Financial Service firms should demonstrate statutory duty of care to customers

The House of Lords Liaison Committee has called on the Government to introduce a new requirement for the Financial Conduct Authority (FCA) to establish a statutory duty of care that banks and other financial services providers must operate towards their customers.

The call comes in a new report from the House of Lords Liaison Committee which says that new powers are needed, to end financial exclusion. The Government should make it necessary for the FCA to establish a statutory Duty of Care, to instruct banks and financial services providers how to operate towards customers. This should replace the existing insufficient requirement to ‘treat customers fairly’.

The change must reflect the power imbalance between banks and the public and prevent financial institutions profiting from the vulnerability of their customers. The change should be part of a new approach where financial inclusion is a key priority for the FCA.

The call comes in a new report which follows up on the 2017 report of the Financial Exclusion Committee.

The report says the enhanced role for the FCA and Statutory Duty of Care and should form part of a new government financial inclusion strategy, The Committee welcomes the development of the Financial Inclusion Policy Forum but says that “cannot be a substitute for an overall strategy”. The new comprehensive strategy to tackle financial exclusion should be published with 12 months and presented to Parliament as a Command Paper.

The changes will be vital to protect the 14.2m people in the UK that are now estimated to have low financial resilience – characterised by over-indebtedness or with low levels of savings or low or erratic earnings. That figure is up by a third since the start of 2020 as the COVID pandemic has impacted the country. The FCA told Committee that 27.7 million adults in the UK (more than half of the population) now have characteristics of financial vulnerability.

The Committee have made a number of other key recommendations to improve financial inclusion in the UK including:

• Measures to protect access to cash announced in the budget should be bought forward without delay and responsibility for this area given to the FCA as part of its new Duty of Care. This will be vital for the 5.4m adults who still rely on cash to a great extent in their everyday lives.
• • The Committee are concerned about the decline in free to use cash machines, particularly in poorer areas. In 2018 two areas of Birmingham in the top 10% of deprived areas in England – Hall Green and Hodge Hill – saw a 44% and 40% decline in free to use ATMs while machines that charged a fee to withdraw cash increased by 59%. The Committee say this is another example of the ‘poverty premium’ and the powers of the FCA to mitigate this trend should be reviewed and enhanced.
• The report highlights the role the Post Office could play in filling the gap in access to cash and other banking services. To deliver this it calls on the Government to consider making membership of the Banking Framework Agreement (where banks allow customers to access their accounts via Post Office branches) compulsory for UK retail banks and to roll out a public information campaign to inform people of the service.
• Digital inclusion: The report recommends that the Government should ensure that nondigital access to financial services, remains possible. Access via free telephone lines, and through face-to-face meetings where appropriate, should remain available indefinitely. This is particularly important for some customers with accessibility needs and older customers who may struggle to adapt to online banking.
• Affordable Credit: The Committee welcomes the news that buy now pay later products such as Klarna and Clearpay will be regulated. The Committee is calling on the Government to ensure that the legislation should be brought forward without delay and the situation be kept under review by the FCA and the Government.

Commenting Baroness Tyler of Enfield, who chaired the House of Lords Financial Exclusion Committee, said “It’s time for the financial services industry to recognise they have a fundamental duty to ensure that banks act in their customers’ best interests and that products and services are fair by design. That duty of care should now be established in law and overseen by the Financial Conduct Authority to ensure greater consumer protection and prevent banks and others from profiting from their customer’s vulnerability.”

“The COVID crisis has laid bare the extent of financial exclusion across the UK. We continue have more than a million adults in the UK without access to a bank account and more than half the country now have characteristics of financial vulnerability.”

“It is now more important than ever that Government come forward with a comprehensive financial inclusion strategy that will ensure access to cash, protect the public and end the scandal of the poorest being overcharged for financial and other services. The Government should publish that strategy within 12 months and allow Parliament to assess it and hold them to account for its delivery.”

Commenting on the report Gareth Shaw, Which? Head of Money, said “Millions of people rely on cash as they are not ready or able to take advantage of digital payments. However, rapid closures to the cash machine and bank branch networks in recent years mean that many of these consumers risk being abandoned by their banks.”

“Our research has shown that people in some deprived areas have seen significant cuts to free ATMs in recent years, while a domino effect of bank branch closures has taken place without enough regard to whether suitable alternatives are in place.”

“The government must urgently set out its vision for the future of cash, including its promised legislation to protect access to it. This should include putting the FCA in charge of the cash system so that it can take the steps that are needed to ensure cash remains a viable payment option for as long as it is needed.”

Responding to the amendment to the Financial Services Bill to enable cashback without purchase, David Postings, Chief Executive of UK Finance, said “Cashback without purchase will allow retailers to enable consumers to access cash at a time and place that is convenient for them and is a welcome development, particularly for those in rural communities. This new legislation will complement the industry’s existing work to maintain access to cash, including the recently launched community access to cash pilots.”