• The deadline for responses to the FCA’s latest consultation paper on the new Consumer Duty closed yesterday
• In its response, AJ Bell argues the new Consumer Duty provides a clear opportunity to revisit the advice/guidance boundary
• The Consumer Duty will represent a step-up in regulatory standards, requiring all financial services firms to ‘act to deliver good outcomes’ for retail customers
• Ensuring financial services firms have confidence to communicate with non-advised customers without straying into advice will be crucial for the Duty to be effective
• Shift to outcomes-based regulation must reflect the fact the market is not homogenous and different propositions cater for varied customer needs
• Regulatory layering and an increase in spurious compensation claims must be avoided
Tom Selby, head of retirement policy at AJ Bell, comments:
“Perhaps the biggest opportunity the Consumer Duty – and the shift to outcomes-based regulation - provides is for the FCA and the industry to scale up support for people saving and investing for their future.
“In the retirement market in particular, people often face complicated choices when deciding how much to save, where to save it, how to invest and ultimately how to turn their pot into an income that lasts for 30 years or more.
“Those who can afford regulated advice are already catered for. For those who can’t afford advice or prefer to invest themselves, Pension Wise provides an extra layer of support and information.
“However, Pension Wise appointments are one-off events. Providers like investment platforms, who have an existing relationship with their customers, are often in the best position to offer ongoing guidance to help savers make good decisions and avoid poor decisions.
“But firms’ ability to offer this help is constrained by a lack of clarity around the boundary between guidance and advice. Firms often have a very limited appetite for intentionally or unintentionally breaching perimeter guidance, which stifles innovation in the provision of support to customers.
“This issue needs to be debated and addressed during the consultation phase if the Consumer Duty is to work as intended.”
Outcomes-based regulation in a fragmented market
“The Consumer Duty clearly aims to move the market to outcomes-based regulation. In doing so, it needs to be recognised that the market is not homogenous – there are different segments of the market that meet different customer needs.
“Giving firms the flexibility to implement the Consumer Duty in a way that best suits their customers will be the most effective way of achieving the intended outcomes.
“There are recent examples of new regulations that have been based on prescriptive rules that have been applied to an entire market, without recognising the differences in customer needs and the propositions that are designed to meet those needs.
“For example, the FCA’s non-workplace pension consultation is proposing that pension firms have to offer a single default fund to customers, potentially including an element of de-risking. AJ Bell believes that its customers would be better served by a small range of funds with different risk levels.
“The non-workplace pension consultation follows closely on from the requirement for providers to offer Investment Pathways to pension drawdown customers. These rules did not recognise that there are fundamental differences between platform pensions / SIPPs and insured personal pensions and hence Investment Pathways have only been effective in part of the market.
“In both cases, the overly prescriptive nature of the rules works against achieving the good customer outcomes the initiatives are trying to deliver.”
Regulatory layering
“Given the new Consumer Duty is intended to replace existing FCA regulatory rules – most notably the ‘treating customers fairly’ principle – it would have greater impact if the existing rules were dispensed with altogether to give firms clarity about their responsibilities.
“The decision to retain the TCF principle in the rulebook alongside the new Consumer Duty risks causing confusing layering of regulation.
“If the FCA wants to signal a step change away from the previous regulatory model, it would be more impactful to discontinue the existing rules.”
The risk of spurious claims
“It will also be important in policing the Consumer Duty that the regulator and others – most notably the FOS – acknowledge the natural limitations when trying to ensure ‘good outcomes’ for customers.
“When investing for the long-term, risk is inherent and the FCA acknowledges that the Consumer Duty doesn’t mean that consumers can or will be protected from all harm. Even with perfect target market definition, processes and communication - and the best will in the world - some people will always misunderstand the nature of that risk and suffer losses they may feel aggrieved about.
“While we acknowledge claims management companies (CMCs) can play a legitimate role in helping people who have suffered due to the failures of financial services firms, we have also seen a growing number of spurious claims in recent years.
“We are concerned the volume of these spurious claims will rise still further under the Consumer Duty. Therefore it is important that the FCA makes clear in both its communications and actions that such claims, which drain time and resource away from vital customer-focused work, will not be tolerated.
“As part of this, the regulator must work closely with the FOS to ensure the intention of this new regulatory approach is reflected in its approach to future complaints. On this front, we are encouraged by the recent announcement of the strengthening of the Wider Implications Framework, and in particular the increased transparency this promises to bring.”
