City firms are braced for one of the biggest shake ups of UK financial services regulation in a decade this week as the UK’s top watchdog unveils its new Consumer Duty to ramp up protection of savers and retail investors.
The Financial Conduct Authority will announce the package of reforms on Wednesday in a bid to usher in better safeguards across the financial services sector and clarify perceived blurred lines across areas like financial advice and the communication of products to consumers.
Legal experts said today the reforms could mark a watershed moment in financial services and ripple well beyond just retail finance firms.
“This regulation is one of the FCA’s most ambitious and far-reaching to date,” Ian Stott, Head of Financial Services at legal and compliance firm Konexo, told City A.M.
“Banks have been watching it closely to understand just where its borders lie, but many are still underestimating just how many in the financial services sector it will capture. It isn’t just retail banks.
“The regulator has been careful to keep the terms broad, and this will capture almost all of those with roads that lead to retail clients. This means wealth and asset managers are included too.”
Stott added that the new rules will require a significant amount of structural and operational reform at banks in order to meet the demand of the regulation.
“Banks will have to change the way their teams work, are structured and how they collect, collate, organise and evaluate data on their products,” he said.
The new rules are expected to require firms to implement a swathe of new procedures including governance – a member of the board must take responsibility and sign off on an annual outcomes report; a review of products and services to ensure compliance; a review of processes and procedures; and new staff training.
FCA needs ‘credible threat’
Analysts warned the success of the measures will depend on the regulator’s willingness to clamp down on firms that are breaking the rules as it ushers in the “biggest domestic regulatory overhaul in almost a decade”.
“If the Duty works as envisaged, it has the potential to lead to better informed consumers buying products and solutions, and receiving communications that are more appropriate for their needs and circumstances,” said Tom Selby, head of retirement policy at AJ Bell.
“However, for this to be achieved the FCA will need to demonstrate a credible threat of enforcement against those firms who already flout its existing rules.”
The FCA will also need to keep a close watch on claims management companies, Selby said, some of whom will “inevitably attempt to use the new requirement to chase spurious claims against firms.”
The new rules are set to come into force from April 2023 but the watchdog has faced pushback from some quarters over concerns it does not leave enough time for firms to implement new safeguards.
The Personal Investment Management and Financial Advice Association in February said “a nine-month implementation period is insufficient for firms to ensure the systems and processes they have in place are sufficient” and could open the floodgates to a wave of complaints.
Michaela Walker, Partner and European Head of the Financial Services Sector, Eversheds Sutherland, added that firms were poised to start introducing plans that had been long in the making since the government opened its consultation.
“Our expectation is that the FCA proposals will not have changed significantly since the CP as the regulator had clearly put a lot of work into mapping out detailed rules and guidance,” she said.
“What everyone is hoping for is more time to implement.”