The Financial Inclusion Centre

The Financial Inclusion and Markets Centre (FIMC) has published its submission to the Financial Conduct Authority (FCA)/The Pensions Regulator (TPR) recent consultation on a new Value for Money Framework (VFM) for workplace pensions. The submission can be found here: FIMC FCA TPR VFM 0326

As we said in our response to the previous consultation CP24/16, we are supportive of the basic idea of VFM assessments of pension scheme charges and service quality. FCA/TPR have clearly put much thought into developing a workable VFM framework.

But we are very concerned about the degree of emphasis placed by the FCA/TPR on investment performance, particularly past performance, in the proposed VFM framework. Good past investment performance does not predict good future investment performance.

Disconcertingly, FCA/TPR intend to basically allow pension firms to select their own assumptions to project future investment performance. There is no logic to allowing firms to select their own assumptions. The risk of firms trying to game the system is all too obvious. Moreover, worryingly FCA/TPR will not require firms and trustees to publish the assumptions used to project investment returns or to publish the advice received from external advisers so that independent observers can see whether external advice has been ignored.

The VFM framework with its emphasis on investment performance will just allow investment managers, consultants, advisers, and other intermediaries to divert attention from the importance of costs and charges and actively promote and sell high cost, complex investment strategies which actually offer little added value but introduce greater risk. It risks causing more pension assets to be invested in high cost, complex, opaque, poorly regulated and governed ‘alternative’ investment assets and vehicles ssuch as private equity with questionable past performance track records and future prospects.

Giving past investment performance such a key role in a VFM assessment, and allowing firms and scheme arrangements to use their own assumptions about future performance, could give a false and misleading measure of VFM and undermine the integrity and usefulness of any rating system intended for comparison. Overall, we think the proposed framework risks misleading pension savers and distorting the market. It is likely to result in poorer quality and value outcomes for ordinary pension savers and investors, and less efficient allocation of resources by financial markets.

The Financial Inclusion and Markets Centre (FIMC) has submitted a response to the FCA’s important consultation on buy now, pay later (BNPL) lending. BNPL is a source of significant consumer detriment. We support much of what the FCA is proposing. But, we think the regulator is not going far enough to address the harms caused by the inherent design features of BNPL which enable lenders to exploit behavioural biases. Our submission can be found here: FIMC FCA BNPL Sept 25 final

The Financial Inclusion and Markets Centre (FIMC) has responded to the FCA consultation CP25/17 Supporting consumers’ pensions and investment decisions: proposals for targeted support. The response can be found here: FCA CP27/17 Targeted Support Financial Inclusion and Markets Centre Submission

The FCA’s proposals are a cause for concern. We very much share the stated objectives of the FCA to help consumers make better financial decisions on pensions and investments. But, we are concerned that the FCA’s choice of intervention, targeted support, will not have the positive impact expected by the FCA. Targeted support would represent a weakening of consumer protection and limit consumer rights of access to redress. Targeted support has two key elements.

It involves a moving of the regulatory boundary so that greater responsibility for poor outcomes is moved towards consumers away from firms, with a consequent reduction in consumer protection standards and access to redress. This is at a time when the FCA is removing the need for firms to have a Consumer Duty Champion. Not only are FCA consumer protection standards under threat, there is a risk that important direct marketing consumer protections may also be weakened.

What is described as targeted ‘support’ with ‘ready-made suggestions’ is in effect an opportunity for firms to use mass market, electronic cold calling techniques to identify potential consumer-targets to sell, upsell, or cross sell products to. This is not a regime which would require firms to prioritise supporting consumers. It enables firms to prioritise selling to consumer-targets.

We believe the real motive of the industry is to change the regulatory boundary to facilitate sales of greater volumes of higher cost, riskier products while reducing the potential liability for redress. In other words, the goal is to improve the risk/return trade-off for firms. The Consumer Duty would provide a limited backstop in this case as firms would now be operating within a redrawn regulatory boundary.

We have made a number of recommendations to mitigate the risks from targeted support.

The Financial Inclusion and Markets Centre (FIMC) submitted evidence to The Committee of Public Accounts – often referred to as the Public Accounts Committee (PAC) – Inquiry into the Government’s use of private finance for infrastructure. The PAC has now published its report Government’s use of private finance for infrastructure

In our submission, we focused on the potential risks and harms for consumers and citizens of using various forms of private finance to fund core physical, green, and social infrastructure. Given our remit, we also focused on the funding of core infrastructure, not the delivery or building of infrastructure. The FIMC submission can be found here: FIMC submission to Public Accounts Committee Inquiry Private Finance Infrastructure final 0425

We argued that it is important to learn the lessons from the failure of the previous PFI regime. The UK economy, public sector, and citizens are still paying the price for that.

The Financial Inclusion and Markets Centre (FIMC)* has submitted a response to HM Treasury’s Phase 1 consultation on the reform of the Consumer Credit Act (CCA). The submission can be found here: HMT CCA phase 1 FIMC submission 0725

This is a very important consultation. Even though consumer credit is now regulated by the Financial Conduct Authority (FCA), the primary legislation still contains some very important consumer protection measures which are at risk of being lost as a result of the reforms. We are very concerned that the Government has sided with the consumer credit industry on removing the sanctions in the CCA.

The current growth and competitiveness agenda means there is a real risk that the FCA will come under pressure to adopt a weaker approach to consumer protection based on the misguided view that this will promote the growth and competitiveness of consumer credit markets and, in turn, help promote economic growth. In this new pro-growth environment, the removal of sanctions as a disciplining force on the consumer credit market is risky.

The Government should also take the opportunity provided by the reforms to improve the responsiveness of the legislative and regulatory system to emerging harm caused by financial innovation. The length of time taken to bring buy now, pay later (BNPL) within the FCA’s remit is a case in point. It is also a good opportunity to address issues relating to county court judgments (CCJs) held on the public Register especially to protect victim-survivors of economic abuse and coerced debt.

*The Financial Inclusion and Markets Centre is a new unit of the Financial Inclusion Centre created to focus on: financial services policy and regulation; financial market reform; evaluating the economic, environmental, and social utility of finance; and understanding the implications of the intersection between finance and technology including developments in AI, big data, and other technologies. The Financial Inclusion and Markets Centre | The Financial Inclusion Centre

The Financial Inclusion and Markets Centre (FIMC) has published a set of proposals to contribute to the Government’s National Financial Inclusion Strategy. The proposals are designed to protect vulnerable consumers and promote financial inclusion and resilience. The proposals can be found here: NFIS strategy FIMC proposals 0425

While we have made progress on some areas of financial inclusion, we have made little or no progress in other key areas. A total of 14 million people have less than £100 in savings.[1] Millions struggle with debt, and can’t afford to purchase or are denied access to the financial products and services they need. Others face adverse pricing practices when using commercial financial services.

The key data on exclusion summarised in the paper suggests that what we are seeing goes beyond market exclusion and is arguably systemic market discrimination.[2]

The lack of progress has left millions vulnerable to financial shocks and unfair market practices. We cannot miss the opportunity provided by the Financial Inclusion Strategy. We cannot afford to wait for the wheels of policymaking to turn slowly. There is no time to lose. We know who is excluded and vulnerable to financial shocks and markets practices, and why.

It is time to fix broken markets so they work better for consumers, not expect consumers to conform to the demands of the market. The sooner policymakers and regulators accept there are millions of consumers the market cannot or will not serve, the better. Alternative solutions and greater support for non-profit providers are needed. Time to turn ideas into action.

The Financial Inclusion and Markets Centre (FIMC) has submitted a response to the FCA’s consultation on the advice/guidance boundary review. We fully support the FCA’s goals outlined in CP24/27 to ensure more consumers get the support they need to produce better financial outcomes. But, we have serious concerns about the FCA’s approach.

The FCA should be congratulated for the significant improvements it has driven through in conduct of business standards in the provision of financial advice. The FCA’s proposals in CP24/27 amount to a weakening of consumer protection and risk reversing the very real progress made. These proposals, if implemented as envisaged, also risk undermining the FCA’s flagship Consumer Duty reforms.

We do appreciate the pressure the FCA is under from government and industry lobbies to redraw the regulatory boundary and to be seen to be delivering on the growth and competitiveness objective. We are concerned that these proposals will undermine the FCA’s primary consumer protection objective without contributing to the objective of helping currently underserved consumers with modest financial assets to receive advice. We urge the FCA to rethink its approach. There are more effective, safer ways to address the challenges identified and deliver better consumer outcomes.

The response can be found here: FCA Advice/Guidance Boundary Review CP24/27

Financial Inclusion Centre has submitted a response to HM Treasury’s consultation on the regulation of buy now, pay later (BNPL) products. We very much welcome the Government’s decision to regulate BNPL and the determination to act quickly.

Our submission can be found here: HMT BNPL Condoc FIC submission 1124 final

As a non-profit organisation which focuses on financially vulnerable consumers and those poorly served by financial services, we have been concerned that these consumers have been left for too long without meaningful consumer protection when using BNPL.

Access to fair, affordable, and sustainable credit that is socially useful and enhances consumer welfare is a critical element of financial inclusion and resilience. We emphasise social utility and enhancing consumer welfare as genuine financial inclusion is more than just about the numbers of consumers potentially having access to credit, or with credit. The fact that consumers can have easy access to certain forms of credit – or, more accurately, can be targeted with certain forms of credit as retail finance is supply side driven not demand led – is not necessarily welfare enhancing. Payday lending was a case in point.

Unregulated or poorly regulated consumer credit can create overconsumption of credit which can undermine consumers’ propensity to save and build financial resilience. If it is too easy to borrow, it can make it hard to save. Overconsumption of credit can result in overindebtedness, leave consumers financially struggling, and exacerbate existing financial vulnerabilities. FCA research has found that adults with characteristics of vulnerability were more likely to report using BNPL, and that 44% of the
most frequent users of BNPL were over-indebted. 1

BNPL is a form of  ‘embedded finance’. Embedded finance exploits the fact that the focus of the consumer is on obtaining the necessary or desired goods and services, not on the utility of the credit which facilitates access to those goods and services. BNPL providers have been very successful at removing any transactional friction that can cause consumers to consider carefully the decisions and choices they make.

It can also have negative impacts on consumer focused competition. It allows well-resourced commercial for-profit credit providers operating to lower regulatory standards to crowd out non-profit community lenders such as credit unions and CDFIs who may be better placed to offer more appropriate credit.

However, we are concerned that the regulation will only cover third party providers of BNPL. We argue the new regime should apply to BNPL generally not limited to third-party lenders. Increasingly, there is a blurring of the lines between finance and technology, and finance, technology, and retail consumer markets (‘embedded finance’ – see above). Yet, the intersection between these markets is poorly regulated. Including only third-party lenders would create an obvious risk that big tech or e-commerce platforms would move into this market and exploit the fact that they did not have to operate to the same standards as regulated providers.

We also argue that, given the risks with embedded finance, the FCA will have to find a way to inject some ‘friction’ into the customer journey to prompt consumers to think carefully about using BNPL before committing to the transaction.

1 Research Note: Deferred Payment Credit

The main financial regulator, the Financial Conduct Authority (FCA), is reviewing its Handbook of rules and guidance following the introduction of the flagship Consumer Duty initiative. The FCA invited comments on issues including:
• which detailed rules or guidance could be simplified to rely on high-level rules, or
have interactions with other rules which could be clarified
• how any steps to simplify the rules and guidance affect its statutory objectives
• the appropriate balance between high-level and more detailed rules
• the potential benefits and costs from simplifying the rules

Financial Inclusion Centre supports efforts to restructure the FCA Handbook and streamline rules that produce no benefits for consumers and business, as long as consumer protection standards are maintained. But, we are very concerned about the potential risks with this initiative especially as it is happening at the same time as the Advice/ Guidance Boundary and Consumer Credit Act reviews.

Financial services lobby groups are using ‘Trojan Horse’ arguments that current consumer protection standards stifle financial innovation and competition, hinder financial inclusion, and hold back the competitiveness and growth of the UK financial sector and wider economy.

There is no evidence that current consumer protection standards have these effects. Yet, Government and financial regulators appear sympathetic to industry arguments. Government is pressuring the FCA to do more to support the growth and competitiveness of the UK financial sector.[1] The FCA uses unfortunate phrases such as ‘regulatory burden on business’,[2] which implies the FCA has already decided there is too much regulation even before the Call for Input or other reviews are completed. We are concerned the FCA will come under further pressure during this review to reduce consumer protection standards. We hope the regulator resists this pressure.

[1] Reeves to tell UK financial watchdog to prove it will support growth

[2] Financial regulator seeks to reduce burdens on firms and support growth | FCA

FIC response to this Call for Input can be found here: FCA Streamlining Rules FIC submission October 2024 Final

The Financial Inclusion Centre has submitted a response to the Financial Conduct Authority (FCA) consultation CP24/16, The Value for Money Framework which has just closed. The summary of our response and full submission can be found here:  FCA consultation on a pensions Value for Money Framework

The overall intention is to enable better scrutiny of value for money in workplace pensions which come under the FCA’s remit. There is a similar initiative for pension schemes which come under The Pensions Regulator (TPR).

Pension arrangements will assessed using this new VFM framework and rated red, amber, or green (RAG). We fully support the intention to ensure people saving for a pension get the best value for money possible. But, we have some serious reservations about the FCA’s approach. The proposed framework could encourage competition on spurious grounds. It threatens to reverse the progress made on reducing investment management costs and as a result risks reducing pension values.