A FinTech view on the newly proposed Consumer Duty
By Rolf Merchant, Head of Member Policy Engagement at Innovate Finance
The FCA’s proposals for a new Consumer Duty is all about setting clearer and higher standards for financial services firms’ culture and conduct for engaging with consumers.
We have heard praise from our members for the Duty’s overarching aims: better customer communications, better customer service, better designed products that meet consumer needs, and fair value for products and services.
Indeed, many FinTech entrepreneurs set about their business with an outcome of having more informed, empowered customers, who have access to quality products that really meet their needs.
We really welcome the thrust of the new proposals, which will do much to enhance consumer protection.
Nevertheless, as we highlighted in our response to the FCA, there were a few areas where we think the new Duty should take into account the specific needs of FinTech.
Matching up with proportionality
The Consumer Duty proposals need to be implemented in a way that ensures smaller, innovative firms – FinTech startups and scaleups – aren’t saddled with disproportionate demands. Typically, newer entrants won’t have access to the same amount of resources and large compliance teams as the established incumbents, so may struggle to cope with greater regulatory requirements.
We’d like to see the new Duty support innovation and boost competition. In practice, that will mean making sure that the application of the new Duty is built into an effective and properly resourced ‘regulatory nursery’ and ‘scalebox’. The FCA needs to give smaller, newer entrants the support they need to navigate the demands on the Duty, and set reasonable expectations for firms based on their size and maturity.
Digital by default
FinTech is digital by nature. Customers engage with FinTech companies through digital channels. FinTechs argue that this has contributed to a high level of customer service and satisfaction.
B2C FinTech businesses have a proven track record of communicating more clearly, more succinctly and more quickly than incumbents. Technology-based communications and tools can facilitate better customer decision‑making. They can also help to review, test and adapt communications to ensure they are likely to be understood by the target consumers.
It’s crucial that the FCA commits clearly to supporting digital communications, including those based on AI, as a means to deliver and achieve the expected outcomes in the Duty. It would be extremely detrimental to FinTech if supervisors insisted upon ‘real life’ or face-to-face interactions to meet the Duty’s communications and advice outcomes.
Possible unintended consequences
If the new Duty imposed significant additional burdens on smaller, innovative firms, there could be a risk of worse outcomes for consumers in the long term.
It could lead to firms taking the decision to operate outside of the regulatory perimeter – either by focusing on unregulated activities or avoiding regulation in the UK. This runs the risk of consumer harm, the precise opposite of the FCA’s objectives.
There is another risk that the Duty leads to firms designing products that are simplistic and do not involve the need to give advice to consumers. The knock-on would be that only those who can afford independent advice, or have sufficient assets to be classed as ‘sophisticated investors’, will end up being able to access more complex, tailored products. This could undermine the drive to create more widely-available financial advice.
We could also see firms wanting to serve low-risk customers only. This would result in leaving more vulnerable customers excluded, since they are often considered higher risk.
One controversial area covered in the FCA’s proposals is the private right of action. The FCA has not explicitly said that it seeks to introduce a private right of action for breach of the Consumer Duty principles, but it is taking views on whether private right of action could support the Duty.
If a private right of action were to be added, there could be serious consequences for startups, since a private right of action would open the door to courtroom disputes about the Consumer Duty. Such litigation could be complex and costly for all parties. This would create a disproportionate cost for startups and scaleups. It could also lead to courts interpreting and making judgments based on the Duty which are both technically complex and inconsistent with the FCA’s own approach.
A final word on the Consumer Principle
At the heart of the proposed Duty is new wording for the Consumer Principle, which reflects the overall standards of behaviour the FCA expects from firms.
Two options have been advanced by the FCA: Option 1 – ‘A firm must act to deliver good outcomes for retail clients’; and Option 2 – ‘A firm must act in the best interests of retail clients’.
We think that Option 1 is far preferable, since it better reflects that final decisions are taken by customers and that the outcomes can be influenced but not always controlled by the firm. Option 2 implies that the customer has little or no responsibility for making decisions.
We do think that the FCA should however make clearer, through the rules and outcomes, that firms will be judged primarily on the actions taken in order to achieve outcomes and not on the outcomes themselves. In other words, a poor outcome for a particular customer should not be a breach of the Principles.
Regulation should provide effective consumer protection, trust and confidence in the market. At the same time, it needs to create an environment for the growth of innovative products and services that meet consumer needs and strengthen financial wellbeing.
The proposals for the new Consumer Duty are a step in the right direction for improving consumer protection. However, we have to make sure that it does not risk stifling smaller, innovative companies, or undermining the UK’s reputation for having the best regulatory environment for FinTech.
It’s now over to the FCA to consider the responses it has received. The FCA plans to set out details of any proposed new rules or guidance in a subsequent consultation, with an aim to do so by the end of 2021. Any new rules will be introduced before the end of July 2022.
P.s. our partners Hogan Lovells produced three helpful insight pieces on the new Duty. Please do have a read!