A woman hides her face behind a black veil

What can the “veil of ignorance” theory teach you about the Consumer Duty?

Consumer protections have existed in the UK for hundreds of years in various guises and with differing levels of effectiveness. However, the core goal remains the same — producing a better, fairer, and safer marketplace for people to buy goods and services.

The new Consumer Duty aims to set out new rules and principles for companies to follow. The hope is that it will set higher and clearer standards of consumer protection across financial services and hold firms accountable for putting their customers’ needs first.

The idea of establishing clear, fundamental rules for governing ourselves is a large part of the American philosopher John Rawls’ “original position” thought experiment.

In the original position, you are asked to consider which founding principles you would choose to form the basis of society’s fundamental structure. However, you must make your choices as if you had no knowledge ahead of time of what position you would end up having within that society. This choice is made from behind what is known as the “veil of ignorance”.

Read on to discover what Rawls’s school of thought can teach us about the nature of the new Consumer Duty and the problems it faces, as well how it might affect your business.

The veil of ignorance seeks to remove bias and develop principles impartially — and rationally

The idea behind the veil of ignorance has formed part of philosophical discussion for centuries as great minds worked to define the concept of a social contract and how we should ethically function as a society.

The usage of the term by John Rawls came through his 1971 book A Theory of Justice and outlined the nature of the theory as we know it today.

Rawls specifies that, to achieve a truly unbiased social contract, it must be made behind a veil of ignorance that prevents those establishing the rules from knowing their role within that society.

In an ideal world, this would force the participants that made crucial choices to select principles impartially and rationally.

Rawls’s theory posits that if those in decision-making positions didn’t know how a choice would affect their own quality of life that they would err on the side of caution and ensure a system of rules that benefit the most underprivileged.

This would ensure a system of “bottom up” rather than “top down” and guarantee that, even if the decision makers found themselves at the base of the society hidden behind the veil, they would still see the benefits.

In the veil of ignorance, representative parties select principles of justice to govern the basic structure of a civilised society. Rawls argues that this would boil down to two key principles:

  • Every citizen is guaranteed an adequate scheme of basic liberties that are on par and compatible with those of all others
  • Any social or economic inequality must satisfy two conditions: they provide the greatest benefits to the least advantaged in society; they are part of positions or offices that are open to all.

Individuals in Rawls’ society would act as if they were risk-averse and opt for the insurance of avoiding a worst possible outcome through maximising the benefits for the least advantaged.

The Financial Conduct Authority’s new Consumer Duty establishes ethical business principles

The Financial Conduct Authority (FCA)’s new Consumer Duty regulations outline a series of consumer protections that aim to push businesses to act in a more ethical manner.

The new rules require firms to obey principles aimed at delivering good outcomes for retail customers.

These four essential outcomes represent the key elements of the firm-consumer relationship and are instrumental in helping to drive positive results for consumers.

These outcomes relate to: 

  • Products and services 
  • Price and value  
  • Consumer understanding 
  • Consumer support.

The rules require businesses to consider the needs of their customers foremost and aim to manage how they behave at every step of the customer journey. It holds companies accountable for their actions and forces them to produce evidence to show Consumer Duty outcomes are being met.

The FCA’s Consumer Duty policy and guidance is likely to affect a range of businesses and associated groups including:   

  • Regulated financial services firms, including those in the e-money and payments sector
  • Industry groups and trade bodies
  • Policy makers and regulatory bodies
  • Industry experts and commentators
  • Academics and think tanks.

The rules and guidance will come into force for new and existing services or products, that are open to sale or renewal from 31 July 2023, and for closed products or services from 31 July 2024.

FTAdviser refers to the Consumer Duty as “arguably the biggest overhaul of regulatory approach since the Retail Distribution Review in 2013” as the FCA’s new policy forces firms to put themselves in their customer’s shoes.

They go on to detail three underpinning rules to the new Consumer Duty. Businesses must:

  • Act in good faith
  • Avoid causing foreseeable harm
  • Enable and support retail customers in pursuit of their financial objectives.

The veil of ignorance shows us how Consumer Duty should work and the issues it could face

One of the major problems with the effectiveness of the Consumer Duty is the inherent desire to benefit one’s own outcomes. Unscrupulous businesses might seek to circumvent the rules to the benefit of their own profits and the detriment of their clientele.

A recent Citywire report shows that FCA have no qualms with tackling corporate corruption by winding up firms that fall foul of best practices and regulations, with eight major firms seeing their assets liquidated.

In an ideal world, everyone would work towards a common good, the desired outcome from the veil of ignorance in which a social contract sees the collective whole benefit over simply the individual.

However, in the real world it is almost impossible to eradicate the problems associated with biases and selfish pursuits.

The Consumer Duty aims to hold businesses accountable to a social contract and encourage them to act ethically in the interest of the greater good.

FTAdviser acknowledges the risk that bogus claims pose and that ultimately any policing of the new regulations will need to take into account the Consumer Duty’s natural limitations.

The vague nature of the Consumer Duty’s overarching four outcomes could lead to well-intentioned businesses being unfairly punished. This is because risk is an inherent part of investing even when checks and balances are in place. 

It is vital that your firm is up to speed and your clients are aware of key changes

Honesty and transparency are the words of the day. As with the veil of ignorance, you should view yourself as being in your clients’ shoes and seek the best possible outcome for all parties and in doing so, guarantee your business will benefit.

In ensuring your firm is up to date with changes in FCA policy and have the necessary evidence in place to support any claims, you can greatly reduce the risk of falling foul of the Consumer Duty.

Similarly, in communicating with your clients about changes and how you are working towards Consumer Duty outcomes, you can mitigate any potential future issues before they become a problem.

The new regulations can pose a minefield for even the most well-versed and informed financial advisers.

So, seeking out the appropriate support to help you towards adhering to new regulations and ensuring your clients receive the best possible service could be a vital step before the new Consumer Duty comes into force.

Get in touch

If you are interested in discussing how we can help with the workload around getting up to speed with new regulations, or ensuring if the worst should happen that your firm has a wealth of evidence to support your good faith claims, get in touch.

Email us at hello@eparaplan.co.uk or call us on 01733 699071.

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