCA’s “new approach” and this is reflected in its enforcement appetite. Fair treatment of customers and clarity of customer communications remain common themes in enforcement cases involving retail conduct. In fact, just over a third of FCA final notices since 2018 have included failings relating to these topics.
Particular issues that have arisen in multiple enforcement cases include:
- The adequacy of documents used by customer-facing employees, such as guidance notes, scripts, and Q&As.
- The quality and frequency of training that firms have provided to customer-facing employees about how they should interact with customers.
- The accuracy of statements made in written customer communications, particularly statements designed to encourage customers to take action.
The quality and appropriateness of customer communications also remains a concern for the FCA. Not only is this topic at the heart of the FCA’s work on sustainability disclosures and product labelling, it is also one of the four outcomes on which the new Consumer Duty will focus.
Early last year the FCA published its guidance on the fair treatment of vulnerable customers, setting out its expectations of what firms should do to comply with their obligations under the FCA Principles for Businesses and associated rules and to ensure they treat vulnerable customers fairly.
This publication followed two enforcement actions against banks in 2020 relating to customers who fell into payment difficulties or arrears. In both of these cases, the customers affected were deemed by the FCA to fall within its definition of vulnerable customers, which affected the FCA’s determination of the seriousness of the breaches when calculating the financial penalties imposed.
What became apparent last year, was that the FCA’s focus on vulnerable customers is not confined to traditional retail enforcement cases. One of the biggest fines levied against a bank last year, by the FCA, took into account the propensity for financial vulnerability within the population of an entire country, said to be adversely affected by the breach, as an aggravating factor for the purposes of penalty calculation.
We expect the FCA’s enforcement focus on the treatment of vulnerable customers to continue throughout 2022 and beyond. It has stated on a number of occasions that the population of financially vulnerable customers in the UK has increased considerably as a result of the pandemic, so it is expected that the FCA will also be looking very closely at how firms are treating these customers along with other customers who display characteristics of vulnerability.
New Consumer Duty
This year, the FCA will publish the final rules for its new Consumer Duty, which will require firms and their senior managers to “act to deliver good outcomes for retail customers”.
The FCA’s objective is to create “a significant shift in both culture and behaviour”. The significance of the new duty will be marked by the introduction of a twelfth FCA Principle for Businesses, alongside a suite of more specific rules for firms and a new Individual Conduct Rule.
It is clear from the draft rules, which we have summarised here, that the new duty will have a very broad scope, capturing all regulated firms involved in the manufacture and distribution, both widely defined, of products and services for prospective and actual retail customers. It will focus on four key outcomes: communications, products and services, customer services, and price and value.
Final rules will be published by 31 July 2022 and firms are expected to have until 30 April 2023 to fully implement them.
Whilst the FCA is unlikely to hold back in taking action against firms and individuals who fail to properly implement or comply with the Consumer Duty, these enforcement investigations are unlikely to materialise until late 2023 at the earliest.
Our next blog in this series considers FCA and PRA enforcement trends relating to financial crime.
This post is based on an article "FCA and PRA Enforcement Action: Trends and Predictions" which first appeared in the January edition of PLC Magazine and a copy of the full article is available here and on the PLC Magazine website.