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Will England and Mark Watson consider the proposed new duty of care, suggested by the Financial Conduct Authority and the issues it could bring in the current climate.

In 2018, the Financial Conduct Authority [“FCA”] sought feedback around its proposed introduction of a “duty of care” or a “new consumer duty” [“NCD”], the aim was to set a higher level of consumer protection in retail financial markets for firms to adhere to. It was hoped that the proposal would help consumers to make well-informed choices about financial products, whilst offering them the protection of regulatory action, such as enforcement. 

The Discussion Paper [“FS19/2”] on the proposed duty was followed by a Feedback Statement which in turn sought detailed responses on the various options and possibilities around the introduction of this new duty of care.

This proposed duty nearly found its way on the statute book in the form of the Financial Services Act 2021 [“the Act”]; perhaps an expression of frustration from Parliament over the length of time that the consultation was taking.

However after much debate, the duty was not included in the Act. Instead, section 29 of the Act requires the FCA to consult on the issue and publish the analysis of responses before 01 January 2022 and to introduce rules relating to the said duty of care before 01 August 2022.

The FCA published its plans for this new duty on 14 May 2021 after a speech made by the Chair of the FCA, Charles Randell on 06 May 2021. In it he said:

“…We need to reset our expectations of how firms define the outcomes their customers can expect from their products and services and how they measure and demonstrate whether those products or services are producing those outcomes. We’ll be consulting on a New Consumer Duty that could embed this approach shortly.”

The duty will have three proposed elements: These are,

  1. The Consumer Principle, which will reflect the overall standards of behaviour the FCA expects from firms. The wording being consulted on is: ‘a firm must act in the best interests of retail clients’ or ‘a firm must act to deliver good outcomes for retail clients.
  2. Cross-cutting rules which would require three key behaviours from firms, which include taking all reasonable steps to avoid foreseeable harm to customers, taking all reasonable steps to enable customers to pursue their financial objectives and to act in good faith.
  3. A suite of rules will also underpin it and guidance that set more detailed expectations for firm conduct in relation to four specific outcomes – communications, products and services, customer service and price and value.

It is clear from this wording that the FCA is concerned about the provision of information and/or advice which is misleading, difficult to understand and does not represent value to the consumer.

Pursuant to section 89(1) of the Financial Services Act 2012, advisors and other regulated persons can be prosecuted for making misleading statements and there are a whole host of various offences under the Fraud Act 2006, Theft Act and other legislation.

But this new duty would add another layer into an already highly regulated and monitored area, one in which advisors will have to tread carefully.

All of this must be considered within the context of two additional developments.

Decision making

The first is the proposed change to the way in which the FCA will make decisions. The proposed change is to take some of the decision-making away from the Regulatory Decisions Committee [‘RDC”] and redistribute these to its Authorisations, Supervision and Enforcements divisions.

This proposition is designed to improve the speed at which the FCA can deal with alleged offences or regulatory breaches by removing the responsibility from the board of the FCA and entrust the decisions to the FCA staff close to the matters.

This seemingly sensible and rational proposal comes with a caveat in that there is the potential for serious issues to arise.

The RDC, whilst not independent, has been seen by many as providing objective analysis and decisions in situations where FCA investigators suspect an offence or breach and those suspected can make representations. The RDC can then consider all of the facts in the round an come to a reasoned and impartial decision.

If the objective decision maker is removed from the equation, there is an on-going potential for issues to arise. Nikhil Rathi, the CEO of the FCA, made a statement on 15 July 2021 in which he wants to make the FCA a more innovative and adaptive regulator, along with an assertive one. It’s that word, “assertive”, that should give advisors concern.

Once the objective decision maker is removed and the final word rests with those who are investigating the alleged offences or breaches, it is not hard to see that impartiality may well be forfeit.

The closer that one gets to the investigation process, the greater the chance there is of decisions being made that are at risk of being arbitrary in their nature. As a result, excessive actions and decisions could increase dramatically.

One can imagine that a team tasked with an investigation is less likely to take an impartial view of that investigation, compared to that say of a third party, even if that third party is within the same organisation.

The second “Big Bang”

On 04 August 2021, the Prime Minister and Chancellor of the Exchequer sent a joint letter challenging asset managers to begin an “Investment Big Bang”, a choice of phrase obviously used to echo the deregulation of the Stock Market by Margaret Thatcher in 1986. The words “Investment Big Bang” were the only words in the letter to be in bold.

Unfortunately, it is only the language that is bold, metaphorically and literally, in the letter. There is little, if any detail, in relation to how this new era is to be supported and encouraged by the Government. It is clear though that the thrust of the letter is attempting to encourage those investing to take more risk. The letter does not encourage pension funds to reallocate the capital invested in fixed income to private companies and infrastructure.

Where there are defined contribution schemes into pension funds, the risk is place on the individual investor. The letter sets out that the Prime Minster and Chancellor “strongly believe” that the investment in long-term assets is a question that all institutional investors should consider.

The pair also contrast the fact that funds in Canada and Australia are benefitting from investing in long-term assets, whereas similar funds in the UK are mostly invested in listed securities, which represent 20% of the assets in the UK.

The argument is that the investment is needed to “unlock” the hundreds of billions of pounds within institutional investors in the UK and to use this to drive the recovery of the UK, post Covid-19.

The UK Infrastructure Bank, launched on 17 June 2021, “is open for business and is ready to co-invest in green infrastructure and support regional economic growth.” The very clear message of the letter is to encourage institutional investors to invest in infrastructure and similar illiquid investments.

Having seen the suspension of some property funds in the past, along with the collapse of Woodford Investment Management for example, illiquid investments are viewed with increased wariness and perceived as less secure than other investments.

Worlds collide

These three developments should give funds, managers and investors time to reflect.

The encouragement being given by the Government is at complete odds with the proposed new duty of consumer care. How is an investor to reconcile being encouraged to invest in more risky funds, in the knowledge that there is a heightened duty of care to the consumer, when the FCA has entered into a new era of aggressive regulation, where there is an increased possibility of capricious and hap-hazard investigatory decisions, coupled to an inconsistent approach across the industry.

Seeking advice at the early stages of any investigation and considering any possible allegations that may result is critical. The effect on funds and investors cannot be overstated moving in to this new era.

William England is a leading junior recommended in the Legal 500 2021 and Chambers and Partners Directory 2021. He is a specialist in financial crime and regulatory compliance. He has been described as “a force of nature.”, “very shrewd, good with clients and a fine cross-examiner”, “an exceptionally bright and extremely hard-working barrister” (Chambers and Partners 2021), and “a fighter who oozes confidence” (Legal 500).

Mark Watson is a member of Carmelite Chambers who specialises in financial crime and was called to the Bar in 2011. He defended in the largest counterfeit cigarette production operation that HMRC has ever prosecuted and is developing an early practice in Covid related payment frauds. He is also an elected member of the Criminal Bar Association Executive Committee.


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