Reading between the lines of the FCA Mission

28 October 2016

By Sarah Isted

The Financial Conduct Authority (FCA) Mission Statement is an important development in the regulatory landscape in the UK. Three years after FCA came into being, with enhanced powers including an entirely new competition mandate, now is the right time for the FCA to consider the 'how'. With new CEO Andrew Bailey, the document provides some interesting insights.

As is often the case with consultations of this nature, what is not said is as important as what is. At a superficial first glance, firms will no doubt detect common themes - accountability, culture and vulnerable customers - but risk missing many of the bigger picture issues not so explicitly called out.

One new thorny point relates to the potential introduction of a firm-wide 'duty of care' to customers. The FCA is not necessarily in favour of this, but the Financial Services Consumer Panel actively pursued its inclusion in the Mission Statement. Many firms - particularly in the asset management sector - are already debating the impact of the fiduciary nature of their roles, and on their behaviours. The imposition of a duty of care would change the risk profile of all firms - and their obligations towards customers. But is this necessarily a bad thing? If consumers successfully benefit from an underlying duty of care, does this allow the regulator to be more explicit about a consumer's responsibility - their need to engage, make the right decisions and take responsibility for their own welfare?

Another interesting focus for me was around risk-based outcomes. Vulnerable customers clearly need more support than other more sophisticated clients; we see that in the differentiation between retail and professional clients today. But if, as the FCA proposes, you begin to also explicitly overlay a 'complex product' approach to this - so customers with complex products also deserve more protection, what market outcomes do you engineer?

I think there are two risks: firms might choose to de-risk and only serve non-vulnerable customers with mainstream products; but where does that leave vulnerable or complex customers? If firms choose to stay with this core client and product set, does it drive competition in a mass market for standardised products? Or does it become a race to the bottom based on brand and ultimately where cost become the key differentiator?

The FCA also clearly wants to shift the dial away from the large-scale redress payments we've seen in the past - from Payment Protection Insurance (PPI) and Interest Rate Hedging Products (IRHPs). The role of formal s.404 redress schemes, the Financial Ombudsman Service (FOS) and the potential legal implications of a duty of care all present an alternative view of how the FCA may consider redress in the future.

I remain of the view that the impact of the FCA's competition powers has not yet been understood by firms. The ability of the FCA to intervene market-wide could significantly alter the way firms work; while we have not yet seen wide spread market change as a consequence of the many market studies underway, the signposting of the FCA's competition tool kit is a timely reminder for firms.

The FCA is keen to hear views of all stakeholders over coming months. Clearly there is much detail and nuance to debate and consider; I recommend that firms (and senior staff within firms) engage, as this could be the blue print for our supervisory approach for many years to come. And remember - what is not said is as important as what is!

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