The Rulebook and the Consumer Duty

There is a lot of information on the FCA website telling you how they operate as a regulator.

They have spent a lot of time and money explaining to both firms and the public the aims and objectives, their strategy, and plans, the tactics, and methodologies.

Each year we cover the FCA Business Plan in these pages and try to give an insight into how the FCA will approach the coming 12 months from a business perspective.

Sometimes, though, it’s the information that they are gathering in, rather than putting out, that gives a clue to how the regulatory world is changing. Monitoring that kind of activity can give risk teams the motivation to re-examine their own work for the ‘principles’ element of regulation.

Back to Basics

The FCA, for all the monitoring systems it has, and experts in the world of finance, and documents, and plans, has managed to succinctly bring its expectations down to 12 Principles, which I won’t list here as you all know, live, and breathe them daily!

I think that we can reduce these further, to a simple two. In regulatory-speak, a combination of rules-based and principles-based regulation.

1. Follow the Rules.

2. Be nice to people.

Yes, there are nuances around the meanings of specific words in the Handbook. There is ‘wiggle-room’ for alternative processes when a ‘Guidance’ instruction doesn’t quite match what an organisation does.

In general, if someone is employed in the organisation to take a step back and say, ‘You know, perhaps we should make this a bit clearer (or quicker or better, or cheaper)’, the firm is on the right path.

The Consumer Duty

The introduction of the Consumer Duty has placed a little more emphasis on doing the right thing and asked for firms to embed this approach. They have made it clear that this can be done through ‘Champions’ at a senior level, records of decision-making that have included the Duty in deliberations, as well as clear ownership of these decisions.

For the same reason as the ‘Principles’ above, I’m not going to list the three Cross-Cutting Rules or the four Outcomes arising from the FCA’s Consumer Principle, ‘A firm must act to deliver good outcomes for retail clients.

If organisations can clearly demonstrate that the Consumer Duty has had a positive influence on customer outcomes, there may be more room for innovation and originality than some have come to expect in the past.

Doing the right thing isn’t hard, but it may not be the most profitable. Unfortunately, when there is no profit in following the rules, gaps are left in our industry for those happy to pursue less ethical practices.

By looking at a recent request for information related to the Consumer Duty in the financial adviser sector, the regulator is wanting to know if they are being nice to people.

What information is the FCA gathering, and why?

In February, the FCA wrote to about 20 larger financial advice firms, seeking information around a specific area that has concerned them over recent years. While the topic is the same, charging for ongoing services after an initial ‘sale’, the approach is different.

In a somewhat loaded question, the regulator has asked if firms have assessed their ongoing services (and charges) after the introduction of the Consumer Duty. (Hint – the answer to this question should not be ‘No’.)

Like a school mathematics exam, the FCA also wants to see your working. It wants information on the number of clients that were due a suitability review for advice given, how many actually received that review, and what fees were refunded when the suitability review did not happen.

This area had previously been flagged with firms at least three times in the last three years, so there is certainly no excuse for not seeing this one coming – another good reason for organisations to keep up to date with their horizon scanning.

Given the warnings previously issued, this can be seen as a test case for the success (or otherwise) of the Consumer Duty. The FCA will find out if actions are being taken to improve the lot of the customer, or whether organisations are simply paying lip-service to the 12th Principle.

Putting things in perspective

This article is focussing on a request for information from several larger firms, in a higher risk area of finance. Realistically, few smaller firms will be asked for information of this nature unless there is a concern about them or a particular product. Although some may dismiss this topic as irrelevant because of their size, this shouldn’t be the case.

When the regulator is looking at the regular statistics that all firms make their returns on, the numbers (whatever they relate to) should be changing since the Consumer Duty was introduced. Changes in the ‘numbers’ evidence a change in attitude – exactly what the regulator is looking for.

If there is not a change (in complaints figures, for example), someone may just start asking questions.

What does this mean going forward? (Narrow view)

Assuming the 20 larger firms can demonstrate that they have not only bought into the Consumer Duty but have taken positive action in an area that the FCA has already expressed a degree of concern, this will be a good thing.

In this brave new world, organisations will be trusted to do the right thing, because they know it’s the right thing – not simply because there is an ‘R’ next to a new paragraph in a sourcebook. This opens positive innovation and opportunities for all.

If, on the other hand, the outcome is less positive, there will be repercussions for those that haven’t fully bought into the Consumer Duty (or those that simply can’t evidence that fact.)

What does this mean going forward? (Broad view)

In principle, everyone knows that the Consumer Duty touches all aspects of the customer interaction and will have stored the documents showing that someone has reviewed the process.

Being realistic about it, there are going to be many that have just done a box-ticking exercise. The recent information request shows that this approach is just no longer sufficient to satisfy the FCA.

The regulator is looking for statistics that demonstrate a change in approach after the introduction of the Consumer Duty. This recent exercise isn’t really a test of the Consumer Duty, it’s a test of making sure you have been paying attention to the letters and notification of the last three years.

In short- if the FCA has said in the past that it thinks there might be something wrong in the treatment of customers, make sure you are on top of it, and doing something about it.

Being even shorter, be nice to people.

Source: Article “The Rulebook and the Consumer Duty” was written by The ZISHI experts, and published in the Advice Matters Magazine | 2024 | Vol 01 | Edition 01

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