Can the UK financial regulator really end rip-offs?

On July 31, the UK’s Financial Conduct Authority will introduce what is being billed as the biggest shake-up to financial regulation in decades.

Called the Consumer Duty, all FCA-regulated firms including banks, investment platforms, asset managers, insurers and financial advisers have spent the past year frantically preparing for its introduction. Ironically, their customers are unlikely to have heard of it. So, what’s in it for us?

Simply put, delivering good financial outcomes for the consumer has to be at the heart of everything these firms do — and crucially, they have to be able to provide evidence as the regulator requires.

With bold promises to end rip-offs, remove jargon and improve customer service to enable consumers to make the best possible financial decisions, the work centres on four key areas (see box) with an added overlay of supporting vulnerable customers — all the more important in the cost of living crisis.

“Finance is at the heart of everybody’s life journey, and we want consumers to lead healthy financial lives,” says Sheldon Mills, the FCA’s executive director, who is spearheading its implementation. “What we’ve seen over successive years is a few features of financial services markets which don’t really work well for consumers.”

Those he’s quick to highlight include inadequate warnings on high-risk investments, opaque fees and charges and the negative impact these can have on your portfolio over time.

But it is the interpretative nature of the Consumer Duty that has forced firms — and boards — to question every aspect of their business models, and be ready to rebut any accusations of sharp practice from the FCA.

Already, the huge scope of this incoming regulation has caused political rows over banks offering poor interest rates on savings accounts, and the possibility that more stringent rules could choke off the Buy Now, Pay Later sector.

Privately, many in industry fear the reform goes too far. But consumer advocates say openly that it doesn’t go far enough. So what could the Consumer Duty mean for you and your money?

A question of trust

Finance industry bosses may tut at the insinuation they do not already prioritise good financial outcomes for customers, but financial scandals such as the Neil Woodford saga, minibond mis-selling and the plight of British Steel pensioners offer ample proof of how easily consumers can be shafted.

Only a quarter of people trust the UK financial services industry to act in the best interests of their customers, according to one recent survey. The FCA’s critics say its past record of clamping down on bad practice leaves a lot to be desired. Could its new approach of encouraging all firms to do better by consumers restore some much-needed trust in the financial regulator?

Hypothetically, had the Duty been in place at the time of past scandals, Mills believes “it could have helped further” to minimise harm, particularly as the Duty applies across the product distribution chain, including financial promoters.

“What has happened has happened,” he says. “But this is a cultural change. It’s not a once and done. This should live with firms for a number of years after it comes into force. We will be looking and monitoring to see the outcomes of the Duty, and to make sure that firms are following it.”

Regulation on steroids

So what changes can we expect to see in our everyday financial lives?

Unusually, the regulator has made firms responsible for interpreting and applying the four desired outcomes to their businesses.

Holly Mackay, founder of consumer website Boring Money, describes the Consumer Duty as “putting the previous regulatory principle of treating the customer fairly on steroids”.

One of the quickest wins for consumers? All kinds of financial information should become much easier to understand.

Behind the scenes, firms have been busy removing jargon from customer communications (no mean feat in finance), optimising customer journeys and testing their websites to aid better understanding.

Boring Money has overhauled hundreds of fund fact sheets for asset managers, trying to make objectives, charges and investment timeframes clearer.

“The term OCF [ongoing charges figure] is a really good example of investment jargon,” Mackay says. “Even if you explain what it is, do investors know what to do with that information?”

Rather than more words (“no!” says Mackay), she wants more context to help investors. Benchmarking one fund’s charges against other similar funds (lower, average or higher) would be much more meaningful — and could save investors money.

Last year, research by AJ Bell found that fees on the most expensive UK tracker fund were 21 times higher than the cheapest, so those who invest £10,000 for 20 years could be left £6,000 worse off.

£2.4bn


FCA estimate of the cost to financial firms of complying with the Consumer Duty

Across the financial industry, applying this kind of thinking should make it much easier for consumers to shop around. But will it really make things cheaper?

“Logically, you would assume a forensic look at value would result in lower fees and charges, but I’m not sure that will be the case,” says Mackay.

By the FCA’s own estimates, the total one-off direct cost to firms of complying with the Duty could be as high as £2.4bn.

It also estimates up to £176mn of ongoing annual costs as firms monitor consumer outcomes, and has additionally warned of indirect costs resulting from the “potential loss in profits due to changes [firms] make to their product design and prices.”

Mackay and others fear increasing the cost burden for financial advisers will do little to help 13mn consumers stuck in the “advice gap”.

However, Mills claims the consumer duty has made the regulator itself “reflect on whether that gap might have widened too much,” stating that a separate review of the boundary between financial advice and guidance will explore innovative solutions.

From nudge to sludge

Financial firms are looking to behavioural economics as they seek to understand our decision-making — and how patterns in customer data can help them predict this.

In an increasingly digital world, it’s possible to test positive “nudges” and the feedback loop is instantaneous, says Reinder Van Dijk, partner at Oxera, a consultancy advising banks on implementing the Duty.

Consumers may not be aware, but technology can monitor in real time how we respond to products, adverts, and emails. This includes timing and the most effective language. 

Investment platform Hargreaves Lansdown has been testing the impact of different nudges on customers running a different risk — an investment portfolio that consists of one large investment in a single share.

When it sent those customers emails entitled “The benefits of having a diverse portfolio” it got a 38 per cent click-through rate. However, this increased to 61 per cent when emails warned “Your portfolio isn’t as diversified as it could be”.

Hargreaves and other platforms hope further personalisation of guidance is possible. However, there’s also a risk that being bombarded with notifications will cause us to disengage, and ignore emails and customer satisfaction survey requests (expect to receive plenty of these).

Making financial information easier to understand should aid financial decision making, so firms are also conducting “sludge audits” of processes and product design that can confuse us.

The FCA has mandated firms to “make it as easy to switch or cancel products as it was to take them out in the first place” and has previously probed the relative ease or difficulty of transferring from one financial provider to another.

Another area in its sights? Lengthy terms and conditions documents. “Typically, they’re a legal arse-covering exercise for firms rather than something customers can actually use,” says James Daley, founder of Fairer Finance. He has come across T&Cs over 80,000 words in length — equivalent to the average novel. 

Providing “helpful and accessible customer support” is another must. “One easy thing to look at is how often firms actually answer the phone,” Mills says. “When you get through, is your problem solved? Where we see outliers, it’s an indication that we need to go and have a chat with that firm.”

Some question whether the Duty’s “price and value” focus could cause financial advisers to move away from levying ad valorem fees on the value of a customer’s portfolio — the old joke being that this is Latin for rip-off — and towards service-based charges.

Privately, advice firms tell FT Money they are reviewing pricing structures and monitoring their competitors — clearly, nobody wants to be the outlier.

Buy now, regulate later?

However, there is one area where the Consumer Duty will take much longer to penetrate — the Buy Now, Pay Later sector (BNPL), the UK’s fastest growing form of debt.

The FCA was due to start regulating BNPL lenders later this year. However, media reports this week have speculated the government will extend this timetable, due to fears tougher regulation would hinder millions of shoppers from spreading interest-free payments in a cost of living crisis.

The Treasury and the FCA both declined to comment. City of London minister Andrew Griffith has previously reminded the FCA of a new “secondary” objective in the government’s financial services bill for watchdogs to promote economic growth alongside maintaining high regulatory standards.

“It seems as if the government has fallen for the line that regulation restricts consumer access to credit,” says Mick McAteer, co-founder of the Financial Inclusion Centre and a former FCA board member. He argues the lack of affordability checks and embedded nature of BNPL payment options on retailers’ websites conflicts with basic principles of the Duty, and that leaving BNPL out of this regulation “risks a repeat of the payday lending experience”.

Unintended consequences

Although the Consumer Duty promises to protect the interests of financially vulnerable customers, McAteer and others are afraid more extensive use of tech, consumer data and AI could allow firms to segment and even screen out different customer groups with still greater precision.

McAteer fears it could lead firms to question “whether it’s worth spending money on servicing particular parts of the population, including more vulnerable consumers”.

“It’s not so easy to demonstrate good outcomes for customers in financially vulnerable circumstances,” adds Tom Lake, director of non-profit body Fair4All Finance. “Whose ‘duty’ is it to make sure there is a level of access for customers who are considered risky or vulnerable?”

Mills plays down these concerns, saying while the Duty “imposes a higher standard on firms, it doesn’t raise new risks for firms,” adding: “I don’t accept that this is going to lead to a material removal of products and services over and above the existing rules that we have.”

However, some financial products and business models feel more likely to be on a collision course with the regulator than others.

“So much of financial services is built around customer inertia, and the Consumer Duty means that’s not OK any more,” says Daley.

He compares “active inertia” (where customers know they could probably get a better rate, but don’t feel this is worth the time or effort of switching) to “passive inertia — being blissfully ignorant that you’re being taken advantage of”.

Profit streams from many financial products rely on this, from mortgages and 0% credit cards that revert to expensive rates when deals expire, or bonus savings rates that plummet after a year.

“Unless firms work really hard to support customers and help them on to new deals, the Consumer Duty poses an existential challenge for some of these products and business models,” Daley says.

It is also providing a stick for politicians and regulators to beat the banks with as they demand that higher interest rates are passed on to savers.

This week, the FCA said it expected banking customers to be “informed of available rates across their product set and how they may benefit from switching.” It has given short shrift to claims that GDPR rules will prevent banks from contacting customers who have opted out of marketing communications.

Mills refutes accusations of regulatory over-reach and fears of price controls. “Value isn’t just about price,” he says, stressing the FCA is not seeking to regulate the price of financial services products on markets. “It’s important that firms take commercial decisions on price, but it is important that firms recognise that they are providing value across sometimes complex services that their customers may not pay regular attention to.”

However, consumer experts also point out that this could threaten another long-established financial practice — giving the best deals to the savviest switchers.

“For too long, people with nothing have been subsidising people who have everything,” says Daley, noting the recent FCA clampdown on so-called “loyalty penalties” in the insurance market, plus its radical overhaul of overdraft charges before the pandemic.

“The Duty won’t necessarily kill the model, but disclosure and transparency has to be much greater, and that comes at a cost.”

Enforcement action

But the biggest question is if a firm is doing consumers harm or providing a shoddy service, how will the FCA know about it?

Regulated firms now have to report on this data internally at board level, and must have a “consumer duty champion” on boards to make sure these principles are embedded at the highest level, but there’s no requirement to report this data to the FCA — just to provide it if asked.

McAteer feels the lack of mandated reporting is a “big flaw” noting that on past form, the FCA is “not very good at spotting what’s happening in the market.”

As D-Day for the Duty approaches, firms are nervously waiting to see if they have done enough to uphold the principles, or if the regulator will make an example of them.

Mills has not and will not rule out enforcement measures for firms that do not comply, but hopes this would be “a last resort”. He stresses that the FCA’s big market studies and “Dear CEO” warning letters aimed at stamping out specific industry practices will not stop.

“What we really want to see is a positive approach from firms to meet that Duty and basically benefit as many customers as possible,” he says.

So, in the coming weeks, if you receive a customer survey, get a helpful nudge or notice the absence of jargon-heavy sludge you’ll know that financial firms are trying to do their duty by you. But whether the regulator thinks they have done enough is another question.