Will the FCA police Line of (Consumer) Duty to the letter of the law?

Superintendent Ted Hastings’ dogged pursuit of “bent coppers” in Jed?Mercurio’s?hit BBC police drama ‘Line of Duty’ finally ended last year when the identity of ‘H’ was revealed.?No spoilers from me for anyone who has yet to watch it but…Mother of God!?

While the FCA’s?new Consumer Duty?was never going to grip the nation in quite the same way, the regulator could learn a thing or two from the no-nonsense approach adopted by AC-12 as it goes about putting its?latest?overhaul?of financial services regulation?into action.?

Where?Superintendent Hastings was arguably a rules-based enforcer, focused squarely on “the letter of the law”, the FCA wants to drive cultural change across financial services by shifting to outcomes-based regulation.??

Businesses will from 2023, when the Consumer Duty is expected to be introduced, need to go beyond “clear, fair and not misleading” and “treating customers fairly” (Principles?7?and?6) when communicating with customers and creating products.??

Instead, the Consumer Duty will require firms to?“act to deliver good outcomes for the retail consumers of its products”.?This Duty will be supported by?a set of cross-cutting rules, four outcomes and rules?that explain how firms should act to deliver good outcomes.?

Challenges?

Most fair-minded people would agree that aiming to deliver good outcomes for customers should be front-and-centre?for?any well-run business in any industry.?In a competitive market, any firm which doesn’t operate in this way should be doomed to fail.?

However, there needs to be a concept of reasonableness underpinning this?“good outcomes”?aim?when it is applied to?investing.?Risk is an inherent part of saving and investing for the long-term, and we all know that the value of investments can go down as well as up – particularly over the short-term.??

It would clearly be ridiculous if, in the pursuit of “good outcomes” for consumers, firms were potentially on the hook in any situation where a “bad outcome” occurred, given they may have no influence over the outcome either way.?

There needs to be a concept of reasonableness underpinning this “good outcomes” aim when it is applied to investing.?

The regulator has tried to provide reassurance by saying it is working closely with the Financial Ombudsman Service (FOS) to ensure the intention of its new approach is interpreted?sensibly.??

However, the FOS is an independent organisation which will take?its own view on what the rules mean when adjudicating on complaints.??

FOS is currently drowning in complaints?where customers have lost money on an investment and spurred on by claims management companies (CMCs), are arguing that because of existing FCA principles 2 and 6, they shouldn’t have been allowed to make the investment.??

My fear when I say that the new Consumer Duty could be a charter for CMCs?will be addressed if the industry and particularly FOS, are at one as to exactly what is expected from regulated firms.??

The letter of the law?

The move to more outcome-focused?regulation?will require firms to be given flexibility to implement reforms in a way that suits their target market. For this to work, the FCA will need to take a much less prescriptive approach than?it has done?previously.?

Principles based regulation and rules based regulation are both valid. Difficulties emerge when both are at play simultaneously.?

Investment Pathways for drawdown,?introduced in February last year,?were a textbook example of a regulatory intervention that was too rigid, too prescriptive and failed to consider the differing needs of different sectors of the market.??

As a result, very few customers in the platform space have invested in one of the four Pathways options.?The?FCA needs to?learn from this mistake and?take a much less prescriptive approach to?future market interventions.?

Principles based regulation and rules based regulation are both valid. Difficulties emerge when both are at play simultaneously.?

Although?part of the purpose of the Duty is to ensure regulatory sanctions are less necessary in the future, there will always be “bent coppers” who need to feel the full weight of the FCA enforcement division.?

Provided the FCA focuses its energies on tackling these bad apples and takes a pragmatic approach when setting requirements for the majority of “good” firms, the Consumer Duty should be a regulatory ratings winner.??

AJ Bell CEO, Andy Bell

This article was first published in Money Marketing, 1st?February 2022?- https://www.moneymarketing.co.uk/opinion/the-new-consumer-duty-has-attracted-criticism-already/