Plans for a new consumer duty were set out by the Financial Conduct Authority (FCA) in May this year after it found that current principles were not working efficiently to protect consumers – but who is set to benefit from the new duty?
The FCA’s new proposals set out clearer and higher expectations for regulated firms when dealing with retail clients. Previously, SMEs were not covered by FCA regulation because lending to an SME was not a regulated activity. However, for the first time, the FCA is now capturing SMEs in its definition of ‘retail clients’ in its new consumer duty. SMEs are therefore likely to benefit from this inclusion as they can expect some protections from the FCA within the duty.
The duty will apply to firms, such as banks and insurance companies, which manufacture or provide products and services to retail clients – even if they don’t have a direct relationship with the end customer.
For many firms this will require a significant shift in culture and behaviour, where they must focus on consumer outcomes and put themselves in their customers’ shoes. The FCA’s focus is now on achieving better outcomes for customers, which is good news for SMEs as it means the authority will look to ensure that small firms are treated fairly.
So, how else might SMEs benefit from this new consumer duty?
Using detailed rules and guidance, the FCA confirms that firms will be responsible for assessing the implications for customers of their actions: they will be expected to monitor, test and adapt their policies, practices and processes so that customer outcomes are in line with the FCA’s expectations. These expectations ensure that products and services are fit for purpose and represent fair value. For SMEs, this should hopefully mean that products are offered at a fair price and that they are not exploited.
If those are the rules, what happens if they’re not followed? Retail clients, including SMEs, will not have a specific right of action for breach of the duty. However, business owners can engage the regulated firm’s complaint process and can complain to the Financial Services Ombudsman or seek compensation from the Financial Services Compensation Scheme.
This new duty is being introduced as SMEs are coming to terms with the severe financial impacts of the pandemic, with one third of them not expecting to be able to recover and repay their debts. Moreover, with UK businesses holding £70bn in unsustainable debt – of which £20-30bn stems from government backed loan schemes – a financial crisis could well be looming.
The FCA will undoubtedly not want a repeat of the financial crash of 2008, where there was a substantial amount of media interest and parliamentary scrutiny over the treatment of small businesses. This history, along with the potential financial crisis that SMEs could soon be facing, have likely played into the FCA’s decision to introduce these provisions at this time
With more detail to follow on the FCA’s consumer duty later this year, the final shape of the duty is still some way off. However, it is clear that the direction of travel is to focus on achieving a higher standard of conduct from firms and achieving better outcomes for retail clients – which, in this case, not only includes private individuals, but extends to British SMEs.
Nicola Ross is a partner in the commercial litigation Team at independent Scottish law firm, Morton Fraser.