FCA not trying to 'trip firms up' with consumer duty

Speaking at the Morgan Stanley European Financials Conference today (March 14), Rathi discussed the FCA shifting away from prescriptive rules to outcomes-focused regulation. 

He said: “We believe the consumer duty will mean fewer detailed or reactive rules. In fact, if firms get it right, analysts will spend less time talking about provisions for redressing issues of the past.

"That, over time, should reduce the Financial Services Compensation Scheme levy, which has already started to stabilise.

“We’re not setting out to trip firms up by going after technical breaches. We look favourably on firms taking reasonable steps to identify and proactively address concerns, even if mistakes are made.”

Fair value 

Rathi highlighted a consistent theme from the regulator which is the onus is on firms to satisfy themselves about fair value.

“That is not a Trojan horse for price regulation. We do not want to regulate prices, just as we don’t want to restrain profits for well-run businesses.

“Indeed, firms which deliver the outcomes in the consumer duty well should have a competitive edge. We are mindful of the risk of unintended consequences. 

“Historically, we have only acted on price where, as with payday lending, there were manifestly unacceptable outcomes even with competition.

“Nor would we want to undermine firms’ capacity to attract capital to invest. Those firms that invest judiciously serve customers better, for one thing,” he added.

Rathi also said the FCA will not hesitate to counter firms that claim there are excess profits and will act if it has concerns. 

“We asked firms how they were sure they were delivering value to savers and communicating effectively with them. Some, frankly, have been more effective than others. The market moved. Savers responded to greater competition, particularly in term products, and no prices were set.

“As with cash savings, we will give firms time to act before we intervene. Lack of responsiveness will lead to firmer intervention. We are taking a similar approach for investment platforms and double dipping, where a fee is charged and a proportion of interest on cash savings kept.”

Redress for customers

Rathi said the FCA aims to “proactively and thoroughly” understand the problem when it comes to redressing customers. 

He also said the regulator was gathering information to better understand how widespread the issue of ongoing advice charges is, highlighting that some firms have already made moves to address this.

“We are developing guidance for firms on our expectations on what they should be doing to deal with identified redress issues more quickly and effectively. We intend to consult on this and better complaints reporting this year.

“Where we have concerns and there is the possibility of the need for redress, we will seek to make that public or encourage firms to do so, as soon and in as much detail as we can. As we have done, recently. We want to give firms, consumers, the wider market information, and certainty when we can. All in line with our strategy.

“This brings me back to consumer duty. Rectifying issues is costly. It takes time. It damages reputations. It deprives firms of cash that could fund investment. That is why we see firms fully embracing consumer duty as the best means of prevention, bringing redress and compensation costs down and so supporting medium-term competitiveness.”

Rathi said the FCA wants to strengthen the principle of the “polluter pays” framework.

He added: “We are consulting on new rules for financial advisers requiring them to calculate potential redress liabilities, deduct that from regulatory capital, and if that breaches minimum requirements then an automatic asset retention applies until the issue is resolved.”

Technology 

Rathi said firms that have mostly been able to meet the consumer duty tackled their legacy data and tech infrastructure “investing in cutting edge technology to understand their consumers.”

“On AI in financial services, it is not our instinct to jump in immediately and seek to regulate in detail, given we can rely on the consumer duty, our market integrity framework and the SMCR accountability regime,” he added. 

Rathi concluded in order for the regulator to move to an outcome-based approach to regulation a mindset shift was required. 

“As we make the shift we aim to act proportionately, based on evidence, collect more if we need it, balance our objectives, mitigate the risk of unintended consequences, flag issues early, allowing those we regulate to act before we feel we must.

“As well as do what we say we will do and act fast where we see significant harm and to avoid a problem becoming larger than it need be.”

alina.khan@ft.com