What is Foreseeable Harm?

‘Harm’ has been a common theme throughout much of the regulator’s work in recent years, with the FCA seeking to avoid consumer detriment and achieve better outcomes for customers.

So, what is ‘harm’? The FCA does not offer a definition, but the Oxford English Dictionary describes it as:

Noun. Evil (physical or otherwise) as done to or suffered by some person or thing; hurt, injury, damage, mischief.

In the context of financial services, harm is clearly not about ‘physical evil’ but rather hurt, injury, or damage caused to a person’s wellbeing or financial situation. It is easy to think of harm as being deliberate (sometimes it is) but it can also be unintended. That’s why firms and employees need to be conscious of the potential harms that their actions, or inactions, can reasonably have on customers.

Harm can occur anywhere within the product distribution chain. This could be at the design stage, in its marketing, as part of the sales or renewal process, or when a client needs to make a claim.

For instance, if a product is not tested sufficiently as part of the design process, this could have unanticipated impacts on consumers, which may not be evident until actual customers are adversely affected.

If the product distribution strategy and its marketing are ill-conceived, then there is a risk that products may be pushed towards customers who are not the intended audience for that product. The impact being that the consumer will not receive the product’s intended value.

At the point of sale, if consumers do not understand pricing structures or the value that a product will bring them, this can lead to customers paying too much for products or services that they do not need.

Harm may also arise if customers are left unable to cancel a product or service that no longer meets their needs. This can arise if the customer is confused or frustrated by unclear or complex processes, whether this is online or over the phone. This may also be the case where customers want to switch to another product or provider but struggle to do so because a firm’s systems make this too burdensome.

Customer vulnerability is another major consideration that should be ever-present in a firm’s approach to harm. If someone, owing to a characteristic of vulnerability, is less likely or unable to access or use a product or service as intended, they are at risk of harm.

The Consumer Duty requires firms to avoid causing foreseeable harm to customers. Foresight means that a reasonable person would know that their action or inaction may result in a certain consequence. In respect of the Consumer Duty, the FCA set the standard as whether a ‘prudent firm, acting reasonably, would be able to predict or expect the ultimately harmful result of their action or omission in connection with the product or service.’

In determining whether harm was reasonably foreseeable, it also depends on what the firm knew at the time or could be reasonably expected to have known. Whilst the capacity of individual firms will vary, firms are nevertheless expected to collect sufficient information to enable them to avoid causing foreseeable harm.

Based on this knowledge, firms should take steps to avoid harm arising, or where evidence of new, existing, or emerging harm is identified, firms should react and take appropriate action to remedy the harm.

Firms must therefore seek to be reasonable and prudent in their conduct and take appropriate measures to avoid causing foreseeable harm to customers. Collectively, all firms caught by the Consumer Duty regulation, by proactively and reactively taking action, will help reduce harm in the financial services market.

In next week’s Insight we will look at some practical steps that firms can take to identify reasonable harm and avoid causing it.

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. Alternatively, get in touch via email at helpdesk@rwagroup.co.uk or call 01604 709509.