What Does It Mean To ‘Act In Good Faith’?

Acting in good faith (bona fide) means conducting oneself in a manner which is open, honest, and fair. For instance, when entering into a contract, this would include the parties informing each other of important, relevant, information that the other would not reasonably be able to discover independently. It would mean that the work done is performed with reasonable diligence and that business ethical standards are maintained, even where there is no legal obligation to do so.

The concept exists, in law, in many jurisdictions, particularly in continental Europe. Whilst in England and Wales there is no general obligation under contract law, requiring parties to act in good faith towards each other (Walford v. Miles [1992]), the obligation is implied under certain types of contracts. This has been increasingly evident in the field of consumer protection, with legislation such as the Consumer Rights Act 2015, demanding good faith be shown towards customers in certain circumstances.

The new Consumer Duty continues in this direction of travel and places a regulatory obligation on firms to act in good faith towards their customers. So, what does this mean in practice?

The FCA wants to foster an environment in which customers within the financial services market can ‘pursue their financial objectives. Firms can help realise this by acting in good faith towards their customers.

Quite often, customers are disadvantaged in their relationship with financial services firms, such as insurance brokers, because, in most cases, the customer does not possess expertise in that area. As such, a power dynamic is created, putting the financial services firm in a dominant position in relation to the customer.

There is a temptation for firms to exploit the imbalance in this power relationship, taking advantage of the customer’s relative lack of knowledge in the area. A firm might, for example, design products without regard for the needs or interests of the target market. Alternatively, they may present communications in such a way that could exploit customers’ emotions and behaviour, persuading them to a product or service which they might not actually need or want. Firms may also encourage customers to take on products that deliver benefits in the short-term but may not necessarily be consistent with their longer-term financial objectives.

A firm’s culture, including its remuneration structure, may result in these somewhat unethical approaches to selling. Sales targets and bonuses could tempt staff away from acting in good faith.

Senior Managers should therefore seek to avoid and remedy situations where a firm’s culture results, deliberately or inadvertently, in customer detriment.

Firms should act in good faith at all stages of the customer journey and throughout the lifecycle of a product or service. This includes:

  • Designing products that provide fair value to the customer and support the needs and objectives of the target market.
  • Presenting information in a way that helps the customer understand the product and clearly explains the benefits and risks.
  • Ensuring appropriate customer support services helps enable customers in accessing/use their products or services.

Firms should also note that acting in good faith is not a one-off intervention, processes need to be reviewed and monitored. Where a firm identifies that it has caused customers harm, appropriate and timely action should be taken to provide remedy or redress.

The Consumer Duty requires firms to act only in the customers’ interests – i.e., in the form of a fiduciary relationship. However, it does impose a far more customer-centric approach for firms, in which acting in good faith is key.

RWA has launched a Consumer Duty gap analysis to help firms implement the new rules and guidance. If you would like more information about this or require any assistance in relation to the new Consumer Duty, please contact your RWA Business Manager or get in touch via email at helpdesk@rwagroup.co.uk or call 01604 709509.

 

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