Policy
Response
Financial Services Authority DP 08/5: Consumer Responsibility
Response by the Building Societies Association|
Contact: Chris Lawrenson Date: 9 Jun 2009 |
Print page | Email |
Introduction
1. The Building Societies Association (BSA) represents all 53 building societies in the United Kingdom. Building societies have total assets of £385 billion and, together with their subsidiaries, hold residential mortgages of almost £250 billion, more than 20% of the total outstanding in the UK. Societies hold over £240 billion of retail deposits, accounting for more than 20% of all such deposits in the UK. Building societies also account for about 37% of all cash ISA balances. Building societies employ over 51,500 full and part-time staff and operate through more than 2,000 branches.
2. This paper provides the BSA’s response to FSA DP 08/5 Consumer Responsibility.
3. As is appropriate, most of the work in relation to TCF has concentrated on the responsibilities of firms. There is a significant array of statutory, regulatory and code of practice duties on financial services firms. However, consumers also have responsibilities and, without a proper understanding of what they are, it is very difficult – perhaps impossible - to draw the line where a firm’s responsibilities end.
4. Furthermore, consumers are entitled to as clear as possible a picture of what can reasonably be expected on their part in relation to financial services. Indeed, consumers sometimes risk damage to their own rights of redress if they do not carry out their responsibilities.
5. Therefore, we agree with what the FSA states in paragraph 2.14 of the DP –
“We believe that helping consumers to understand the nature and extent of their current responsibilities, as well as those actions they can take to protect their own
best interests, is both helpful and consistent with our statutory objectives to:
- secure the appropriate degree of consumer protection; and
- to promote public understanding of the financial system.”
6. There is clear statutory recognition that consumers have responsibilities - section 5(2)(d) of the FSMA requires the FSA, in considering what degree of protection may be appropriate in relation to consumers, to have regard to “the general principle that consumers should take responsibility for their own decisions”.
7. Unfortunately, among the large amount of information available about TCF, there is little on consumer responsibilities. The FSA Consumer and Practitioner Panels discussed the matter during 2005, but (although, by and large, they agreed about what were firms’ responsibilities) they were unable to reach full agreement about consumers. We therefore welcome the FSA’s initiative in seeking to fill that void.
8. We now respond to each of the DP’s questions in turn.
Q1: Do respondents have any comments on this summary of the basic legal position?
9. The BSA believes that, broadly speaking, it is a fair summary, but it is not the full picture. We have certain specific observations.
10. The legal position is fundamental, especially the law of contract. For example, it is very clear that consumers have legal responsibilities; namely –
(i) To act lawfully and in good faith
11. Firms and customers have a high-level duty to act lawfully in their dealings with one another. But, as a statement of responsibility, this is probably too general to be very helpful. What are the customer’s specific legal duties? They are as follows –
(ii) Not to make misrepresentations or withhold material information
12. To put this point positively, the customer must answer questions honestly and carefully when applying for a product, ie provide accurate information in response to requests from the firm. Failure to do so might give the firm the right, under contract law, to terminate the contract. Dishonest provision of information might also have criminal consequences, eg fraud.
13. There can also be consequences in failing to provide material information, ie information that the firm could reasonably have expected to be provided even if it did not specifically ask for the information. In law, this is sometimes expressed as the uberrimae fidei (of the utmost good faith) rule. Non-disclosure can make certain contracts voidable, notably insurance contracts. In practice, firms will usually ask all the questions, for instance in application forms, that they need to.
14. The Ombudsman must take into account relevant law in determining a complaint (DISP 3.8.1R). Therefore, dishonesty or non-disclosure of information that ought to have been disclosed, if relevant to a complaint, would have to be taken into account by the Ombudsman.
(iii) To abide by the terms of the contract
15. Contract law requires both sides to abide by the terms of the agreement – therefore, a customer must, for example, make the agreed payment or payments - if any - for the service, inform the firm of material changes of circumstances (if required by the contract) etc.
(iv) To take responsibility for his or her own decision
16. As noted above, this responsibility has statutory recognition (section 5(2)(d) FSMA). However, this consumer responsibility relies on the firm having provided information that is clear, fair and not misleading in all relevant respects. Customers should not be expected to take responsibility for their own decisions if those decisions resulted from misleading information provided by the firm.
17. As long as the firm has provided clear, fair and not misleading information, the consumer has responsibility for his or her decision, eg the product’s investment or performance risks. Clearly, cases where specific advice was provided give rise to different considerations and it is important that the distinction between advised and non-advised sales is fully appreciated by regulators, ombudsmen etc.
18. If the firm has provided clear, fair and non-misleading information, the customer has responsibility to make sure he or she understands what he or she is buying and tell the firm if this is not the case. In these circumstances, the firm is entitled to presume that the customer has understood. A clear acknowledgment of this point from the FSA is very important.
19. The authorities generally need to be joined-up about this matter – note, for example, that BERR’s consultation on the Consumer Credit Directive also deals, among other things, with consumer responsibility.
20. Paragraph 2.10 refers to the need to differentiate products “with differing levels of responsibility falling on the consumer to reflect their relative capability and the nature of the service or product”. The differentiation point is fair – both firms and consumers have responsibilities in this respect.
21. As the DP notes (in paragraph 3.5), the common law starts from the principle of caveat emptor or ‘let the buyer beware’ –
“A common law maxim warning a purchaser that he could not claim his purchases were defective unless he protected himself by obtaining express guarantees from the vendor.”
Oxford Dictionary of Law (Oxford University Press)
22. The principle of caveat emptor has been going through a process of erosion for well over a century – at least since implied obligations in sale of goods contracts were first codified in 1893. The maxim is now at its weakest ever but, even as recently as February 2006, the then Chairman of the FSA, asked the question – “What does caveat emptor mean in the retail market for financial services”.
23. The diminution of caveat emptor does not entirely remove the need for consumers to take personal responsibility. It is, therefore, a sensible starting point for considering consumers’ responsibilities. This is explored below.
24. It is perhaps not surprising that the business and consumer sides have had difficulty in agreeing precisely what are consumers’ responsibilities because there are certain complications; for example –
-
Legal duties - eg to abide by the terms of a contract - need to be distinguished from what might be termed ‘moral’ or pragmatic responsibilities, such as to take reasonable steps to be able to make an informed choice - generally speaking, the former fulfil a duty owed to the firm (and recognised by law – usually civil law) and the latter are prudent steps for consumers to take in their own best interests. Therefore, the term ‘consumer responsibilities’ is somewhat ambiguous.
- As the FSA’s July 2004 paper on TCF, Treating Customers Fairly – Progress and Next Steps, said: “A significant proportion of the population have poor literacy and numeracy skills. 25% of adults have “very low” numeracy, being unable to perform the simplest calculations”.
- The extent of a consumer’s responsibilities might differ depending upon the circumstances, eg depending on the complexity of the product, whether it is an advised sale or not, etc.
25. Nevertheless, the FSA figure in relation to literacy and numeracy means that some three-quarters of adults are able to understand what they are doing and that is the central point that law and regulators should take a position on, with the vulnerable minority treated as special cases (as is the case, for example, under the Consumer Protection Regulations 2008 - SI 2008 No 1277 –the CPRs).
26. Therefore, it is still perfectly possible to address the matter of consumer responsibilities. The comments in this response distinguish between consumer responsibilities comprising (a) legal duties and (b) ‘other’ responsibilities.
Q2: Do respondents believe that the current balance of responsibilities, as defined by the common law and FSA regulation, is appropriate?
27. As noted above, we believe that a clearer statement of consumers’ legal responsibilities is required.
28. The other responsibilities of consumers are not, generally speaking, underpinned by law. Broadly, they comprise actions that consumers should take to protect their own interests; for example, allowing them to make better decisions and put themselves in a stronger position should they subsequently make a complaint. But, so long as they take the consequences, there is no obligation on consumers to take these steps. They are as follows -
(v) To take responsibility for management of their finances
29. A consumer, to the best of his or her ability, should take responsibility for the management of his or her own finances. For example, a consumer should exercise self-discipline in distinguishing between needs and wants, recognising the need to budget etc. This is wider than (ii) (see paragraphs 12 – 14 above), which relates to the choice of an individual product rather than the consumer’s entire financial position.
30. Failure to take such responsibility could potentially have legal consequences. For example, depending on the product, firms are often under an obligation to assess a borrower’s ability to repay. However, the firm will not necessarily have the same information about an individual’s overall financial position as the individual himself or herself.
31. Therefore, as noted above, failure to disclose material information could have adverse legal consequences for a consumer and, even if the firm was also at fault, could amount to contributory negligence in some cases.
(vi) To gather relevant information about products to be able to make an informed choice
32. This matter has no specific legal underpinning, but is recognised in by regulators, consumer organisations or businesses in certain overseas jurisdictions *. Indeed, in his February 2006 speech, the then FSA chairman, summarising the discussions between the Consumer and Practitioner Panels, noted the desirability of consumers, when potentially making a decision during an advised sale to –
“Read advertisements and other material, particularly that required by regulation, carefully and with reasonable caution, being alert to offers that seem too good to be true and being clear as to the commitment they are taking on;
Engage, with appropriate assistance from the firm, actively and attentively in the fact finding process; …
Ask questions where they feel uncertain, including about the purpose and risks of the products and services recommended;
Read and reflect upon the suitability letter and statement of demands and needs provided by the firm to ensure that it properly reflects the discussion.”
Q3: Is there more the FSA can do to make clear how we differentiate our expectations on firms dealing with consumers with different levels of capability?
33. As noted above, the FSA has stated that a significant minority of the population has poor literacy and numeracy skills. Poorly educated consumers are part of the circumstances in which firms do business, but are not the fault of firms and do not mean that the firms are failing in TCF. The financial services industry may well have a part to play in financial education, and work is already going forward in this area, but it is not the responsibility of business to provide education to the public in basic numeracy and literacy – that is a duty of the State.
34. The FSA’s July 2004 Paper Treating Customers Fairly – Progress and Next Steps stated that “firms – whatever their customers’ financial capability – must ensure that they build the delivery of fair treatment into their business.” There is an onus on firms to provide clear, fair, not misleading, and legally and regulatorily-compliant information. This might require tailoring for groups of target customers but, once the firm has provided the requisite information, it is for the customer to the best of his or her ability to read and understand it, to ask questions if necessary and, ultimately, accept responsibility for the decision to take the product. Caveat emptor remains in place to that extent.
35. A problem is the fact that firms do not have complete control over what they include in their contracts. Legislation or regulation often requires health warnings and other notices. It is, therefore, increasingly difficult for firms to keep their documents short and to be as transparent about key features as they would like.
36. For example, at the FSA’s request, the Association withdrew an old model term and replaced it with another model that met the FSA’s concerns about the term being potentially unfair. Although the Association understood the FSA’s concerns and co-operated fully, the original term contained fewer than 40 words, but its replacement comprised more than 200. This is a simple illustration of the difficulties, with the best will in the world on all sides, in achieving compatibility between the fairness and also the clarity to which consumers are entitled.
37. The plan for CAT Standard products might have helped consumers, particularly the financially inexperienced, but unfortunately the Government dropped the project.
38. The CPRs (see paragraph 25 above) include the concept of the ‘vulnerable consumer’. Commercial practices that are likely to distort the economic behaviour of a clearly identifiable group of "vulnerable" consumers, are assessed from the perspective of an average member of that group. A consumer might be vulnerable to a particular practice because of his or her "mental or physical infirmity, age or credulity”. This is clear. It is very important that we do not creep towards a position, either through regulatory activities or FOS decisions, where consumers who are not vulnerable are, nonetheless, able to claim protections intended for those who deserve them.
Q4: Do respondents have any comments on the suggestions above or further suggestions for action that the FSA, firms or others might take to help consumers to better understands their role?
39. The basic legal responsibilities of consumers are clear. The wider, pragmatic, responsibilities also seem fairly straightforward. In the Association’s view, it would be helpful to consumers, firms and regulators if greater efforts were made to educate the public about their financial responsibilities.
40. Education in financial services and awareness needs to start at a young age otherwise youngsters tend to follow in the footsteps of their parents and knowledge/acceptance of responsibilities does not change. In the light of recent events in the market, this is a particularly good time for a consumer awareness campaign, because consumer focus on financial services is already heightended.
41. The BSA would be happy to engage further with the FSA in discussions about how the BSA and building societies might be able to help with the exercise. We have a dedicated Consumer Responsibilities Working Group.
Q5: Do respondents have any comments or suggestions on the list of sensible actions for consumers in Annex 1?
42. The suggested actions in Annex 1 have merit, but the risk of information overload must be guarded against. The useful advice to consumers could be included on the FSA consumer website and in its financial capability work.
FOOTNOTE
* For example, the Consumers’ Association of Ireland considers that consumers have
“The responsibility to be more alert and questioning about the price and quality of goods and services we use.” www.consumerassociation.ie/consresp.html
The Dutch financial authority (Autorieit Financiele Markten) suggests that –
“As a consumer you have your own responsibilities …. Therefore, if you wish to purchase a financial product, make sure that you are aware of all the necessary information first …. Read the terms and conditions and give proper consideration to the risks compared to the benefit of what you will get from the product …”
www.afm.nl/consumer/default.ashx?DocumentId=4000
The Insurance Bureau of Canada states that consumers have a responsibility to ask questions to safeguard their right to purchase appropriate coverage. www.rbcinsurance.com/consumer_rights.html
