What does it mean for the investment management industry?
The FCA published a consultation on 31 May setting out their proposals for a new Consumer Duty, which aims to set a higher level of consumer protection in retail financial markets.
The FCA stated that there is evidence of practices which cause consumer harm, including firms providing information which is misleadingly presented or difficult for consumers to understand, hindering their ability to properly assess the product/service.
The new Consumer Duty seeks to enhance the FCA's existing rules and tackle the harms seen in retail financial services markets, as well as their causes.
The Consumer Duty will have three key elements, which firms will need to adhere to:
However, while the IA supports the intention to ensure that consumer harm is addressed and hopes that the consultation on the proposals will shine a light on those firms not meeting the spirit of the existing rules, it is our belief that new rules or compensation cannot and should not replace effective authorisation, supervision and enforcement of those firms that are the cause of consumer harm.
We summarise the IA response to the consultation here.
Neither of the suggested options for wording of a new Principle are universally supported by the investment management industry and the IA would welcome the opportunity to develop something more suitable. The concept of “best interests” already applies to the investment management sector through the Handbook, but we recognise that different parts of the market have unique characteristics that effective regulation needs to take into account.
Therefore, if the “good outcomes” option were to be taken forward it should at least explicitly include the concept of “reasonableness” and be amended to, for example, “a firm must act with reasonable skill, care and diligence to deliver fair outcomes for retail clients”. We suggest the FCA also needs to consider more carefully the implications intended or otherwise of the introduction of a duty for firms that do not have a relationship with the underlying retail clients and of whom they have no direct knowledge. We have asked for more clarity on where regulated entities are falling short of the FCA’s expectations in respect of the current regulatory framework. This should include the practical implementation of the new Cross-cutting Rules to avoid complicated compliance processes that will be costly for firms to implement and deliver little or no value to end consumers and will not reduce the harm that the FCA is looking to address. The IA strongly support the simplification of regulation and recommends the FCA reviews the Handbook to remove any Principle, rule or guidance that is superseded through the introduction of the Consumer Duty or very clearly acknowledges that firms complying with rules designed to achieve the same outcomes will already be in compliance with the Consumer Duty, or aspects of it. Regulatory responsibilities need to be clear, which they will not be if one layer of regulation is overlaid by another. We would also note considerable concern at the use of the term “duty” because of the legal connotations it brings and believe a phrase such as “consumer care regime” would be more appropriate. The IA do not support the proposals for a Private Right of Action. The existing complaints framework for consumers is clear in terms of how it operates, free for consumers and encourages two-way communication to resolve the complaint in a timely manner before a complaint is referred to the Financial Ombudsman Service for independent arbitration, if necessary. The introduction of a Private Right of Action would benefit lawyers and claims management companies at the expense of the FCA’s ability to make and interpret its own rules as well as affect the competitiveness of the UK market. We expect the FCA to review these submissions and produce a further consultation by the end of the year. We will of course keep you up to date. In the meantime, if you have any questions please speak to Nic Edge: nic.edge@theia.org