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Make sense of responsibility

It can hardly be disputed that a compensation culture exists in the financial services sector and consumers are currently expected to take little responsibility for their financial decisions, even where they have acted unreasonably.

But this could be about to change. The FSA’s most recent work on “consumer responsibility” seems to have slipped under the radar but DP08/05 Consumer Responsibility should be applauded for encouraging consumers to take more responsibility.

Unfortunately, responses to DP08/05 have not shared this enthusiasm for change, denying any suggestion that consumers take responsibility for their own actions.

The FSA released DP08/05 on December 19, 2008, with responses required by June 19, 2009. DP08/05 made no policy proposals on consumer responsibility but set out:

  • The FSA’s view on how the law and FSA rules currently interact on the balance of responsibilities between firms and consumers; and

  • How this balance would operate in a “better world”, and what actions should be considered to reach this “better world”.

    It is often overlooked that the Financial Services and Markets Act states that the FSA must have regard to “the general principle that consumers should take responsibility for their decisions” when securing an appropriate degree of protection for consumers (one of the FSA’s statutory objectives), clearly justifying the FSA’s work in this area.

    DP08/05 acknowledges that due to consumers’ lack of knowledge and understanding of financial services, the current balance of responsibilities operates in favour of the consumer. To shift the balance, consumers must be better educated about financial services and more involved and engaged in their own financial decisions.

    DP08/05 discusses various ways of achieving this. The FSA is already engaged in this work through its financial capability programme but some tentative new suggestions are included, such as firms including in their disclosure to consumers a list (as set out at Annex 1 to DP08/05) of “sensible actions consumers might take to protect their own interest”, including:

  • Answering advisers’ questions fully and volunteering all information;

  • Before during and after the advice process, reading all documents and information provided, pointing out any errors and asking questions if you don’t understand anything; and

  • Advising the firm of any changes in needs, circumstances or information provided.

    This is significant for firms because the implication is that if – and only if – better consumer understanding of financial services is achieved, then consumers may be asked to take more responsibility for their financial decisions.

    This could make it more difficult for consumers to succeed when complaining about firms. Indeed, the FSA even says that “helping consumers…take more responsibility for their own decisions could result in… a reduction in the more obvious and spurious complaints”.

    So far so good – the FSA recognises the current imbalance and is seeking feedback on what to do about it to help bring about a “better world”. The FSA is not seeking to impose legal obligations on consumers, remove consumers’ rights to complain or even make it more difficult for them to complain. But if consumers understand financial services products and services better, this could not only affect the outcome of a complaint but, more important, should also result in fewer complaints to start with.

    According to their responses to DP08/05, the Financial Ombudsman Service and the Financial Services Consumer Panel do not share this view.

    Both appear to object to the FSA even raising the issue of a “balance of responsibilities” between firms and consumers. The FOS seems to be of the opinion that the fact they have been upholding a higher proportion of complaints justifies this stance.

    I would take the opposite view – this indicates that consumers need a greater understanding of the decisions they are making and the FSA makes it clear in DP08/05 that only when this has been achieved will any rebalancing of respon- sibilities be considered.

    By objecting even in principle to the rebalancing, the FOS does not do itself or consumers any favours – not least as the FOS always maintains that it is not a “consumer champion”. Its reaction to a perfectly reasonable discussion paper by the FSA casts doubt on that assertion.

    It is in everybody’s interests to have better educated consumers and, if that is achieved, it is perfectly reasonable that the balance of responsibilities may alter.

    The FSCP takes a similar, if not slightly stronger line to the FOS. In its press release it “urged the FSA to abandon its unrealistic attempts to articulate consumer responsibilities in financial services”. It also refers to the FSA “placing unrealistic expectations on consumers”.

    The FSCP’s response does a gross disservice to those it represents. The FSCP appears to assume that a rebalancing of responsibilities is an impossible task and should be abandoned – patronising at best, insulting at worst.

    Do the FSCP and FOS want to maintain the status quo where consumers are ill-educated and regard the FOS as an insurance policy against any poor financial decisions they make? In whose interests would that be?

    The FSA has taken the first steps towards rebalancing responsibilities in a way that would benefit firms and consumers. Some would argue DP08/05 goes nowhere near far enough but it is a step in the right direction. To try to kill this off immediately is a negative and cynical move.

    It is appropriate to finish with a quote from Sir Callum McCarthy (then chairman of the FSA) from 2006: “Were the FSA to aim to relieve consumers of all adverse consequences, an environment would be created in which they no longer needed to weigh up the reasonableness of their financial decisions.

    “No market can work effectively without involved customers. Consumer responsibility is therefore vital to the effectiveness of financial markets.”

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    There are 2 comments at the moment, we would love to hear your opinion too.

    1. Consumer responsibility
      The author of this article has either not read the Discussion Paper concerned, not read the FSMA recently or understood some pretty basic Common Law principles. The Act does not provide for the FSA to change the legal position on consumer responsibilities. A Discussion Paper is not the means used by the FSA to enhance financial capability. That is the Moneymadeclear site. The Act does not entitle the FSA to issue this paper. The DP purports to describe the Common Law position by reference to four principles. Those principles do not exist in English or any other country’s legal systems. The paper fails to set out the correct position at Common Law and it was the Consumer Panel’s duty to point this out.

    2. Consumer responsibility
      Oh and by the way, Walter Merricks in Ombudsman News rejects the views expressed in this piece and implicitly the DP.

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