In April 2013 the Financial Conduct Authority is expected to take over the supervision of all conduct-related matters in FSA authorised firms. The FCA has been given a mandate from both the government and the public to take a much more proactive approach to consumer outcomes. Through a combination of new powers and objectives and the continuation of the FSA’s “credible deterrence” approach to enforcement, the FCA hopes to change the way firms operate to ensure that customers are not left disgruntled and out of pocket.
Consumers are central to the FCA’s approach to supervision. The FCA has a strategic objective to ensure that markets function well in addition to three operational outcomes, which are to ensure that: consumers are given products that meet their needs; the integrity of the financial sector is protected and enhanced; and markets are competitive.
It is clear that consumer protection will be an all pervasive aspect of the FCA’s work. In order to fulfil its strategic objective of ensuring that markets function well, consumers will have to be given a fair deal. Financial products must be developed and sold with the consumer at the centre. Boards must be motivated by good customer outcomes and ensure that they are kept fully abreast of the consumer experience of their product and services, addressing failings robustly as soon as they come to light.
A particularly costly lesson that has been learned following the FSA’s approach to conduct supervision has been the need to tackle issues when they emerge, thus preventing widespread detriment to consumers. The FCA will pay greater heed to whistleblowers and the warnings of consumer organisations in order to understand better what risks exist.
The FCA will intervene much earlier in products which it considers to pose a risk to customers. There will be greater scrutiny of product governance – how a product is designed to go to market, how it will operate and the means of distribution. The FCA will consider whether the product has been designed around a target customer’s needs; whether there is monitoring of customer outcomes; whether information reaches the board or those who can address issues promptly. Distribution strategies will be subject to review to ensure that they are appropriate for the product.
In particular, firms will be expected to have procedures in place to assess their target market. Products should be stress-tested and potential risks for consumers identified before the product reaches the market.
Following the scandal of payment protection insurance mis-selling, many in the market believe that products are often sold to customers outside their target market. What might be a perfectly sound product for one market may be utterly inappropriate for another. Firms will be expected to identify accurately who will benefit from different products and, perhaps more importantly, who should not be sold a particular product.
The FCA will also examine whether products are good value for money – a significant change to the approach taken by the FSA. Charging structures must deliver good consumer outcomes.
Early intervention in the product life-cycle will enable the FCA to prevent harm to customers. One of the new powers granted under the new Financial Services Act allows the FCA to ban temporarily products that pose an unacceptable risk to consumers.
So what should FSA-regulated firms be doing to prepare for the new FCA regime? It could be argued that there are certain common failings that can be identified in recent FSA enforcement action. Such common failings include:
• Failure in firms’ systems and controls to ensure that risks of customer detriment are measured and monitored. This might be considered a breach of Principle 3: A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
• Failure to understand TCF obligations and to understand what good conduct looks like. This might be considered a breach of Principle 6: A firm must pay due regard to the interests of its customers and treat them fairly.
• Poor quality customer literature and information about products which means that customers fail to understand what they are buying and whether it is suitable for them. This might be considered a breach of Principle 7: A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
• Products are not suitable for the customer and fail to meet their demands and needs. This might lead to a breach of Principle 9: A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.
Simon Lovegrove is a lawyer with the financial services group at Norton Rose LLP
In April 2013 the Financial Conduct Authority is expected to take over the supervision of all conduct related matters in FSA authorised firms
Products should be stress-tested and potential risks for consumers identified before the product reaches the market
Early intervention in the product life-cycle will enable the FCA to prevent harm to customers.
