Sants: 'Regulation only works if it is easily understandable by those delivering'

Sants: 'Regulation only works if it is easily understandable by those delivering'

Sir Hector Sants has welcomed the regulator’s consumer duty proposals but warned about the risks of overcomplicating them.

Speaking at City & Financial Global’s FCA Consumer Duty Virtual Summit yesterday (November 18), the Money and Pensions Service chairman said he was “strongly supportive” of the proposal and believes the introduction of such a duty provides an opportunity to reset the relationship between firms and their customers.

But he said in order for the duty to be transformational, there are some issues which need to be addressed. 

Sants said: “Firstly, and I think arguably, most importantly, it's the need to avoid overcomplicating the regulatory framework, which arguably is already extremely complicated. 

“From my first experience, good regulation only works if it is easily understandable by those who are actually delivering on the surface. If it's only understandable by the compliance department it is not going to work.

“So there is a risk that by layering the duty on top of recurrent principles, this could actually confuse rather than help.”

He suggested that the duty could replace some existing principles, particularly ones governing treatment of customers. 

“The proposed change should be taken as an opportunity to simplify and not to further complicate the regulatory framework,” he added.

Earlier this year, the FCA published its proposals for a new consumer duty, designed to create a higher level of consumer protection in retail financial services.

The Maps chairman explained the FCA has proposed two potential formulations of the new duty, one centred on best interests and the other on good outcome. 

“We would argue that it may make most sense to combine the two in a hybrid approach,” he said. “So the duty would read that a firm should act in the best interests of retail consumers in order to help ensure a good consumer outcome. 

“This synthesis would also clarify that the consumers' best interest should act as the guiding principle throughout the product life cycle.” 

He explained the current FCA proposal was focused on avoiding detriments, rather than on the more positive role of building individual financial wellbeing. 

“Their requirement to avoid harm is axiomatic to the definition of consumer protection,” he said. “But focusing primarily on this aspect risks presenting the new duty as primarily a negative set of expectations. 

“A greater emphasis on the role of financial wellbeing would engage firms to think more holistically and creatively and position the new duty as a positive incentive to improve practices and contribute to the public good.

“This switch in emphasis could be achieved through a redrafting of the cross cutting rules.”

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