The Financial Conduct Authority (FCA) has unveiled proposals that it believes will offer beef up consumer protection in the financial services industry.
“In our experience, financial services markets do not always work well to provide adequate levels of consumer protection, and competition does not always work effectively in consumers’ interests,” the FCA said, as it introduced plans for a Consumer Duty.
The watchdog claims the Consumer Duty will build on its previous interventions in market regulation while recognising the changing environment for consumers by:
- explicitly setting a higher standard of care across all retail markets, informed by our work on behavioural biases and vulnerability
- extending rules focused on product governance and fair value, which already exist in certain sectors, across all sectors
- focusing on matters of market practice (eg sludge practice) that interfere in consumer decision making and, by doing so, cause harm
- ensuring firms consider the needs of their customers – including those with characteristics of vulnerability – and how they behave, at every stage of the product or service lifecycle, and
- requiring all firms to focus on good customer outcomes and whether those outcomes are met
Under the Consumer Duty, firms and the FCA’s supervisors would increasingly focus on the outcomes that consumers experience. Firms would need to assess and evidence the extent to which and how they are acting to deliver good outcomes.
“Combined with our more data-led approach, this should enable us to more quickly identify practices that negatively affect those outcomes and to intervene before practices become entrenched as market norms,” the FCA claimed.
Wide-ranging but woolly
PIMFA, the trade association for wealth management, investment services and the investment and financial advice industry, reckons the proposals are a bit “woolly” and called for greater clarity. It also questioned whether the current proposals will remove bad actors from the market as intended.
“We are slightly disappointed that despite wide-ranging calls for clarity on its proposals, the rules and accompanying guidance published remain somewhat theoretical and woolly,” grumbled Tim Fassam, the director of government policy and relations at PIMSA.
“PIMFA retains concerns that the inherent subjectivity of the Consumer Duty will ultimately lead to confusion both for consumers and firms in terms of their expectations of a good outcome, and without clarity on what the FCA’s expectations of the Financial Ombudsman Service (FOS) are, and how, or if, they will be codified, we would be concerned that this could lead to a significant rise in cases brought against firms through no fault of their own.
“PIMFA are confident the vast majority of firms in our sector are already operating at, or above, the FCA’s expectations and to an extent, this confidence transmits to the broader financial services sector,” Fassam said, before reprising the ‘few bad apples’ complaint often heard when a regulator tries to toughen up regulations.
“Our concern, as we set out in our initial response, is that there are clearly firms operating within the market who either choosing not to follow the rules or struggling to meet their current obligations under them. Introducing new rules and regulations at significant cost to well-run firms will have little to no impact on the firms which are already not meeting their obligations.
“In order for these reforms to be worthwhile and impactful, the Consumer Duty needs to empower the FCA to finally drive the bad actors out of the market through effective supervision and enforcement. It is unclear to us whether or not this will actually be the case,” Fassam said.
Tom Selby, the head of retirement policy at wealth management platform operator AJ Bell said few would argue with the intent of the FCA’s proposals, “which is to ensure good outcomes are at the heart of everything financial services firms do”.
Echoing Fassam’s comments, Selby said most ‘good’ firms should already be operating in this way.
Those who fail to deliver will risk failing to attract new customers and existing customers simply walking out the door, Selby asserted.
Proposals risk adding to the workload of the good while failing to root out bad actors
“The inconvenient truth is that the majority of ‘bad’ actors in financial services either flout existing rules entirely or take a slapdash approach to treating customers fairly.
“While the FCA is right to focus on boosting standards across the market, there also needs to be a credible enforcement threat against the minority of firms who consistently fail savers and investors. The regulator says it plans to be more assertive in dealing with firms who do the wrong thing – this will be crucial in delivering improved outcomes for consumers,” Selby said.
“The Financial Ombudsman Service will have a central role to play here in ensuring the intent of the new Consumer Duty is mirrored in the way it is applied in reality,” Selby concluded.
Anne Fairweather, the head of government affairs and public policy at AJ Bell’s rival, Hargreaves Lansdown, said the FCA “is right to zero in on the responsibility that the financial sector has in supporting consumers in their consultation on a new Consumer Duty”.
“An ambitious deadline of April 2023 has been set but, paired with the iterative approach they’ve outlined in today’s announcement, there should be time to iron out wrinkles in the framework. As always with wide-ranging reform, this will prove contentious in some quarters, especially with headline costs up to £2.4bn being quoted,” Fairweather said.
She claimed, however, there has been a missed opportunity when considering the benefits of greater personalisation in communications.
“The power of data hasn’t yet been fully harnessed here – more could be done to support consumer understanding. The advice/guidance boundary gets in the way of our ability to engage our clients using targeted messaging and guiding them to better outcomes.
“The Consumer Duty offers the opportunity to look beyond the current, rigid advice boundary and instead judge the value firms provide based on the outcomes they drive for consumers. We’ll continue to make the case for the benefits that more personalised guidance could bring to the millions who are left unadvised in the current system,” she said.