Shayne Halfpenny-Ray examines the consumer duty consultation and asks: what does this mean for our united profession?
The Financial Conduct Authority (FCA) launched its consumer duty consultation in June, stating that it “wants to see a higher level of consumer protection in retail financial markets, where firms are competing vigorously in the interests of consumers”. The aim is for firms to focus on consumer outcomes, which will be matched by a higher level of expectation on standards from the regulator.
The new consumer duty would be cemented in the FCA Handbook both as rules and guidance, incorporating:
- A consumer principle, which sets a clear tone and uses language reflecting the standards of behaviour the FCA expects from firms.
- ‘Cross-cutting rules’, which develop and clarify the consumer principle’s overarching expectations of firm conduct and set out how it should apply in practice.
- Four ‘outcomes’: a suite of rules and guidance setting more detailed expectations for firm conduct in relation to four specific outcomes for the key elements of the firm-customer relationship.
Within the structure of the duty, the FCA proposes cross-cutting rules, setting out the expected behaviours, and would require firms to:
- Act in good faith.
- Take all reasonable steps to avoid foreseeable harm to consumers.
- Take all reasonable steps to enable consumers to pursue their financial objectives.
The question is: what does all of this mean for the profession?
Firstly, consumer harms have rightfully been a key focus for all of us but have been of particular importance since the inception of lockdown measures due to Covid-19 and the financial vulnerabilities it has exposed. Finding ways to enhance and better support consumer needs and deliver good outcomes can only be a good thing for building and securing public trust in our profession.
Secondly, a focus on both outcomes and fair value are welcome – fair value is important if we are to improve access and engagement as well as trust in financial products and services. If we can determine how best to measure what areas consumers value (and the CII’s Public Trust Index can be a guide to this), we can really capture how to better meet the needs of those we serve. This is always useful in our wider focus on trying to move past the obsession with price and the received wisdom that ‘cheaper is better’, as well as how we can better spread the message of the value of professional advice.
Thirdly, there is a strong opportunity to push the regulator into recognising the fact consumers aren’t just individuals, but also do and should incorporate small and medium-sized enterprises (SMEs). There needs to be a better understanding of the fact many SMEs have little more resources than retail customers and face the same imbalance of knowledge between themselves and financial services experts. If we can all do more to meet the needs of these customers and deliver good positive outcomes, the knock-on result for both the business environment and trust in the profession could be huge.
Finding ways to enhance and better support consumer needs and deliver good outcomes can only be a good thing for building and securing public trust in our profession
Areas of concern
There is very little in the duty on the need to improve financial inclusion. In fact, the argument for the duty was proposed and campaigned for by consumer groups as one that should be applied to the regulator through legislation. The idea is it can be held accountable to the duty and therefore take a greater role in understanding how the market really operates both for consumers and professionals. Furthermore, the collection of some guidance and some cross-cutting rules seems sporadic and disconnected from existing principles. For instance, vulnerable customers are mentioned, yet this duty is seen as a separate entity to the vulnerable customer guidance launched earlier this year, despite the overlap and the fact a solid consumer duty should almost leave said guidance redundant. This was a point we were keen to impress to the regulator – as much as consumers call for greater clarity when it comes to financial products and services, professionals also need clear and consistent rules and guidance so they can comply and carry out their duties to the best of the ability. An underdeveloped framework only serves to obfuscate processes and therefore could lead to a failure to meet the higher expectations of the regulator. There are other areas of both promise and concern, particularly with what the impact will be of a private right to action on a breach of guidance, rather than rules, and how that could negatively impact the market, specifically professionally indemnity insurance, an area of existing concern for brokers and advisers.
However, we should certainly commend the FCA for the intention behind this work, especially when taken with the latest business statement, which promises a new direction for the regulator after some tough criticism it has faced during the last few years.
Ultimately, this process is far from complete and we will continue to engage on these proposals, striving for a regulatory system that delivers for consumers and the sector, while allowing professionals to continue to provide the best possible service and share good practice to ensure standards remain high. The CII is confident the more we work collaboratively with the regulator, consumer groups, firms and other bodies, the more effective and proportionate regulation will be.
Shayne Halfpenny-Ray is public affairs manager at the CII