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 submitted a response to this Call for Input FCA Streamlining Rules FIC submission October 2024 Final
Summary of FIC submission
This Call for Input is happening at the same time as the Advice/ Guidance Boundary Review and review of the Consumer Credit Act. The combination of these reviews means there is a real risk the boundary of regulatory responsibility will be redrawn in the industry’s favour. In other words, more of the risks and costs of misselling, the selling of unsuitable products, and other market failures will be transferred to consumers.
- FIC 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.
- The FCA wants to move more towards high level rules leaving firms more discretion on how to interpret and apply the rules. Current regulation could have been based on high level principles and rules. Sadly, in financial services, firms could not be trusted – or could not trust themselves – to responsibly interpret and comply with high level regulatory principles and rules. Over the years, the industry has had to be told in ever increasing detail by the regulator what is expected of them with the result that the current Handbook and guidance is now very detailed.
- However, even though the Handbook rules and guidance is very complex, it is important to recognise that the main costs associated with regulation do not arise from firms having to read a complex rule book. The main costs come from firms internalising and operationalising regulatory expectations, setting up systems and processes, and employing risk and compliance professionals to comply with regulation, and avoid FCA sanctions and paying redress to consumers.
- So, moving to a high level rules approach and streamlining the rules per se will not materially reduce industry costs, or change firms’ ‘risk appetites’ – if consumer protection standards are maintained. And it is a big if.
- With high level rules, firms would still have to operationalise regulatory expectations. Indeed, if the certainty provided by detailed rules and guidance is removed, firms could find it more, not less, challenging to comply with regulatory expectations. This is critical. Industry lobbies recognise that streamlining rules and guidance will not materially reduce costs or change risk appetites. Instead, we think the industry lobbies could push for redrawing the regulatory boundary in firms’ favour during this Call for Input and the Advice/ Guidance Boundary and Consumer Credit Act reviews. In other words, they will push for more of the risks and costs of misselling and other market failures to be transferred to consumers.
- If the FCA redraws the regulatory boundary, this might make the industry appear more competitive in the short term (if ‘competitive’ is taken to mean regulatory costs for the industry being reduced). But, this could enable more misselling and selling of unsuitable products and undermine the FCA’s primary consumer protection and competition objectives. This would damage trust and confidence in the industry and its long term competitiveness, which would in turn undermine the FCA’s competitiveness and growth objective.
- We do not know yet what the industry will propose or how the FCA will respond. But, we urge the FCA to:
- publish a full list of proposals submitted by the industry;
- publish an assessment of the proposals on consumer protection standards; and
- with regards to revising how information is disclosed, conduct research with consumers to gauge understanding.
- Unlike other consumer markets, competition and innovation has not been very effective at producing good consumer outcomes in retail financial services. Whereas, robust regulatory interventions have driven major improvements. While we do think it is possible to restructure the Handbook, moving to a more high-level rules based approach, and allowing firms more discretion on how to demonstrate compliance with regulatory expectations, could make it more difficult for the FCA to monitor and supervise market behaviours. Therefore, any proposed changes should be assessed for the potential impact on the FCA’s ability to exercise its supervisory and enforcement functions.
- We urge the FCA to create an independent advisory committee comprised of consumer representatives to scrutinise and advise the FCA on the potential impact of any proposals.
- There are clearly issues with regards to access to affordable credit, insurance, and advice to help consumers build financial resilience – see Annex I of the submission. We need to accept there are millions of consumers a well-regulated market just cannot serve on terms that suit both consumers and commercial firms. Weakening consumer protection and redrawing the regulatory boundary would not be a sensible solution to promoting inclusion, or socially useful innovation.
- There are better alternatives including: supporting the non-profit community lending sector; expanding the use of workplace payroll savings schemes which also support credit unions’ ability to provide loans;[3] supporting the expansion of deduction based lending;[4] supporting the development of alternative basic low cost insurance products; allowing debt advice charities to play a bigger role in providing limited advice on basic products, and signposting consumers to appropriate non-profit providers; and improving the way information is used in credit risk assessments to build a bridge back to financial inclusion.[5]
[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
[3] See: Getting Workforces Savings-Payroll Savings with Credit Unions | The Financial Inclusion Centre
[4] New research shows deduction lending adds up for low income borrowers and lenders | The Financial Inclusion Centre
[5] For example, as proposed by Registry Trust The Data That Matters