The Consumer Duty and the fight over the regulatory philosophy governing UK financial services

02 March 2023

The FT published a report, widely picked up elsewhere, that the UK’s City Minister, Andrew Griffith, has criticised the FCA’s flagship Consumer Duty regulation. The report, if true, is interesting not only in respect of the upcoming Consumer Duty, but also because it is one of the early skirmishes over the direction that UK financial services regulation should take.

The Financial Services and Markets Bill (FSMB) is currently winding its way through Parliament, and it is likely to receive Royal Assent later this year. The legislation will require the FCA and PRA to review all on-shored EU financial services legislation and to decide whether to retain, amend, or scrap each rule. Unlike the Retained EU Law (Revocation and Reform) Bill relating to other sectors, the FSMB does not prescribe a time limit for the review and decision-making required of the FCA and PRA. The FSMB will also give the regulators a new secondary objective to consider competitiveness during its rulemaking and supervision of financial firms, returning in a roundabout way to the previous FSA-led regime.

The Government is clearly nudging the regulators towards a regime that, in the Government’s view, better balances economic growth and efficiency with the regulators’ (since 2008, predominant) concerns for safety and stability. The expectation is not necessarily for wide-ranging de-regulation, but for a reconsideration of the rules in tandem with a demonstration of Brexit dividends (for which, read: some divergence from common EU standards).

The FCA has responded immediately with a review of its asset management regime.  The Government has held back on introducing a controversial ‘call-in’ power in the FSMB, which would give the Treasury a firmer hand by which to steer the regulators’ actions. But the prospects of conflict are already there to be seen.

Exhibit A: the Solvency II reforms to release capital for insurers to deploy to longer-term investments. The Treasury was reported to be at loggerheads with the Bank of England’s more cautious stance. The Government won out and the Solvency II reforms will be driven through changes in the FSMB.

These disagreements are the practical consequences of a problem that the FSMB seeks to address. With the removal from UK financial services governance of the EU’s institutions, the UK must determine its own checks and balances to govern regulation. The lines will need to be drawn between legislation and regulation; the relative balance of power between Government, Parliament, and the regulators to set the direction and purpose of policy; and the accountability mechanisms needed to maintain fairness. It is not yet clear that the FSMB addresses all these questions or at least it does not address them all clearly. We will be publishing more on this soon.

But where does this leave the Consumer Duty? There is no suggestion in the reports that the Government will step in to stop or to moderate the FCA’s rules establishing the Consumer Duty, which are still due to take effect at the end of July 2023. The FCA is pushing forward with guidance to the market to prepare for and deliver compliance on time. Nonetheless, some regulated firms complain that compliance with the Consumer Duty and the costs that it entails, will mean withdrawing from or reviewing whether to provide certain services to retail consumers. Understandably, those businesses might feel they have a more sympathetic ear in the Government (with its predominant concern for international competitiveness and economic growth) than in the FCA (with its predominant concern for consumer protection and market stability). While the airing of these concerns might not stop the rules coming into force (although don’t entirely discount it), it could influence the way that the FCA applies the Consumer Duty, with a greater emphasis on its competitiveness objective than otherwise would have been the case.

Some regulated firms complain that compliance with the Consumer Duty and the costs that it entails, will mean withdrawing from or reviewing whether to provide certain services to retail consumers.

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