Just before Christmas I wrote a critical blog post on the proposals by the Financial Conduct Authority (FCA) to reform the Financial Services Compensation Scheme. It generated a lot of supportive comments. At the same time the FCA published a consultation paper (CP21/36) on a “New Consumer Duty”. This seems to have similar objectives in that it is an attempt to stop consumers from being provided with misleading information, being provided with unsatisfactory support or buying products that are inappropriate or harmful.
For “consumers” read “individual investors” in the investment sector.
The FCA therefore is proposing a whole new set of rules to enforce a new Consumer Duty and the consultation paper alone consists of 190 pages of convoluted text, even though it is supposed to be principle based. It is also clear that there was considerable opposition from the financial services industry particularly as they will incur substantial costs in adapting to the new rules and maintaining them. There is also doubt as to whether it will result in any benefit as there is already an obligation to treat customers fairly and a multiplicity of other rules are already in place.
It might even increase costs to consumers as firms pass on their additional costs, and increase the risk of litigation. One aspect of the proposal is however not to provide a Private Right of Action (PROA) for a breach of the new rules or principles so consumers would have to rely on the Financial Ombudsman for any redress. This is very unsatisfactory as that organisation is hardly very effective at present and takes way too long to deal with complaints.
An example of the sophistry in this consultation paper is the discussion of two possible Consumer Principles to underpin the conduct of firms: Option 1 – A firm must act to deliver good outcomes for retail clients; or 2 – A firm must act in the best interests of retail clients. Can you divine any difference?
What are the likely costs of the adoption of this new Consumer Duty and associated rules? The paper says total one-off direct costs to comply will be in the range of £688m to £2.4bn. Annual on-going costs will be in the range £74m to £176m. The paper is remarkably unclear on the likely cost benefits to consumers.
I don’t know how much labour was put into writing this paper but it must clearly have been very considerable. I consider it a waste of effort. I doubt that consumers will be much better protected by adoption of the new Consumer Duty. The problem with the FCA is not lack of adequate rules, but an inability to enforce them vigorously. Firms devise new products that are too complex, badly understood by consumers and yet the FCA does not stop them being sold. They also approve firms and their management who should not be and fail to step in when matters are clearly going wrong.
It’s a management problem in essence and inventing new rules will not help.
My detailed comments in response to the consultation are present here: https://www.roliscon.com/Consumer-Duty-Consultation-Response.pdf
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.