How will the new Consumer Duty work in practice?
The recent FCA consultation on a new Consumer Duty is driven by a desire to deliver better outcomes for consumers by proposing a new Consumer Principle which provides an overarching standard of conduct applying to regulated products and services sold to ‘retail clients’, ensuring that they are fit for purpose, represent fair value and are clearly communicated.
Whilst PIMFA supports the FCA’s desire to address the harms the consultation is intended to tackle, we see this approach as indicative of a long-standing criticism we have of the regulator, namely that, when harm does occur in the market, it proposes to introduce a collection of new rules rather than understand whether or not those already in place could be enforced better and be accompanied by fit-for-purpose supervision.
We are also concerned that, as it stands, the new duty could lead to a situation in which the Financial Ombudsman regulates in hindsight, with firms falling foul of elements of a duty that wasn’t evident or apparent at the time. Ultimately, it is likely that this will lead to firms trying to second guess how the regulations could be interpreted in the future unless they are given clear and specific guidance, whilst also driving up costs for some firms or leading to future regulatory failure for others.
We are therefore urging the FCA to give due consideration to the broader regulatory architecture and how its proposals may interfere inadvertently with business models – specifically in the Execution Only market. Previous work linked to the Financial Advice Market Review concluded that almost any recommendation with any degree of personalisation crossed the boundary. This would create a tension between what services firms have permissions for and are willing to provide, and the execution of a consumer duty.
The FCA places their emphasis on ‘getting it right in the first place’, giving them greater scope to hold firms’ senior management to account if poor outcomes become apparent in the future, and places a requirement on firms to demonstrate the reasonable steps they have taken to comply with the proposed Consumer Principle in their interaction with retail customers, creating a further burden on firms. Surely this must be accompanied by considerably more granularity in the detail of what is actually required.
At this stage the FCA is not consulting on new rules per se, just the wording of the Consumer Principle. However, in asking for responses to the question ‘what unintended consequences might arise from the introduction of a Consumer Duty?’, we believe that these could well result in a smaller range of products for customers, particularly if some did not represent fair value for a sufficient number of customers, or higher upfront costs for certain products or services.
There will be a further consultation paper due by the end of December 2021, in which the FCA will consult on the drafting of new rules, with a view to these being in place by 31 July 2022. It will be interesting to see the cost benefit analysis in this next stage.
We believe that it would greatly benefit firms and clients alike if there were fewer interventions in markets and less need to remediate poor outcomes in the first place so surely what we need from the second consultation is greater detail on these proposals, how they would work, why the regulations currently in place are not sufficient and, above all, what the FCA will be doing to provide more effective supervision.
First published in Money Marketing