The Financial Conduct Authority (FCA) has unveiled a consultation looking to tackle the causes of harmful practices to drive a “fundamental shift” in companies’ culture and push firms to get “products and services right in the first place”.
It has shared concerns that the financial services industry’s current offering is not always right for clients, and it is looking to change firms’ mindsets.
Previously, the watchdog identified practices that caused harm to customers such as behavioural bias exploitation, selling of products that were not fit for purpose, or poor customer support.
The future rules will focus on supporting and empowering customers to make good financial decisions and avoid harm at every stage of their relationship with the sector.
Information will need to be clear, and firms will need to offer products and services that cater to client needs as well as provide helpful customer service.
‘Too often consumers are not given the information they need to make good decisions’
The FCA said it will supervise the practices assertively and intervene quickly if the rules are not respected by financial services businesses.
The consultation will be open until 15 February 2022 with confirmation announced in July 2022 and full implementation expected by by the end of April 2023.
Sheldon Mills (pictured), executive director of consumers and competition at the FCA, said: “Making good financial decisions is vital to financial well-being and trust, but too often consumers are not given the information they need to make good decisions and are sold products or services that do not offer the benefits they might expect.
“We want to change that. We’ve been working to set a higher standard for firms, to put more of the onus on them to act in their customers’ interests and get their products and services right. The new duty will drive a change in culture at firms. We expect firms to step up and put consumers at the heart of what they do, and we’ll be holding senior managers accountable if they do not.
“The duty will also help create an environment for healthy competition between firms, encouraging them to be innovative in developing products and services that meet consumer’s needs.”
FCA’s proposals ‘theoretical and woolly’
But the Personal Investment Management and Financial Advice Association (Pimfa) criticised the regulator’s proposals for being “somewhat theoretical and woolly”.
Tim Fassam, director of government policy and relations at the trade body, said: “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.
“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.”
Too many regulatory ‘layers’
Tom Selby, head of retirement policy at AJ Bell, echoed Fassam’s sentiment as he believes that more needs to be done to take out the ‘bad apples’ in the industry, but also argues that the FCA should have ditched its regulatory rules beforehand to give firms clarity about their responsibilities going forward.
“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,” he said.
“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.
“Given the new consumer duty is intended to replace existing FCA regulatory rules – most notably the ‘treating customers fairly’ principle – it would have made sense to ditch this altogether to give firms clarity about their responsibilities.
“The decision to retain this principle in the rulebook alongside the new consumer duty risks causing confusing layering of regulation which is far from ideal. If the FCA really wanted to signal a step change away from the previous regulatory model, why not discontinue the old rules altogether?”
Selby added that consumers will need to be made aware that, at the end of the day, they retain the “ultimate responsibility” for the decision they make with their finances.
“A consumer duty focused on ensuring companies act in the overall best interests of customers will not prevent all harm and must not be used as a green light by claims management companies to chase spurious cases against firms. The FOS 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.”
‘The power of data hasn’t yet been fully harnessed here’
Anne Fairweather, head of government affairs and public policy at Hargreaves Lansdown, added that the regulator could have put greater focus on client communication in its draft rules as she argues it is a core part of helping clients’ understanding.
“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. This new approach, focused on consumer outcomes, is very welcome,” she said.
“However, there’s 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.”
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