The Consumer Duty will help with managing the entry of bigtech firms into the UK retail financial service, ensuring a level playing field, the chief executive of the financial services watchdog has said.
The Consumer Duty is one of the big regulatory changes next year and applies to just about everyone under the Financial Conduct Authority (FCA) spotlight — whether a payments institution or an investment firm.
It is a new principle being championed by the UK regulator that requires firms to act to deliver good outcomes for retail customers.
“The Duty puts the onus on firms to act to deliver good outcomes for consumers: To act in good faith, avoid causing foreseeable harm and support customers to pursue their financial objectives,” said Nikhil Rathi, chief executive of the FCA, while addressing the UK Finance annual dinner.
Rathi’s speech reflects the FCA’s approach so far when communicating with concerned firms.
While the regulator is aware it will be challenging to implement, it was deemed necessary due to market failings.
“Parliament debated and explicitly mandated the Consumer Duty due to falling public confidence in retail financial services.
“We know that the Consumer Duty does not guarantee a good outcome. It leads firms to consider what that looks like and to take decisions in good faith,” he said.
The Consumer Duty timeline currently dictates that manufacturers, those behind the products being created, will need to complete their review process to meet the outcome rules by April 30 next year.
Rules will meanwhile apply for open products and services from July 31, 2023 and for closed services by July 31, 2024.
Rathi noted that the Consumer Duty provides one method for better managing bigtech’s entry into the financial services sphere.
“From masters of the universe to demi-gods of data, financial and bigtech firms will wield huge power over the direction of our lives,” he said.
Here, the FCA believes that the Consumer Duty, alongside the Senior Managers’ and Certification Regime, will offer the framework to respond quickly to bigtech innovations so that new products can be trialled with informed consent and with consumer interests front and centre.
“The Consumer Duty will also allow us to move more quickly to facilitate new developments, including AI, across sectors,” he said. “It will help us manage the entry of bigtech firms into the UK retail financial services industry, ensuring a level playing field.”
The FCA has so far taken an even-handed approach to bigtech’s entry into the market. For example, a recent consultation talked up its potential to disrupt payments, including enhancing competition to the card schemes.
However, the FCA also warned that in the long term, a competition risk may emerge as the market evolves, whereby bigtech firms control access and data to a significant portion of transactions through a monopoly on key mobile gateways.
Rathi also talked about what has been a centrepiece of the FCA’s work — financial inclusion.
Some have suggested that the consumer duty may result in financial exclusion, with firms unwilling to take risks or innovate.
“I know some argue that the Consumer Duty may prompt risk aversion in firms and even withdrawal of products for difficult to reach groups,” acknowledged Rathi. “We will be monitoring closely to make sure this does not happen.”
He added that while he wanted firms that are FCA-authorised to take full advantage of digitalisation, this must come hand in hand with making sure that market developments do not leave groups of consumers behind, particularly “those most vulnerable or the least digitally enabled”.
“That is why the Consumer Duty has a particular focus on vulnerable consumers and taking reasonable steps to ensure informed decision making,” he said.
By now, payments and e-money firms will have undoubtedly accepted that they will be in scope of the Consumer Duty, and need to comply with the new requirements that it sets out.
However, payments players have so far said they think this is a misguided move.
For example, earlier this year, a spokesperson for the Payments Association told VIXIO that they were “concerned” about the “applicability to payments firms”.
“It is really not at all clear that by adding an additional compliance burden to payments firms, we will improve the security or quality of payment transactions."