The industry has raised concerns about whether the Financial Conduct Authority’s proposals for its new consumer duty provide enough clarity on what a “good outcome” looks like, saying any confusion would lead to a rise in claims.
In a consultation paper today (December 7), the regulator published draft guidance to help firms prepare for the introduction of the duty planned for April 2023, but some members of the industry remain sceptical.
The FCA has proposed to move forward with its original proposals for the new rules, despite concerns around proportionality and design, as well as any potential consequences the rules could have.
Tim Fassam, director of government policy and relations at Pimfa, said: “Whilst we do agree that it is right that the FCA looks to assert a standard of higher consumer protection, we are slightly disappointed that despite wide ranging calls for clarity on its proposals, the rules and accompanying guidance published remain somewhat theoretical and woolly."
He said Pimfa was concerned about the "inherent subjectivity" of the duty and that it could "ultimately lead to confusion both for consumers and firms" in terms of the FCA's expectations of a good outcome.
"Without clarity on what the FCA’s expectations of the Financial Ombudsman Service 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.”
The consumer duty is designed to create a higher level of consumer protection in retail financial services.
It will include three core elements:
- The consumer principle, which will reflect the overall standards of behaviour the FCA expects from firms. The wording being consulted on is: 'a firm must act in the best interests of retail clients' or 'a firm must act to deliver good outcomes for retail clients';
- Cross-cutting rules which would require three key behaviours from firms: taking all reasonable steps to avoid foreseeable harm to customers, taking all reasonable steps to enable customers to pursue their financial objectives, and acting in good faith;
- It will be underpinned by a suite of rules and guidance that set more detailed expectations for firm conduct in relation to four specific outcomes – communications, products and services, customer service and price and value.
Tim Morris, IFA at Russell & Co Financial Advisers, said: “The wording suggests stronger action through ‘assertive supervision’ and suggests the FCA will act more quickly with a ‘data led approach’.
“Sounds promising, yet easy to be sceptical after seeing many similar initiatives. For example, stating that advice firms ‘must act to deliver good outcomes’ sounds like a rehash of treating customer fairly.
“I will reserve full judgement until I see this in action and if it helps wean out the bad actors.”
Bad actors
Another concern was around whether the duty would be able to capture the bad actors and push them out of the market or simply add another layer of burden for firms.
Fassam said: “Our concern, as we set out in our initial response, is that there are clearly firms operating within the market who are 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.”
He explained that 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,” he said.
Meanwhile, Jenny Stainsby, global head of financial services regulation at Herbert Smith Freehills, said: “The FCA hasn't taken on board concerns that a fair outcome isn't always a good outcome from a customer's perspective.
“There will continue to be situations in which a client is disappointed by the performance of an investment for instance, even where the firm has complied with both the letter and the spirit of the duty.”
She added: “'Good practices' do not always result in 'good outcomes' and it will be incumbent on the FCA and the Fos to distinguish between good outcomes and fair outcomes, regardless of the wording of the duty."
Complex or crystal clear?
The paper outlined that final rules are expected by July 2022, with an implementation period for firms running until April 2023.
However, Steven Cameron, pensions director at Aegon, said even if firms do, as the FCA believes, have sufficient detail of proposals to begin implementation now, this timescale was “particularly tight” bearing in mind the regulatory and legislative change.
He said: “The FCA is pushing ahead with its new consumer duty, which it describes as a ‘reset’ and ‘fundamental shift in industry mindset’. The aim of making sure firms have good customer outcomes at the heart of all they do is admirable and the latest paper adds more detail to FCA expectations.
“Running to 243 pages, half of which are taken up by draft non-handbook guidance, this illustrates just how complex and all-encompassing the new duty is.”
Cameron added it was “encouraging” to see the FCA had taken on board concerns that were raised.
“For example, cross-cutting rules no longer include a requirement for firms to take ‘all reasonable steps’, something which looked highly subjective and challenging. Instead firms must act reasonably to avoid foreseeable harm and enable and support retail customers to pursue their financial objectives.
“We welcome the FCA’s intention to work closely with firms throughout the implementation period and to identify where further good and poor practice examples might supplement draft guidance.”
Elsewhere some industry body members have welcomed the FCA’s proposals.
Sian Fisher, chief executive officer of the Chartered Insurance Institute, said: “The FCA is being crystal clear: they want the profession to innovate to address the unmet needs of consumers. The regulator’s findings support those of our public trust index - failure to address this erodes consumer trust in the profession.
“We fully support cultural change that enables consumers to make informed and timely decisions, receive satisfactory support from providers and take action to address their needs.”
sonia.rach@ft.com
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