The Financial Inclusion and Markets Centre (FIMC) has submitted a response to the Financial Conduct Authority (FCA) consultation on the Advice/Guidance Boundary Review. The submission can be found here: ADVICE GUIDANCE CP24 27 FINANCIAL INCLUSION AND MARKETS CENTRE SUBMISSION
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 proposals 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.
Summary of our response
- We think the FCA’s proposals are the wrong way to address the challenges identified in CP24/27. The FCA wants to create the conditions to ‘encourage’ firms to serve the mass market by moving the boundary of responsibility for poor outcomes away from firms towards consumers thereby limiting firms’ liability for redress.
- Creating yet another concept called ‘targeted support’ using terms such as ‘suggestions’ will introduce even more complexity into the financial advice market making it harder for consumers to make informed, confident choices. Creating more complexity would enable firms to exploit consumer vulnerability to sell higher revenue generating, potentially riskier, solutions and products to the mass market.
- Describing this new type of service as providing ‘suggestions’ is potentially misleading. The FCA would be encouraging firms to design interventions, including behavioural interventions, with the express intent of persuading consumers to take a particular course of action. The proposed interventions are very different in nature and effect to providing information only and allowing consumers to make any subsequent decision. The FCA wants targeted support and ‘suggestions’ to have the same effect on consumer behaviour as personal recommendations. Otherwise, why would the FCA develop these proposals?
- Targeted support would, in effect, be sales advice and we think should be regulated as such. But, the effect of targeted support and ‘suggestions’ would be that firms would not have the same degree of responsibility and redress liability if suboptimal consumer outcomes result as would be with personal recommendations – even though, to stress, targeted support is intended to have the same effect on consumer behaviour as personal recommendations. Encouraging mass market sales advice delivered within a redrawn boundary, in a market where fierce competition has been shown to cause significant consumer harm, creates obvious risks.
- Even if the FCA includes some protections with the targeted support model and the Consumer Duty applies, logic dictates that the proposals would have to amount to a weakening of consumer protection and limit consumers’ ability to obtain redress. If consumer protection standards were to be maintained then the regulatory boundary would not move and firms would still be unwilling to serve the mass market. Firms will only serve the mass market if they are given assurances that consumer protection is weakened and access to redress is limited.
- We support the idea of the industry using ‘innovative’ business models to reach underserved groups of consumers. If firms really believed they could use targeted support responsibly then they should not object to retaining the current boundary and consumer protection standards. After all, if their systems and controls are so good, then there would be few incidences that would give rise to redress claims so they would not be exposed to high redress costs.
- Industry lobbies might argue that they are trying to close the advice gap in the public interest but the current regulatory boundary prevents them from serving mass market consumers. We think these arguments are disingenuous. We can see nothing in the current regulatory regime that prevents firms from using innovative business models to serve the mass market while maintaining current consumer protection standards. But, firms do not trust their own internal risk management and compliance processes when serving the mass market and fear the consequences of being exposed to redress liabilities. The fact that industry lobbies are seeking to redraw the boundary and limit access to the FOS speaks volumes.
- We believe the real motive is to change the regulatory boundary to facilitate sales of greater volumes of higher cost, riskier products while reducing the potential liability for redress. The goal is to improve the risk/return trade-off for firms at the expense of the consumer interest. The Consumer Duty would not act as a backstop in this case as firms would now be operating within a redrawn boundary.
- We think it is unlikely that firms will use targeted support to target consumers with modest assets. Rather they will use the opportunity provided by weakened consumer protection to target consumers with higher levels of assets and higher revenue-generating potential, safe in the knowledge that in the event of poor outcomes redress liabilities will be reduced.
- We are concerned about the risk assessment and theory of harm the FCA uses to frame its proposals. It does not provide a meaningful assessment of the downside risks of these proposals. The harm is primarily framed as occurring because the FCA does not introduce these proposals, rather than assessing what might happen if the FCA does introduce these proposals. Nor has the FCA considered alternative, safer ways to achieve the stated goals. Rather than weakening consumer protection to ‘encourage’ firms to target customers, the FCA should require firms to identify customers who may be in need of support in order to fulfil their Consumer Duty outcome obligations.