The FCA has imposed a series of increasingly stringent rules on the U.K.’s financial services industry during the past decade, starting with the retail distribution review, which took effect on Dec. 31, 2012 and banned all commissions from the sale of retail investment funds, among other measures.TOBY MELVILLE/Reuters
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Financial professionals in the U.K. are skeptical of whether the latest set of new rules governing their sector will benefit consumers, even as investor advocates in Canada are urging regulators here to adopt similar measures.
Last month, the U.K.’s Financial Conduct Authority (FCA) finalized its rules and guidance for the new consumer duty, which “will set higher and clearer standards of consumer protection across financial services” when the new regime comes into force in mid-2023.
Specifically, the consumer duty introduces a principle that requires firms and their advisors to deliver good outcomes for clients. The most notable changes include requirements to simplify processes for switching or cancelling investment products and to provide more timely responses to customer queries.
The FCA has imposed a series of increasingly stringent rules on the U.K.’s financial services industry during the past decade, starting with the retail distribution review, which took effect on Dec. 31, 2012 and banned all commissions from the sale of retail investment funds, among other measures.
However, Anna Sofat, founder of financial services boutique Addidi Wealth Ltd. in Reading, says the new consumer duty rules will be no more effective at preventing bad behaviour than any of the regulations already in place.
“Here we have another set of fairly prescriptive rules and, my fear is, like all the previous rules, the companies will look at them and say, ‘Okay, this is what we need to do in order to meet these rules,’ and they themselves then become quite prescriptive in how they do business,” she says.
“The industry is incredibly creative in the wrong place in some ways. It spends so much time and energy trying to meet the rules in a very creative way that doesn’t harm the business that [firms] will find other ways around this as well.”
The resources put toward establishing the new consumer duty requirements, Ms. Sofat says, would have been better utilized by increasing enforcement of the existing rules.
“It really [should be] about shutting down where bad practices are found very early and very quickly,” she says.
Getting advisors to focus more on doing what’s right instead of on what they think they can get away with is the primary goal of the new consumer duty rules, says Matt Connell, director of policy at the Chartered Insurance Institute in Swindon.
However, he says the wording of the new rules – such as requiring firms to test their analyses of client outcomes “where appropriate” – allows firms to look for “loopholes and limitations.”
“That is very prescriptive, where as soon as you say ‘where appropriate’ you create all sorts of opportunities for lawyers to interpret what that means,” Mr. Connell says.
Given more freedom, he says the FCA would probably have focused on more policing as Ms. Sofat recommends, without necessarily creating another specific set of rules. But there was “pressure for the new rules coming from the FCA’s Financial Services Consumer Panel,” he says.
That panel has been advocating for a consumer duty regime to be placed on financial services firms since 2017, arguing it would ensure “firms would no longer be able to adopt a, ‘Let’s see if we can get away with it,’ approach [and] would effectively deliver what the [treat customers fairly principle] intended, but so clearly fails to do.”
The new rules do force businesses to think about consumer outputs, Ms. Sofat says, “but you will still get clever people who will design processes that will tick the boxes.”
For most advisors, the biggest challenge posed by the consumer duty regime “won’t be culture or behaviour, it will be data,” says Barry Neilson, chief commercial officer at Novia Financial PLC in Edinburgh.
“The majority of advisors will probably already be operating in a manner that produces good outcomes for their clients as the existing regulation pretty much mandates that,” he says. “Their consumer duty gap is more likely to be in how they [demonstrate] evidence [of] good outcomes.”
To address that gap, Mr. Neilson says advisors will likely need to acquire more data from the third-party platforms they utilize to remain compliant, which he says could lead to firms hiring more data analysis professionals.
Taking ‘international developments into account’
Here in Canada, the Canadian Securities Administrators (CSA) are now in the process of reviewing the public comments on their proposals for total cost reporting after having implemented two major investor-focused sets of rules for the investment industry – the second phase of the client-relationship model and the client-focused reforms – in recent years.
“As always, we take relevant international developments into account when considering new rules,” says Ilana Kelemen, a CSA spokesperson in Montreal.
Jean-Paul Bureaud, executive director of the Canadian Foundation for the Advancement of Investor Rights (FAIR Canada), says the CSA would be wise to go a step beyond taking the U.K.’s new regulations into account and adopt them directly.
“A lot of people in Canada would argue – and this probably includes the CSA – that the existing rules achieve the same objective,” Mr. Bureaud says. “The main difference is that in the U.K., they are now making it explicit whereas in Canada, they’re still more implicit, more of a byproduct of the regulation. But if they’re already implicit, then why not state them explicitly? What’s the harm?”
FAIR Canada has already encouraged the CSA and provincial governments to make consumer duty principles “an explicit requirement in the mandate of regulators,” Mr. Bureaud says. “Over time it will have a profound effect.”
Ms. Sofat remains unconvinced.
“It all just comes back to accountability,” she says. “Without that and without very clear lines of enforcement, these [new regulations] are not going to make much difference, sadly.”
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Jameson Berkow