Constructing a Taxonomy of Financial Consumer Protection Policy and Assessing the New Consumer Duty in the United Kingdom’s Financial Sector

Abstract

forthcoming in Vol 7(2), Cardozo International and Comparative Law Review 2024

In view of regulators’ confidence in the United Kingdom’s new Consumer Duty reform, this article wishes not only to evaluate the application and effectiveness of the Duty, but to place it within a broader context of consumer protection policy, in finance and in other sectors, to see how far the Duty goes. The achievements of the Consumer Duty cannot be evaluated in isolation and need to be contextualised against other regimes of consumer protection such as energy; telecommunications services; aviation services; packaged holidays; and goods sectors, including food, healthcare (i.e., both services and pharmaceuticals), and e-commerce.

This Article offers a new taxonomy for cross-cutting consumer protection levels, derived from our studies of the abovementioned sectors. Our taxonomy breaks down a number of levels of consumer protection, i.e. referring to what the consumer is protected for or against, and these are mapped against two broad ideological umbrellas of ‘consumer empowerment’, which supports consumer choice as a main protection in free market ideology; and ‘consumer citizenship’, which supports more protective or even paternalistic provision in consumer protection, based on the often unequal and weak economic citizenship of individuals as consumers.

We then evaluate the levels of consumer protection achieved in the financial sector, by undertaking an overview of key tenets of consumer protection in debt and investment services. These are mapped against the cross-sectoral taxonomy in order to show how well financial consumer protection provides for the spectrum of protection for consumer empowerment and citizenship. The Consumer Duty is discussed in relation to what ‘new’ achievements it makes as part of financial consumer protection, bearing in mind the already-discussed shortfalls in financial consumer protection generally, as compared with the cross-sectoral taxonomy.

We assess that while the Consumer Duty has made improvements, these relate to the same old levels of consumer protection for consumer empowerment and choice. Using the framework of input and output legitimacy, we argue that there are significant gaps remaining in the Consumer Duty that pertain to “consumer citizenship” needs. First, by excluding private civil redress from the Duty and disregarding the feedback from consumer organisations, much reliance is placed on the FCA’s own enforcement. Given international recognition that effective enforcement does not only lie with public regulatory enforcement, there is a real risk that consumers may feel that they are outgunned and unable to achieve distributive justice, impacting the output legitimacy of the reforms. Second, the FCA lacks output legitimacy in its failure to secure performance or welfare outcomes for consumers and its failure to recognise that these are crucial to consumers’ expectations for their well-being or their hybrid objectives.

This Article argues that there is a need to develop the Consumer Duty into a performance-based regulatory framework to secure consumer protection in relation to reasonably expected performance and welfare outcomes, utilising regulatory tools that are often ignored in financial regulation but utilised in other sectors. To start, we suggest that the FCA should embrace a performance-based regulatory standard that reduces harm and failure to consumers as a pathway to developing more varied quality and performance standards and welfare benchmarks for products and services. The performance-based paradigm has the potential to bring about regulatory adjustments based on consumers’ experience of effects and outcomes. We are of the view that such regulatory adjustments may finally meet consumers' needs in terms of performance or welfare outcomes in financial products. One such regulatory adjustment is a loss-sharing proposal which would require firms to share in consumers’ losses where a complex financial product is sold. This proposal may be seen as radical but is based on existing examples of skin-in-the-game incentives in financial regulation. Ultimately, as the Consumer Duty intends to educate financial firms to put themselves in consumers’ shoes, it is not excessive to require them to be engaged with consumers’ actual welfare outcomes.

Keywords: consumer protection, financial consumer, Consumer Duty, performance-based regulation