In October 2016, the FCA highlighted at page 24 of its Mission Statement that The Financial Services Consumer Panel (FSCP) which is an independent statutory body, believed that a legal statutory duty of care would significantly improve the culture in financial services. The FSCP’s view is that rules should be made stating what a reasonable duty of care is for financial service providers to their retail customers.
Whilst the FCA believes that such a duty of care is unnecessary, they have decided to explore the question of whether a firm’s duty of care should be codified and extended.
The aim of this article is to explore the background to the duty of care in light of the FCA’s mission statement.
In relation to an insurance agent, a duty of care arises in the following circumstances.
- Under the principal/agent relationship
- An agent is under a common law duty to act in the best interests of the principal. This is already a stronger obligation than a duty to use reasonable skill and care since it has a fiduciary element.
Agency relationships abound in the insurance market. It is axiomatic that an insurance broker is the agent of the insured regardless of any duties which the broker may carry out as agent for insurers. The courts are quick to imply agency where they see an intermediary having a direct relationship with an insured, even where that agent’s principal trading relationship may be an explicit agency relationship with the insurer or the insurer’s MGA.
- Where there are sub-agents involved, the agent which is the immediate principal of the sub-agent will be responsible for any breaches of duty committed by the sub-agent.
- The contract of agency may be amended by the parties, thereby reducing the extent of the agent’s obligations to the principal (being the insured for a broker or insurer for an MGA) or limiting the financial exposure. Where the insured is a “consumer”, the power to make such reductions or limitations is circumscribed by the Consumer Rights Act 2015 for contracts entered into after 1 October 2015 and The Unfair Terms in Consumer Contracts Regulations 1999 (UTCC) for contracts entered into before 1 October 2015.
- Under contract
- Where a consumer has a contract with an adviser who is not the consumer’s agent, the contract may set out the extent of the adviser’s duty of care. If not explicit, the courts will readily imply a duty of care and require the adviser to exercise reasonable skill and care.
- As with the agency relationship, the extent of the duty of care may be limited by agreement as may the financial consequences of any breach. As under paragraph 1b above, the adviser’s ability to limit exposure is subject to the Consumer Rights Act 2015 and UTCC depending on when the contract was entered into.
- Under Tort
- It is possible that a party which has no contract with a consumer may owe a tortious duty of care on the basis that detriment will be caused to the consumer as a direct result of the party’s failure to observe reasonable skill and care in producing an insurance product. This would be a parallel duty to the duty owed to the consumer by the manufacturer of tangible goods, where, for instance, a warranty is offered along side white electronic goods.
- In insurance, it is normal for there to be a contract between the consumer and the provider/insurer of the product purchased, because the product is the insurance contract itself. The terms of an insurance contract are also subject to the Consumer Rights Act or the UTCC depending on when the contract was entered into (save as to price and terms of the contract that are negotiated with the insurer which are not standard terms). Therefore the position in tort is of less importance in insurance.
- ICOBS imposes a large number of obligations for the benefit of consumers, all of which are actionable by the consumer. Firms cannot contract out of the obligations imposed by the regulatory system.
- ICOBS 2.5.1R restricts the ability to contract out of non-ICOBS duties or liabilities i.e. those which arise outside the regulatory system, unless reasonable to do so.
- Various Codes of Practice
From time to time the ABI and BIBA will issue codes of practice. These are non-binding, but tend to show the standards expected from firms in the service of consumers. The English Courts would have regard to such codes in considering whether a firm is in breach. Some examples of codes of practice are the ABI’s publication on Cluster Policies (October 2015) and BIBA’s Code of Conduct (May 2015).
- Professional Indemnity Insurance (PII)
If any material change is made to the liability landscape, the impact on the availability and cost of PII would need to be taken into account.
It is clear that the duty of care already arises in many instances and may be implied in some relationships even when there is no express arrangement or intention between the parties. Further thought and discussion is needed around this proposal as it is wide-reaching and multifaceted as evidenced by its impact on other areas such as professional indemnity insurance.
The FCA is of the opinion that there is no need for a statutory duty of care, since the FCA rules include an obligation on firms to treat customers fairly as stipulated by FCA Principle 6.
In light of the above, and the existing duties and obligations, we agree with that view.