A New Consumer Duty — Innovate Finance response to FCA consultation (CP 21/36)

22nd February 2022 | Blogs

About Innovate Finance

Innovate Finance is the independent industry body that represents and advances the global FinTech community in the UK. Innovate Finance’s mission is to accelerate the UK's leading role in the financial services sector by directly supporting the next generation of technology-led innovators.

The UK FinTech sector encompasses businesses from seed-stage start-ups to global financial institutions, illustrating the change that is occurring across the financial services industry. Since its inception in the era following the Global Financial Crisis of 2008, FinTech has been synonymous with delivering transparency, innovation and inclusivity to financial services. As well as creating new businesses and new jobs, it has fundamentally changed the way in which consumers and businesses access finance.

Introduction

Innovate Finance welcomes the opportunity to respond to the FCA’s second consultation on a proposed new Consumer Duty (“CP 21/36”).

Innovate Finance considers that the UK’s retail financial services market benefits from a regulatory environment which promotes competition and innovation in the interests of consumers. Our members leverage the latest technologies and well-evidenced behavioural insights to ensure delivery of exceptional products and services and high standards of consumer care.

While we are supportive of the FCA’s aims for the Consumer Duty, we consider that further work is needed on the part of the regulator in order for this new Duty to drive the intended policy outcomes and avoid unintended consequences. We outline our key observations and recommendations below.

In reviewing the consultation paper and producing our response, we have consulted with Innovate Finance members, spanning a number of industry verticals including arrangements between Payment Scheme participants and payment services providers (“PSPs”) and other forms of regulated firms for indirect clearing; self-directed investment platforms; and regulatory technology firms.

Innovate Finance would be pleased to discuss this response in more detail with the FCA and/or facilitate discussions directly with our members.

A shift to outcome-based regulation in principle could promote innovation

We welcome a move from prescriptive rules on ‘how’ to comply, which increasingly do not reflect digital customer journeys nor deliver good outcomes for consumers, towards a focus instead on ‘what’ the customer experience or outcome should be.

It allows for innovation to achieve the same — or better — results for consumers and enables use of technology to provide tailored customer journeys.

Outcome-based rules should not be superimposed on top of duplicative, prescriptive rules

Outcome-based rules will not promote innovation if they are superimposed on top of existing prescriptive rules. The FCA is proposing to remove two existing handbook principles, but aside from that there is no indication of other regulatory requirements being removed in favour of outcome-based requirements. In CP 21/36, the FCA is introducing over 120 new pages of Handbook and non-Handbook requirements for firms.

In advance of the introduction of the new Consumer Duty, we recommend that there be a thorough, post-Brexit review of FCA retail consumer regulation to identify existing prescriptive rules which could be removed when the Consumer Duty is introduced.

Successful implementation of the new Duty will require a significant change in culture, methodologies and skills by FCA supervisory and enforcement teams

Successful implementation of the new Consumer Duty relies on a prerequisite that there be a significant change in culture, methodologies and skills by FCA supervisory and enforcement teams.

The approach to supervision and enforcement of an outcome-based regime will require new ways of working to be developed at the FCA — and we encourage the regulator to share details of its new ways of working and the evaluation framework to assess firms’ compliance with the new Duty, in the interests of transparency.

New ways of working can only be successful if accompanied by a culture (behaviours and incentives, at all levels of the organisations) that supports the new regime and the right capability, in terms of skills, knowledge and resources.

To engender confidence with the FinTech community and wider financial services industry, it will be imperative that the FCA demonstrates upskilling of its teams. The pace of change in technology and the market means it is difficult for ‘vertical’ supervisory and other teams to keep up with change. A wider understanding of innovation and the markets being regulated needs to be embraced across all teams, not just at leadership levels and in innovation teams.

This is particularly important given the FCA’s announcement that it reformed its decision-making powers, so that it can take faster and more effective decisions for consumers, markets and firms. In practice, this means that senior managers can trigger criminal and civil actions against firms, without the need in many cases for escalating upwards to the Regulatory Decisions Committee (“RDC”). We remain concerned that without the requisite knowledge and training for FCA senior managers, and without the benefit of challenge by the RDC, it could result in an unfortunate “shoot first, ask questions later” approach. If the regulator were to misfire in its approach in relation to the new Duty, say when a FinTech was in the lead up to an Initial Public Offering (“IPO”), it could have serious ramifications.

Further, we query how the FCA will be able to embed the new Duty internally “within existing resources”. In our view, successful implementation of the new regime will require significant resources on the part of the regulator.

Regulated firms need evidence that these changes — culture, skills, resources, etc — will be introduced effectively at the FCA before they can have full confidence in the Consumer Duty regime. We invite the FCA to share its accompanying change programme to implement and embed the new regime internally to provide assurance to industry.

The cost benefit analysis is not robust and does not fully consider the impact on competition, new entrants and scale-ups

The new Consumer Duty is one of the most significant proposed policy interventions from the FCA in recent times.

We would invite the FCA to fully quantify the benefits arising from the new Consumer Duty, and fully quantify the key assumptions underpinning the analysis. We also note the absence of the metrics by which the FCA proposes to measure the benefits under its new data-driven approach.

Separately, in our response to HM Treasury’s consultation on the Future Regulatory Framework Review, we have explained why effective cost benefit analyses are critical to ensure that regulators’ powers are used in an appropriate and proportionate manner, and we set out several recommendations to enhance future cost benefit analyses. In particular, we recommend that a formalised, cross-regulator approach to cost benefit analyses is developed (based on HM Treasury’s Green Book) and applied to ensure consistency.

The proposals have unintended consequences for vulnerable customers and financial inclusion

A report by Frontier Economics (July 2021), which was commissioned by the FCA Practitioner Panel, flagged a number of unintended consequences from the FCA’s policy intervention:

“Firms are likely to proceed with a view that regulatory risks have increased, which will influence their decision-making. Some marginal decisions that today lead to an offer to a customer may in future lead to the offer not being made, and in some cases, the aggregate effect of these decisions could be to reduce availability for particular customer groups, or to pull back from certain product areas. It is plausible that this may be more likely for vulnerable customer groups.

[...] there will be wider risks and policy considerations around support for vulnerable customer groups, financial inclusion and the ‘levelling up’ agenda, and the international competitiveness of the UK Financial Services sector.”

In light of this, we would again invite the FCA to quantitatively evidence (as part of an updated cost benefit analysis) the expected welfare gains for retail consumers as a result of the new Consumer Duty regime.

The FCA should explore the extent to which Regulatory Technology “RegTech” and Supervisory Technology (“SupTech”) solutions can be deployed in support of the new Consumer Duty

Arguably, prescriptive regulations more readily lend themselves to machine-readable solutions and efficient, technology-based compliance. However, we consider that artificial intelligence (“AI”) and other technologies can aid compliance with outcome-focused regulation.

We would encourage the FCA to explore how best to enable and incentivise technology solutions — including through modifications to the Handbook. Innovate Finance would be pleased to discuss this in more detail with the FCA.

A consistent approach with the Financial Ombudsman Service (“FOS”) is required

Our members’ experience points to the lack of consistency between FCA and FOS interpretation of regulation, in the context of adjudication. The FCA’s overlapping and interdependent obligations for all firms in the chain of consumer services, particularly certain duplicative obligations on Manufacturers and Distributors in relation to the new Consumer Duty outcomes, we expect will create more ambiguity and uncertain outcomes for firms in FOS rulings. While the FCA states that firms need only be responsible for their own actions, the duplication of liability for price and value in particular provides FOS grounds for joint liability. This incoherent application of FCA rules sets unhelpful precedents and imposes new requirements for firms to manage, broader than those contained in the Handbook. The quasi-regulatory requirements arising from FOS’ findings translate to uncertainty and unpredictability from a compliance standpoint, which start-up and scale-up firms find costly to manage.

Our members are concerned that while the FCA believes that the wording of the consumer principle is not expected to result in different standards of expectation, there remains uncertainty around future FOS interpretations. These concerns were also echoed in the Frontier Economics report.

Implementation should be over a two- to three-year period

We recommend that firms be given a two- to three-year transition period to reach compliance with new Consumer Duty; firms cannot start implementation until they have certainty about the requirements to which they will be subject.

Our members’ feedback points to the fact this will be a significant undertaking in terms of resources and costs involved. Further, the FCA should be mindful of competing pressures on firms’ capacity to implement the Consumer Duty — particularly, concurrent regulatory change requirements.

Moreover, as the regulatory perimeter widens in scope to cover new products and services — with legislation and regulation on the horizon to create a new regime for Buy Now Pay Later (“BNPL”) providers, for example — we would urge the FCA to ensure that new regulatory regimes are aligned and introduced in a way that does not cause unnecessary burden to innovative FinTech firms.

Lastly, as noted above, significant change will also be needed within the FCA and the implementation timetable should allow for a comprehensive change programme within the regulatory teams to provide industry confidence in the new regime.

Consultation Paper questions and responses

Q1: Do you have any comments on the proposed scope of the Consumer Duty?

We consider that the obligations of firms within the supply chain of a product or service should be proportionate to their ability to influence the outcomes of retail customers. As such, we would urge the FCA to clarify and revise its expectations for Manufacturers and Distributors — please see our comments in response to question ten for further detail.

We recommend that the Consumer Duty be owed primarily to whomever a firm ultimately contracts with and that it extends to others only where harm is reasonably foreseeable, there is sufficient proximity and it is fair, just and reasonable for the Consumer Duty to apply.

We would also urge the FCA to clarify further in the non-Handbook guidance what responsibility retail consumers retain for their own decision making.

Q2: Do you have any comments on the proposed application of the Consumer Duty through the distribution chain and on the related draft rules and non-Handbook guidance?

We note that the draft rules include parallel obligations on both the Manufacturer and Distributor to take action following their respective review of a product to mitigate any further harm to a customer. See, for example, the similar requirements placed on both Manufacturer and Distributor under PRIN 2A.3.8R and PRIN 2A.3.24R, respectively.

On an operational level, it will be difficult to reconcile these two competing obligations if Manufacturer and Distributor perform their own reviews and come to different conclusions on the necessary steps to prevent harm. In any commercial contract between Manufacturer and Distributor, each party would need to have the right to take remedial action to mitigate the harm. Where they form conflicting views on the actions to be taken, it is difficult to see how both Manufacturer and Distributor could comply with its own obligations under the PRIN 2A.3 without terminating the arrangements.

We urge the FCA to share further guidance on how Manufacturer and Distributor should work together to mitigate harm before the remedial action must be carried out. As drafted, the obligation is for each party individually to first perform the mitigation and then to inform each other person in the distribution chain.

Q3: Do you have any comments on the proposed application of the Consumer Duty to existing products and services, and on the related draft rules and non-Handbook guidance?

We note the draft rules and non-Handbook guidance regarding existing products, and it is our understanding that where a firm has “vested contractual right” the rules do not require that firm to waive those rights. For example, PRIN 2A.4.24R which sets out this exception where the firm would otherwise be required to take action following its review of the value assessment of a product.

We would welcome further or revised guidance on the interpretation of vested rights. We note that the guidance, for example in PRIN 2A.4.25G, refers to “payments already due under the terms of the contract”. We take this to mean any right to payment that existed at the formation of the contract, even where that sum has not yet become payable. For example in a fixed term loan agreement with twelve monthly repayments entered into before the rules come into effect, we would consider all twelve repayments to be vested rights at the formation of the contract, even where each repayment does not become due and payable until its relevant monthly repayment date.

The reference to “payments already due” is likely to include debts which have accrued at the time the rules come into effect, but may exclude debts or payment rights which are conditional on future triggers or events. A clearer distinction may be to rephrase the guidance to refer to “payments already agreed under the terms of the contract” which removes from the guidance the need for overly legalistic determination of the date of accrual of a payment.

Q4: Are there any obstacles that would prevent firms from following our proposed approach to applying the Consumer Duty to existing products and services?

We consider that “reverse engineering” the respective obligations of firms involved in the chain of production and distribution, including re-negotiation of agreement terms and liabilities, will require longer to implement than agreeing obligations for new products and services.

Q5: Do you have any comments on the proposed Consumer Principle and the related draft rules and non-Handbook guidance?

We would request that the FCA make clearer in either rules or guidance how the Consumer Duty will be applied to self-directed investment platforms (execution only, non advisory) or simple products, such as payment or deposit accounts. Whilst there is guidance in some places which is instructive, for instance 2A.2.9G and 2A.2.12G, many of the rules and guidance, when applied to execution-only firms or simple products, are challenging to understand. For example:

Acting in good faith, and "product design"

The proposed guidance at 2A.2.3 (examples of where a firm is not acting in good faith) is exceptionally broad, especially as it relates to product design. We recommend that the FCA clarify the intent; it is not clear how firms will be able to evidence compliance with 2A.2.3G(a) in the context of product design decisions. For example, we consider that similar wording to that in proposed 2A.2.15G(1) could achieve the same aim and provide further clarity to firms by having a more singular standard to adhere to: “ensuring that all aspect of the design, terms, marketing, sale of and support for its products or services are designed to meet and not frustrate the objectives and interests of its retail customers”.

Acting in good faith, and the meaning of "inappropriate"

In 2A.2.3(b), we would urge the FCA to clarify the meaning of the word “inappropriate” and “manipulate” in this context, to ensure that normal marketing (which inherently is trying to create demand for products) is not covered, especially where it is in compliance with the firm's financial promotions obligations. The word "inappropriate" is inherently subjective, and we recommend that the FCA provide further clarity on how this should be assessed by firms as part of their compliance programme.

A formal definition of "foreseeable harm"

Regarding "foreseeable harm", we appreciate the guidance in 2A.2.9G that a firm is not expected to prevent all harm, but would request that this is reflected in the rule itself (at 2A.2.5), for example by a formal (rules-based) definition of what “foreseeable harm” is (and is not) in this context, which takes into account the guidance.

Financial Promotions and the Consumer Duty

We recommend that the FCA provide further guidance on how firms are expected to structure their processes to comply with the rules relating to financial promotions, and the rules relating to the Consumer Duty, with respect to communications or marketing. This will introduce a considerable compliance burden on firms with multiple regulatory requirements to achieve similar aims. The new Consumer Duty requirements represent, we consider, a higher bar. Some of our members query whether the FCA may suspend the financial promotion obligation where the Consumer Duty obligations apply.

"Unless it knows or could reasonably be expected to have known otherwise"

We recommend that the FCA provide guidance on what it means by “unless it knows or could reasonably be expected to have known otherwise” in the context of 2A.2.12G, and firms providing execution-only services or simple products. Firms providing execution only services may be narrow in their product offering, which inherently may not take into account all circumstances for a particular retail investor or retail investors generally. For example a share trading platform may not know, and can not be expected to know or monitor, the broader financial objectives of its customers and/or take a view on whether shares generally, or any particular share, is aligned with their financial objectives. Likewise, banks that provide payment or deposit accounts free from credit or investment services will not have the same level of information or any other need to obtain this level of information.

Information to make informed decisions

In 2A.2.15G(2), we would request that the FCA provide more context on how this would apply to execution-only (self-directed) platforms, for instance a platform allowing customers to buy or sell listed shares and exchange traded products such as exchange traded funds. In that context, it is very unclear what “the information and support they need, when they need it, to make and act on informed decisions”. Some of our members have queried whether this includes, for example, market data, professional third party research, or advanced charting tools. All of these aspects come at significant cost and would require significant work to provide, which may not be commercially viable. Likewise, 2A.2.16G does not appear viable for execution-only platforms — for example, if a customer writes to customer support expressing a specific financial objective, the firm then “becomes aware”, but the execution-only platform is not in a position to support that objective. Similarly, the “reasonable expectations of retail customers” in 2A.2.20 may be contrary to the (clearly described) boundaries of an execution-only product; for example, customers may expect advice, or guidance, or more — none of which is offered by execution-only platforms.

Q6: Do you agree with our proposal to disapply Principles 6 & 7 where the Consumer Duty applies?

Innovate Finance agrees with this proposal. In our view, outcome-based rules will not promote innovation if they are superimposed on top of existing prescriptive rules. We note that in CP 21/36, the FCA is introducing over 120 new pages of Handbook and non-Handbook requirements for firms.

The FCA must also clarify the relationship between the Consumer Duty and industry codes of practice.

Q7: Do you agree with our proposal to retain Handbook and non-Handbook material related to Principles 6 and 7 should remain relevant to firms considering their obligations under the Consumer Duty?

We would reiterate our call for the regulator to review the body of UK retail consumer regulation in the Handbook and remove duplicative requirements and guidance, before the introduction of the new Duty.

Some examples of rules and guidance that could be replaced by the Consumer Duty include (non-exhaustive list):

Various sections of the Consumer Credit Act (1974) (“CCA”), including prescriptive rules on communication with customers, contract forms and communication of late payments. In many cases, better outcomes can be achieved for consumers by reliance on the Consumer Duty and scrapping ineffective, prescriptive ‘tick box’ rules. While we recognise that making amendments to the CCA is not within the FCA’s gift, we note that when Parliament repealed some CCA requirements they were then replaced by rules within the FCA Handbook.
- Related to the CCA rules on notices of sums in arrears (“NOSIA”), for example, sections of the FCA’s consumer credit sourcebook (“CONC”) could be removed – for example, CONC 7.17. Where consumers have entered into a forbearance arrangement with their lenders, the application of NOSIA rules can cause confusion and distress. In this scenario, firms compliance with prescriptive NOSIA rules is ostensibly at odds with the consumer understanding and good customer outcomes promoted under the Consumer Duty regime.
Financial promotion obligations where the consumer duty obligations apply.

Q8: Do you have any comments on our proposed cross-cutting rules and the related draft rules and non-Handbook guidance?

We refer to our response to question five.

Q9: Do you have any comments on our proposed requirements under the products and services outcome and the related draft rules and non-Handbook guidance?

We refer to our response to questions two and ten.

Q10: Do you have any comments on our proposed requirements under the price and value outcome and the related draft rules and non-Handbook guidance?

We note the FCA’s change of approach (between its first (CP 21/13) and second consultation (CP 21/36)) in respect to the requirements under the price and value outcome. The approach in CP 21/13 was to apply requirements under the price and value outcome to “Firms”; whereas the approach in CP 21/36 creates separate obligations for “Manufacturers” and “Distributors”.

Our members consider that the separation of the price and value outcome obligations for Manufacturers and Distributors is necessary and appropriate. However, we are concerned that the obligation for Manufacturers to assess the total price paid by the retail customer in the assessment is disproportionate to the nature of a Manufacturer’s role, will be unachievable in many cases, and in some cases may possibly be illegal.

Our members consider that it will not be feasible, in the majority of cases, for Manufacturers to obtain the information in line with the requirements under 2A.4.7 (3)(a)-(d):

“(3) the expected total price to be paid by the retail customer or that may become due from the retail customer. The expected total price includes:

(a) the price paid by the retail customer on entering into a contract for the product;

(b) any regular charges or fees payable over the lifetime of the product, for example an annual management charge;

(c) any contingent fees or charges, for example, administrative charges for changes of address, charges falling into arrears on a loan, or charges for transferring investments; and

(d) any non-financial costs the retail customer is asked to provide to the firm”

We consider that it would be inappropriate, and in many cases impossible, for Manufacturers to have oversight of Distributors’ fees and charges in every instance, and it will create immense confusion for the industry to try to identify and quantify the information pursuant to 2A.4.7 (3)(d). We would emphasise that only the distributing firm has sight of the end price, including all fees and charges, paid by the retail customer. Further, the requirement that the Manufacturer has oversight of the total price paid is redundant: Distributors are already subject to a range of FCA rules and Principles governing fees and charges, in addition to the Distributor’s own duty of care price and value obligations.

We also flag up the impossibility of Manufacturers being able to satisfy the obligation in 2A.4.7(4), which requires Manufacturers to assess:

“any characteristics of vulnerability that retail customers in the target market display and the impact these characteristics have on the likelihood that retail customers may not receive fair value from its products.”

This would require the Manufacturer to have a direct relationship with the end users, and it replicates the obligations that more fittingly rest on the Distributor.

Moreover, we are concerned by the competition and commercial law ramifications that flow from requirements under 2A.4.7(3). While the FCA has asserted in its non-Handbook Guidance (see 6.4) that the intention is “not to set prices, and the proposals will not have this effect” it is difficult to see how these requirements would not give rise to some form of price setting. This raises significant legal and commercial issues:

Restrictions on the disclosure of commercially sensitive information. We consider that the FCA’s new obligations would require the sharing of commercially sensitive information between firms, which may be a breach of confidentiality and inappropriate commercially if a Distributor is distributing its proprietary products alongside third-party products.

Competition law breaches. A Manufacturer’s oversight of a Distributor’s pricing may give rise to a breach of competition law in creating vertical agreements in some sectors. Further, a Manufacturer’s oversight and control over multiple Distributors’ pricing may inadvertently place the Manufacturer in a “dominant position”. Taking banking as a service (“BaaS”) as an example: there are only nine UK clearing firms, and several offer BaaS, for which the clearing bank is the Manufacturer. The FCA’s proposed requirements would result in clearing banks potentially controlling the pricing for millions of retail deposit accounts.

In light of the above, we would urge the FCA to amend 2A.4.7(3) and remove the obligation in 2A.4.7(4). We recommend that 2A.4.7(3) be amended such that there is only a requirement for Manufacturers to assess whether a Distributor’s overall cost structure and non-price value considerations are fair to consumers. It is our view that the responsibility to ensure the end-user price received is not of poor value should rest only on the Distributor.

Our members consider that the position outlined in the FCA’s non-Handbook Guidance at 6.34 provides an appropriate apportionment of responsibility for price and value:

“All firms in the distribution chain are responsible for the value of the prices that they control. However, the firm at the end of the distribution chain has responsibility to ensure consumers do not receive poor value. Fees charged by different firms along the distribution chain might together result in a higher overall fee that does not represent fair value for consumers.”

This position is further supported by PRIN 2A.4.15, which sets out a clear staging of value assessments to be undertaken by the Manufacturer and Distributor — the PRIN language implies that Manufacturers have a more limited role in assessing pricing structures.

Q11: Do you have any comments on our proposed requirements under the consumer understanding outcome and the related draft rules and non-Handbook guidance?

We are extremely supportive of the principle that firms’ communications should support and enable consumers to make informed decisions about financial products and services. Many of our members leverage behavioural design insights to shape their customer journeys throughout the full product lifecycle, so that customers are given the information they need, at the right time, and presented in a way that is readily understood.

We remain concerned that the interplay of the new consumer understanding outcome and existing retail consumer legislation and regulation — such as the Consumer Credit Act — could give rise to uncertainty for both consumers and firms.

The Frontier Economics report commissioned by the FCA Practitioner Panel provides an example with reference to the CCA:

“A customer has requested an unsecured loan and the provider has sent both detailed terms and conditions (to comply with the CCA) as well as a simplified key terms document (to comply with the Duty). The customer asks if they need to read both the detailed and simplified terms: does the provider respond to confirm that the customer does need to read both sets of terms? And if so, what purpose did the simplified terms serve? Are providers able to rely on a term that is not in the simplified terms?”

In addition, the CCA and FCA Handbook NOSIA rules could undermine the consumer understanding outcome. The NOSIA rules require lenders to send a letter where consumers fall two or more payments behind on their loans. Lenders must also issue subsequent notice of sums in arrears (“SNOSIA”) every six months after the initial NOSIA, until consumers are up to date with their repayments. The wording of the NOSIA and SNOSIA is prescribed by law.

Lenders are required to send these notices even where consumers have entered into an agreed forbearance arrangement. For consumers with an agreed forbearance arrangement with their lender, particularly those consumers with characteristics of vulnerability, the receipt of SNOSIAs can cause unnecessary confusion and distress — ultimately giving rise to poor consumer outcomes.

We recommend that the FCA provides further guidance on ‘what good looks like’ for firms as they balance the need to meet prescriptive regulatory and/or legislative requirements and consumer understanding outcomes.

As noted in question 7 above, these are some examples of existing ‘prescriptive’ rules which should be removed when the Consumer Duty enters into force — to avoid duplication, confusion, and unsatisfactory consumer outcomes.

More broadly, we note the FCA’s 2019 report to HM Treasury regarding the CCA, and Innovate Finance is separately calling for CCA reform.

Q12: Do you have any comments on our proposed requirements under the consumer support outcome and the related draft rules and non-Handbook guidance?

We have no comments on the proposed requirements and related rules and non-Handbook guidance.

Q13: Do you think the draft rules and related non-Handbook guidance do enough to ensure firms consider the diverse needs of consumers?

We note the new proposed rules and related non-Handbook guidance, in addition to the existing Vulnerability Guidance. While this is comprehensive, we remain concerned that elements of the Consumer Duty do not overlay well with elements of the existing body of retail consumer related regulation and legislation — see our comments regarding the CCA, in response to question eleven, for example.

In order to support firms' efforts as they endeavour to best meet the needs of customers with characteristics of vulnerability, we would urge the regulator to issue further guidance as to how firms balance the Consumer Duty requirements alongside existing prescriptive regulatory and/or legislative requirements that may inadvertently give rise to poor customer outcomes.

More broadly, we note that the FCA wishes firms to consider other protected characteristics, beyond vulnerability, and we await the forthcoming consultation on advancing diversity and inclusion in the financial sector.

Q14: Do you have views on the desirability of the further potential changes outlined in paragraph 11.19?

We consider it may be beneficial for the FCA to explicitly make reference to protected characteristics under the Equality Act (2010) in its rules and guidance, so as to avoid confusion and conflation with vulnerability. We recognise there can be interplay between protected characteristics and characteristics of vulnerability, and we recommend that the regulator clearly articulate its expectations for firms.

Q15: Do you agree with our proposal not to attach a private right of action to any aspects of the Consumer Duty at this time?

Innovate Finance agrees with the FCA’s proposal not to attach a private right of action (“PROA”) to any aspects of the Consumer Duty at this time, and we recommend that this is not introduced at a later stage.

The PROA could open the door to complex and costly litigation about the Consumer Duty. Firms could also face an increased risk of collective actions, in circumstances where complaints about a breach of the Consumer Duty could readily arise across entire product or consumer classes. Further, claims management companies could also create significant costs that damage smaller providers, even if the cases are not upheld.

In addition, a PROA could lead to courts interpreting the principles and handing down judgements that are (a) technically complex and (b) inconsistent with the original aims behind the policy intervention by the FCA. Navigating a body of case law on top of regulatory and legislative requirements would be a significant challenge for prospective market entrants and start-ups.

Firms need certainty that the FCA approach will not be reinterpreted — whether by the FOS or by courts under a PROA. We are concerned that PROA could significantly deter product innovation and competition by start-ups and scale-ups and would add a layer of uncertainty to the Consumer Duty.

Q16: Do you have any comments on our proposed implementation timetable?

Our members’ feedback points to the fact this will be a significant undertaking in terms of resources and costs involved. Additionally, the FCA should be mindful of competing pressures on firms’ capacity to implement the Consumer Duty — particularly, concurrent regulatory change requirements.

As noted above, significant change will also be needed within the FCA and the implementation timetable should allow for a comprehensive change programme within the regulatory teams to engender industry confidence in the implementation of the new regime.

Q17: Do you have any comments on our proposed approach to monitoring the Consumer Duty and the related draft rules and non-Handbook guidance?

With reference to regulatory approach, we consider that successful implementation of the new Consumer Duty relies on a prerequisite that there be a significant change in culture, methodologies and skills by FCA supervisory and enforcement teams.

To engender confidence with the FinTech community and wider financial services industry, it will be imperative that the FCA demonstrates upskilling of its teams. The pace of change in technology and the market means it is difficult for ‘vertical’ supervisory and other teams to keep up with change. A wider understanding of innovation and the markets being regulated, need to be embraced across all teams, not just at leadership levels and in innovation teams.

Further, the FCA should also explore the extent to which RegTech and SupTech solutions can be deployed in support of the new Consumer Duty. We consider that AI and other technologies can aid with the compliance and monitoring of outcome-focused regulation.

To that end, we would encourage the FCA to explore how best to enable and incentivise technology solutions, including through modifications to the Handbook. Innovate Finance would be pleased to discuss this in more detail with the FCA.

Q18: Do you have any comments on our proposal to amend the individual conduct rules in COCON and the related draft rule and non-Handbook guidance?

We have no comments on this proposal.

Q19: Do you have any comments on our cost benefit analysis?

The new Consumer Duty is one of the most significant proposed policy interventions from the FCA in recent times.

We do not consider the cost benefit analysis to be robust, and the regulator has not considered fully the impacts on competition, new entrants and scale-ups. Costs for regulated firms will increase significantly: there will be one-off costs to understand the new requirements and develop gap analyses; and costs to review and modify existing products, customer communications and journeys. Moreover, the FCA expects firms to assess and evidence the extent to which and how they are acting to deliver good customer outcomes — this translates to material outlays to create and maintain the new evidential monitoring and reporting.

In light of this, we would invite the FCA to set out the counterfactual in quantitative, rather than qualitative terms; fully quantify the benefits arising from the new Consumer Duty; and fully quantify the key assumptions underpinning the analysis. We would also urge the FCA to publish the key metrics of success that it will be monitoring.

We would be pleased to discuss with the FCA the impacts that the proposed Consumer Duty will have on the FinTech ecosystem.

Q20: Do you have any other comments on the draft non-Handbook guidance?

We urge the FCA to amend the non-Handbook guidance to make clear the position for agency banks and other indirect access providers (“IAPs”).

The FCA sets out in paragraph 3.26 where the lines are to be drawn in terms of application of the Duty to firms that do not material influence over the design or operation of retail products or services — on this basis, agency banks and other IAPs fall out of scope.

The non-Handbook guidance should therefore be updated to reflect this explicitly, and mitigate the risk of confusion for consumers and firms alike.

Separately, we would also urge the FCA to clarify further in the non-Handbook guidance what responsibility retail consumers retain for their own decision making.

Q21: Can you suggest any other examples you consider would be useful to include in the draft non-Handbook guidance?

We refer to our answers to questions five and twenty.