Opinion

Regulation in the time of COVID: our duty to consumers

Gavin Stewart Gavin Stewart

Gavin Stewart has been keeping an eye on the world of financial services regulation during lockdown. We bring this week's posts into digest form.

This week's series of blogs covers the recent consumer duty CP, the PRA business plan and consumer credit regulation. 

Thoughts on the 'consumer duty' CP (TCF)

The proposal to have a new 'consumer duty' takes great care to distinguish between its respective use of the terms 'client', 'customer' and 'consumer'. While I understand the reasons for doing so, I doubt the distinctions will survive contact with reality, either inside or outside the Financial Conduct Authority (FCA).

Within the proposals, the consumer principle refers to 'clients', while the x-cutting rules and the outcomes use 'consumers'. But it's difficult, for example, to imagine normal discussions between supervisors and firms not using the terms interchangeably.

There is also the matter of how the terms are used elsewhere in the handbook. When I was helping run the FCA and Bank of England (BoE) TechSprint at the end of 2017, for which the challenge was to digitise the reporting of retail deposits, we discovered there was little or no distinction between how the three terms had been used through generations of policy making.

This wider issue has the potential to confuse and complicate, and will need to be sorted out as and when the FCA Handbook comes to be digitised.

For the new duty specifically, I suspect the distinctions may start to matter only when something has gone wrong and the respective legal teams become involved. Assuming these proposals turn into rules, there will be immediate focus on how the FCA will enforce them, at which point it will become clear which of the three terms we should be using most.

PRA business plan

The Prudential Regulation Authority (PRA) has just published its business plan for 2021/22, with little fuss, and it's useful to reflect both on why there is so little fanfare, and on why it might warrant a little more.

The FCA's is now due in July, having been postponed from April, and will likely generate rather more headlines. The PRA publication also coincided with the BoE's TSC appearance to give evidence on Greensill, which may influence the PRA's future plans.

The first point to make about the PRA's plan is that, in a wholly good sense, it contains no real surprises. Partly this is due to its tight remit and that there being no financial stability crisis at present.

Its predictability, however, is also testament to the measured way the PRA goes about its work, its resistance to scope creep, and the consistent follow through on its priorities. It's worth, however, highlighting two of its strategic goals as warranting more than usual attention:

1 Market changes and horizon scanning

2 Competition.

On 1, the PRA identifies geopolitics and COVID-19 risks, as well as its now-normal focus on climate risk and fintech. The former group will be attracting fresh analytical firepower, so additional resource overall is likely to be assigned to this work. Unlike the FCA, the PRA and BoE can do this fairly effortlessly, without robbing Peter...

On 2, meanwhile, there is emerging scepticism within the BoE about the fintech halo effect, fuelled by London Capital & Finance (LCF) and Greensill, as well as the exuberance around cryptocurrency.

Tension between "proportionality" and maintaining standards is growing, with the 2016 authorisation of Wyelands Bank - part of the Greensill scandal - as a challenger bank, now adding to it.

Thoughts on the consumer duty CP (disclosure)

The debate in the FSA on the usefulness of disclosure and of communication with consumers as tools of regulation began in the early 2000s, and within a couple of years there was a broad consensus that they were "necessary, but not sufficient".

However, these tools have continued to be a foundation of regulatory policy and are prominent in the consumer duty proposals, most explicitly in the first outcome, so it's worth thinking about why disclosure and communication continue to be seen as so important.

Part of the answer is that there's still significant reliance on inputs, as identified by the FCA Chair in his recent speech, the TCF section of which deserves a close read.

This likely stems from continued adherence to theories of consumer responsibility - 'buyer beware' - that have probably become outdated due to the increasing complexity of many financial products and services. And also from a perceived need to have some more tangible expectations of firms that can be more readily followed up by supervision and enforcement.

What seems clear is that disclosure that is sufficiently detailed to give a true picture of a product or service will almost certainly be too long and (necessarily) complex (and in too small font) to expect consumers to read them.

Much will depend on how the FCA applies the consumer duty in practice, but disclosure and communication is likely to be only a small component of any successful approach.

Consumer credit regulation

Some of the seeds of the FCA's statement on Amigo Loans were sown by the original decision to move consumer credit regulation from the Office of Fair Trading (OFT) to the new FCA, which happened in 2014.

I've posted before about the pull that consumer credit exercises on the regulator's resources and, most recently, about the logic of the FCA establishing a regional network to enable it to regulate this sector more effectively. Underlying all this, however, is the fundamental difficulty involved in taking on responsibility for the sector during a decade of austerity.

Whereas the OFT had operated a licensing regime, the FCA was taking consumer credit under the umbrella of FSMA, which in the first instance, involved the creation of a new set of rules and the authorisation of around 50,000 firms.

At the same time, a supervision strategy was being established and enforcement was charged with policing the perimeter. Each of these was an enormous task and significant efforts were also made to knit them together, although co-ordination was inevitably difficult.

However, the overall challenge of defining what a 'good' credit market would look like during a period of austerity remained a gap, one that would best be filled by parliament rather than the regulator.

The landscape is further complicated by a growing tendency of banks to withdraw from less 'prudent' lending, which itself is encouraged by a complex mix of post financial crisis regulation, both conduct and prudential.

Looking ahead, the Future Regulatory Framework (FRF) provides an important opportunity for parliament to take the leading role in setting out the purpose, core elements and regulatory principles of regime such as consumer credit.

The consumer duty CP (success factors)

The success of the FCA's proposed consumer duty will ultimately stand or fall on whether it becomes an intrinsic part of the way firms operate. So the test for the proposals' key tenets - one principle, three x-cutting rules and four outcomes - is whether they can be incorporated easily (to the extent they aren't already) into firms' business models, processes and culture, not least with all the feedback loops that are involved.

Among other things, semantics will be important, and how sympathetically the FCA will be able to supervise and enforce against the new duty and its accompanying rules.

Will firms need to match the FCA's use of 'client', 'customer' and 'consumer'? Can the regulator distinguish effectively between form and substance?

Another success factor is whether the duty can be distilled into meaningful board discussions or, like previous efforts on TCF, becomes subsumed in MI that's hard to interpret. The FCA's proposals will have been designed with all this in mind, but so too were previous efforts in this space.

The duty is provisionally intended to come into effect during summer 2022, when the the FCA and the industry are likely to be still in the middle of COVID-19 reflections. This will make it harder to implement consistently but, conversely, means it is properly tested at the outset.

In the meantime, there will be another consultation and it will be especially fascinating to see what the cost benefit analysis looks like when it is finally published.

To discuss these issues further, contact Gavin Stewart.