As the long-anticipated consumer duty comes into force today the financial services sector faces the biggest regulatory overhaul in over two decades. One marked by a notable willingness from the FCA to take “robust action” if the sector fails to comply – an indication of the more interventionist stance the regulator has pursued in recent years.
The duty reforms, driven by FCA concerns over sustained consumer detriment and poor customer service, mark a landmark moment for the market. The scope of the 120-plus page document is broad, but its four key pillars are: products and services; price and value; ensuring that consumers understand products; and making sure they get support.
And whilst the sector has had since July 2022 to prepare itself, the impact will be far reaching and could cost the industry up to £2.4bn. Banks, building societies, insurers and investment companies are amongst those impacted, as well as motor finance, product warranties and store cards. For many, it means older financial products which do not meet the higher standards will be removed from the market in a move which the FCA hopes will spur competition and drive innovation.
Whilst the consumer duty has been broadly welcomed by industry, politicians and consumer champions alike, its implementation will not be plain sailing.
The rules are still up for interpretation
The FCA is known for not being overly prescriptive in its rules. It tends to lay out guidelines and leave it to firms to interpret them. The same can be said for the consumer duty which has been simultaneously criticised as too interventionist and too vague – a difficult balance to strike. For many firms, identifying where the new rules need to be applied and the value of making these changes will be a significant undertaking.
Sections of the market have been missed
The new rules will only apply to sections of the market and products which are already regulated by the FCA, meaning that anything outside this far-reaching definition will not be held to the same standards. This is particularly key for the Buy-Now-Pay-Later sector, where recent speculation that the government will delay the timetable for new regulation, will no doubt be met with more robust criticism as the standards gap widens.
It’s going to get political
Political scrutiny of the financial services sector has been heightened in recent weeks – with attention turning to customer screening processes, passing on of savings, and reporting and governance standards. A regulatory requirement for “higher standards” across the market adds to the arsenal of MPs looking to hold the sector to account.
As we approach the next general election, politics will become simple and populist as parties focus on winning votes. That means even technical regulation can become a lightening rod for support or dissent.
The Conservative Government will point to the introduction of the consumer duty as a sign of its commitment to its voters and draw on the duty’s principles to make new interventions. Action on banks withdrawing accounts, for example, fits neatly when framed by the new consumer duty. On the other hand, the 120-page document provides the Labour Opposition with a foundation on which to launch its consumer-centric approach to financial services and a stick to beat the Government with if it fails to take – or ask the regulator to take – action where providers fall short.
For providers, this means there is a need to review the risks and opportunities the consumer duty presents and ensure that the action they are taking to champion consumer interest shines through with politicians and the media alike as scrutiny mounts. Getting the evidence base right will be key to securing long-term impact amongst those shaping the future operating environment.
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