Get Ready Now: FCA Consumer Duty Proposal Looms Large For Payment Firms

June 14, 2022
The UK's Financial Conduct Authority (FCA) is on the cusp of outlining its final Consumer Duty proposals, which are due to be introduced next year, as experts express concerns it may be a bumpy ride with many firms not prepared.

The UK's Financial Conduct Authority (FCA) is on the cusp of outlining its final Consumer Duty proposals, which are due to be introduced next year, as experts express concerns it may be a bumpy ride with many firms not prepared.

The UK’s financial watchdog is due to introduce one of its most radical pieces of policy yet in 2023.

It stems from a consultation paper published last year, which looked at how the FCA intended to reduce the impact of consumer harm in financial markets.

The FCA outlined a package of proposals for what it has named the "Consumer Duty", aimed at driving a change of culture in firms.

The expectation is that when the new Consumer Duty is finalised, firms will step up and put consumers at the heart of what they do.

"When I read the consultation, unlike open banking, I thought that this is a piece of policy where the name makes sense,” commented Dan Scholey, chief commercial officer at Moneyhub.

It does not need to be onerous but organisations do have a duty of care, he pointed out. “They're coming at it from a position of knowledge. People either don't have the knowledge or the time to manage finances as well as they should, and are left on their own to fend for themselves.

“What the Consumer Duty suggests is that they have more access to information, and it encourages good practices instead of exploitation,” he said.

However, firms are only just waking up to the prospect of new, much tighter, compliance rules, according to market insiders.

“The industry is generally considering the implications and changes that may be required to the proposed Consumer Duty,” said Hari Bhambra, global head of compliance solutions at Apex Group.

The common concerns relate to consequential costs of increased compliance, any reduction of product offerings and impact on market positioning, she continued, adding that firms that have a commitment to good governance, transparency, clear communications and a focus on client outcomes may welcome this change in regulatory focus.

Yet, considering the wide scope of the rules, firms may also be weighing up just how they fit into the new policy. Between the first consultation in May last year and the latter published at the end of the year, the FCA has increased the scope to further than intended, bringing in small and medium-sized enterprises.

"My sense is that the more sophisticated legal and compliance functions are certainly waking up to the fact that this will take quite a bit of work, not least in determining whether and how the various rules and guidance under the duty apply to them,” said Max Savoie, partner at Sidley Austin, who works with payments and electronic money institutions.

It will have an impact on a variety of different business models and there are probably a lot of firms that have not yet fully come to terms with the impacts, he suggested. “It will be challenging for firms to work through that, and how to interpret and comply with the rules in practice.”

In particular, Savoie suggested this could bring about changes to product development, as well as distribution processes. It is clear that the FCA expects that the duty itself needs to be embedded within the firm and its culture, including in its business teams and management.

“In other words, this is not just a legal and compliance issue; senior management should be fully engaged."

Kate Robinson, principal at Avyse Partners consultancy, agreed. “It is essential that senior leadership teams take the time and put in the effort to understand what the Consumer Duty is asking them to do,” she said. “This is the time for firms to test their moral compass and ask some potentially difficult questions about their business model and the way they operate, and to do this successfully senior leaders need to understand what the Consumer Duty is seeking to achieve.”

Commenting on the proposal in general, Robinson noted that this is somewhere they have been before and things did not necessarily go very well that time.

“Going back quite a few years, the regulatory approach was principles based with the expectation that firms would be able to interpret this and deliver good outcomes for customers. However, many struggled with the lack of clarity and guidance on how to behave,” she said.

It seems now that regulation has come full circle, but this time the regulator appears much more joined up internally on its approach to implementation. “We have seen firms receiving letters on the ‘use it or lose it’ permission initiative and clearly the FCA wants to move quickly and decisively.

“We are also seeing firms seeking authorisation being subject to very detailed assessments of their business model, processes, and controls,” she added. “From our perspective, the FCA is prepared to play tough. You, therefore, need to be prepared and citing a lack of guidance will not equal a get out of jail free card.”

But should payments firms be in scope?

Payments firms are due to be included in the Consumer Duty, once it becomes enforceable. However, there has been pushback in the industry.

"Consumer Duty is something that those in the payments industry are very concerned about, and our minds haven't changed since last year when it comes to the applicability of Consumer Duty to payments firms,” said Tony Craddock, director general of the Payments Association.

The FCA is using a broad brush to solve a problem that really does not exist within the payments sector, he said. “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."

"The solution that the FCA has come up with will apply to all firms in the payments industry and will definitely result in additional costs,” Craddock said. “While the purpose of Consumer Duty is to protect consumers, we believe that the additional compliance burden on payments firms could actually prevent consumers from getting the best products, because payments firms will have lower profitability, and this will feed through into less investment in new and better products."

Yet, Scholey suggested that it opens up more opportunities for businesses than it closes down. “It will allow people to get access to quality services, so will delight consumers. It is only a threat to those that don't get organised.”

Some have not even read it yet, he warned. “My biggest worry is that there is a lack of awareness. You'll always have people leaving things too late, but for those that are on the front foot, this is a real opportunity to deliver much more appropriate, tailored products."

The Payments Association, however, is seeking for the FCA to exempt or carve out firms, Craddock said. “As an industry, we do our best to protect consumers but believe that the current level of compliance and reporting is adequate."

Firms are split on the need for a new Consumer Duty, acknowledged Savoie. “The industry as a whole understands the importance of providing services that are suitable for consumers and for communications to be clear, fair and not misleading.”

However, there are quite a lot of questions still from the sector about whether this regime is needed, he indicated. “People are asking what specific harms the FCA wants to address in relation to payment services and e-money that aren’t covered by its existing principles and rules.”

For this reason, some in the sector take the view that the existing principles for business and the more targeted conduct of business rules under the Payment Services Regulations, the E-Money Regulations and the FCA Handbook are a better mechanism for dealing with consumer protection in the context of payments and e-money.

The payments industry could be seen as a victim of its own success, quipped Craddock. “We're now seen as systemically critical infrastructure, and are on the regulatory radar. As a result, payments is now on the regulatory radar and tighter regulations and reporting requirements are being enforced.”

“I do not believe that enough PSPs are anticipating this, and the additional burden that comes with it, and just hope that this does not prevent the continued growth of the payments industry,” he suggested.

However, the payments sector was unlikely the main driver for the Consumer Duty proposal, Savoie suggested. “What is interesting is that it shows the FCA is becoming more and more willing to apply universal standards to all regulated financial services providers, including those in the payments sector.”

Payment services and e-money were always governed under distinct regulatory regimes but are now being included with deposit taking, consumer credit, investment and insurance services under these new rules, he pointed out.

“We have seen this theme emerge over the past couple of years with the extension of requirements regarding wind-down plans and certain rules relating to marketing and customer communications. If this is the direction of travel, there may be more to come."

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