Speaker: Money and Pensions Service (MaPS) chair Sir Hector Sants

The FCA, in its consultation paper published in May of this year, proposed a new consumer duty to sit above and in tandem with the current principles. It would be designed to provide an overarching standard of conduct. In the FCA’s words the duty is designed to “put firms in the customers shoes” and to ask the question: “Would I be happy to be treated in this way?”

From MaPS perspective, to remind you our vision is: “Everyone making the most of their money and pensions”, we welcome this proposal. We believe the introduction of such a duty provides an opportunity to reset the relationship between firms and their customers and build on the positive developments we have seen in the marketplace post the financial crisis – particularly with regard to customers in vulnerable circumstances.

However, to be transformational, we believe there are some issues which will need to be addressed. I would highlight three:

1. Firstly, the need to avoid over complicating the regulatory framework. From my personal experience, good regulation only works if it is easily understandable by those who actually deliver the service. There is a risk that by layering the duty on top of the current principles this could actually confuse rather than help. It is not clear to me that we need a “super principle” as well as the existing principles, notably principles six and seven. Surely this new duty could replace the principles governing treatment of customers? The proposed change should be taken as an opportunity to simplify and not further complicate the regulatory framework.
   
2. Secondly, and fundamentally, there is a question of the balance between judging compliance by outcomes as opposed to compliance by a process. Modern regulatory thinking has emphasised the importance of judging by outcomes: “outcome-based regulation”. The idea is that this gives firms the responsibility of owning their own processes whilst making enforcement judgements easier, as outcomes are often clearer and easier to retrospectively assess than compliance with processes.
   
   This approach is clearly helpful to regulators. It is better than a myriad of detailed rules, which can often be circumvented by company lawyers. However, in relation to the consumer duty there is a risk – namely the long-term outcome for the consumer will often depend on many externalities. In particular, consumers’ individual circumstances can change. Therefore, if outcomes are the principal determinant for compliance and thus redress, the long-term and uncertain nature of forecasting outcomes can lead to a very risk adverse approach by firms, particularly with regard to servicing customers in vulnerable circumstances. There is thus a significant risk that judging the consumer duty by outcomes will lead to a further withdrawal of services to these customers.
   
   The solution to this risk is probably to create more of a hybrid system where poor outcomes are seen as an indication, rather than a determinant, of non-compliance by firms. A key test should be that if at the time, the advice is offered in good faith, and with fair consideration of the consumer’s circumstances, this should be seen as the ultimate test of compliance rather than the long-term outcome of the transaction. The FCA proposes two potential formulations of the new duty – one centred on “best interests” and the other on “good outcomes”. We would argue that it would make most sense to combine the two, so the duty would read: “a firm should act in the best interest of retail consumers in order to help ensure good consumer outcomes”. This would illustrate the link between the quality of input (firms’ conduct) and the quality of result (good consumer outcomes). This synthesis would also clarify that the customers best interest should act as the guiding principle throughout the product lifecycle.
   
3. The third issue goes to the heart of the MaPS mandate to build financial wellbeing. As a reminder we define financial wellbeing as:

Feeling secure and in control. It is about making the most of your money day to day, dealing with the unexpected, and being on track for a healthy financial future. In short: financially resilient, confident and empowered.

The current FCA proposal is focused on avoiding detriment rather than focusing on the more positive role of building individual financial wellbeing. The requirement to avoid harm is axiomatic to the definition of consumer protection but focusing primarily on this aspect risks presenting the new duty as primarily a negative set of expectations. A greater emphasis on the role of financial wellbeing would engage firms to think more holistically and creatively; positioning the new duty as a positive incentive to improve practices and contribute to the public good.

This switch in emphasis could be achieved through a redrafting of the cross-cutting rules. We would agree with the general intent of the FCA’s proposals for cross cutting rules but would suggest adding in the importance that offering /providing the product was consistent with the principle of promoting the consumer’s financial wellbeing over time. This also encourages the firms to think about the potential for harm over the longer term.

A final point in relation to the FCA’s proposals I would like to make is in relation to consumer responsibility. A fair and effective regulatory system certainly needs to recognise that wherever possible consumers need to take responsibility for their decisions – as set out in principle four – but this is only possible where the consumer is informed and equipped to make the right decision. This might therefore be the opportunity to modify principle four; to link this to firms fully discharging their responsibilities to provide clear information, and where relevant, advice. This would emphasise that consumers can only take responsibility for their decisions when firms provide the necessary information in an understandable format.

Before concluding may I make a wider point which this consultation highlights? For a regulatory system to succeed in its aims of firms promoting customers’ best interests and adopting practices designed to achieve that goal, we need a clear way of judging what is a good process. I have already argued that outcomes, whilst an indicator, are not the answer. The key question is: can we supplement outcomes with anything else?

This probably takes us in two directions. One is product regulation. Clearly if the allowable product suite is closely defined, good process is relatively easy to judge. The other direction brings us back to the question of revisiting the guidance/advice boundary. It can be argued that if the guidance was more personalised, more directive, and delivered by a non-commercial organisation then completing a guidance session might provide a mechanism for judging whether the individual was equipped and informed to make good decisions.

Both these questions are too large to be explored today but they do illustrate my concluding point.

The FCA’s consultation gives the financial services community an excellent opportunity to fundamentally reappraise the consumer protection framework and really take on board the lessons of the last few decades. The central lesson must be that a better system is rooted in having equipped and confident consumers, working with firms focused on the best interests of the consumer and looking to build their long-term financial wellbeing.

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