The FCA’s transformation to becoming an assertive, front footed regulator has been accelerated by three recent developments, all of which prioritise the protection of consumers.

Perhaps most significantly, on 27 July 2022, it confirmed plans to bring in a new Consumer Duty to set what it considers to be appropriate standards for consumer protection by firms. The inference to be drawn here is that the regulator considers that firms’ own assessments of how they are meeting their customers’ needs have been lacking, and that the shortfall can only be made up with a more intrusive regulatory approach.

Although Principles 6 and 7 of the existing regulatory framework impose overarching obligations on firms to treat customers fairly, the new consumer duty imposes a higher standard of conduct – that firms must deliver “good outcomes for retail customers”. In practice this is likely to mean that firms will need to show the regulator, on an ongoing basis, what they are doing to satisfy this. As part of the new duty, firms will need to focus on supporting and empowering customers to make good financial decisions, and there will be specific requirements for firms to end rip off charges and fees, make it easier for consumers to switch or cancel products and focus on the real and diverse needs of their customers, including those who may be vulnerable. The new rules come into force on 31 July 2023 and firms will need to act quickly in the meantime to determine what changes they will need to make to products, policies, procedures and customer documentation to ensure compliance with this new higher standard.

Indeed, the FCA has been expressing concerns about firms’ treatment of consumers for some time now. A survey carried out by the regulator in July 2020 found that 12 million adults in the UK at that time had ‘low financial resilience’, a situation which has been exacerbated by Covid-19 and the worsening economic outlook. In this regard, it has also recently clearly set out its expectations for those firms operating in the consumer credit sector, who may potentially benefit from the prevailing economic situation.

Similarly, on 1 August 2022, the FCA also confirmed that it has implemented stronger rules relating to adverts for high-risk products which are either misleading, or which are not appropriately consumer-targeted. Consumer surveys have indicated to a concerning degree that many investors or would-be investors simply do not understand that losing their money is a real risk of investing and this significantly increases the risk of poor outcomes and scams, particularly with the proliferation of online marketing of financial products. The new rules, which will come into effect from 1 December 2022, enhance the existing financial promotions regime to require clearer and more prominent risk warnings, to ban inducements to invest and also to ensure that authorised firms which approve the financial promotions on behalf of unauthorised persons have sufficient competence and expertise in the underlying product to do this safely. Significantly, however, these new rules do not apply to crypto-assets, although legislative changes to bring crypto-assets within the regulatory perimeter are anticipated.

Finally, on 3 August 2022 the FCA published new rules to enhance the oversight of authorised principal firms for their appointed representatives (ARs). The AR model has long been a cause of concern for the FCA, and in announcing the new rules, the FCA was not shy of criticising principal firms, many of whom it says ‘do not adequately oversee the activities of their ARs’. The new rules, which will take effect from 8 December 2022, substantially enhance the supervisory responsibilities of principal firms and include new obligations on principals to: provide 30 days’ notice of an AR appointment taking effect; provide additional information to the FCA about the nature of its relationship with the AR; and to assess on an ongoing basis whether the AR’s activities generate a risk of “undue risk of harm” to consumers or market integrity. Whilst the changes stop short of extending FCA supervisory powers directly to ARs, the new rules will significantly enhance the compliance obligations for authorised principal firms, who will need to carefully consider their existing and proposed AR relationships and to make any necessary changes before December 2022.

Whilst these changes will affect firms in different ways, they cannot be considered in isolation and rather should be seen in the context of the FCA’s ongoing and extensive transformation programme. Consumer protection is clearly at the heart of its current strategy, and firms will need to act quickly to undertake gap analyses and assess what they need to do differently to comply with these new standards. A failure to act now is likely to lead to supervisory action by the regulator, which can include closing firms down, as well as potential enforcement investigations.

FURTHER INFORMATION

If you have any questions regarding the blog above, please contact James Alleyne in our Criminal team.

 

ABOUT THE AUTHOR

James Alleyne is Legal Counsel in the firm’s Financial Services Group. He advises clients on the full spectrum of financial services and FCA-related matters, including on authorisation applications, perimeter and supervisory issues, enforcement investigations and cases before the Regulatory Decisions Committee and Upper Tribunal.