How is the Consumer Duty changing?
Under the Consumer Duty, firms are required to be “open and honest, avoid causing foreseeable harm, and support you [consumers] to pursue your financial goals.” The aim behind this is to enhance retail customer outcomes. However, the regulator has recently acknowledged that there is confusion around how some aspects of the Duty apply to wholesale firms, which may lead to disproportionate “compliance burdens.”
In order to clarify what falls within the Consumer Duty’s scope the FCA has released three updates – an opportune time to do so, as the UK government has called for reducing regulatory burdens on businesses as well as fostering a crypto-friendly environment for firms to operate in.
Good things come in threes
The first update came from Nikhil Rathi, FCA Chief Executive, in a letter to Rachel Reeves outlining the regulator’s Mansion House commitment to address concerns about the application of the Consumer Duty.
Rathi’s letter highlighted that the FCA aims to streamline its rulebook by decreasing the rate at which it implements new rules to enable innovation, technological growth, and adoption of artificial intelligence. The main message within the letter alluded to distinguishing between the different types of activities and protections under the Consumer Duty, and that much wholesale activity is outside of its scope. By reducing rulemaking and assessing where rules apply, the FCA is furthering the current regulatory narrative that promotes innovation over regulation.
The FCA’s second centres on progress it has made in relation to streamlining certain requirements, such as improving the rule feedback tool within the FCA handbook to allow users to provide suggestions on improving the rules. The regulator has also committed to areas of ongoing progress, including =consultation papers and policy statements = on topics such as the mortgage rule review, assessment of value reporting for asset managers, client categorization rules, and the advice guidance boundary review.
Finally, the FCA has also released its focus areas and priorities for 2025/2026 that, similarly to the Consumer Duty, are intended to ensure good consumer outcomes:
- Committing to distributing more information around best practices in line with regulator expectations.
- The need to address actual or potential consumer harm.
- The need for more data to better understand how firms are embedding the Consumer Duty.
- Realizing opportunities to streamline the rules to reduce burden on businesses and improve outcomes for consumers.
Drawing a clear line
A speech by Director of Consumer Investments, Lucy Castledine, expressed how the FCA intends to position itself as a “smarter” regulator through being “predictable, purposeful, and proportionate” while helping consumers navigate their financial lives by working across the industry to boost trust and product innovation.
This is reflected directly in the FCA’s four-point action plan, intended to bring clarity to the market and reduce the growing amount of ‘conservatism’ from firms which has led to an ‘unduly’ prescriptive and administrative approach to regulation. The action plan details that the FCA will:
- Provide more clarity on their supervisory approach and expectations under the Consumer Duty when firms work together to manufacture products for retail customers to prevent misunderstanding, excessive compliance costs, and duplication of effort between firms to the detriment on business models where firms work together.
- Consult on plans to update the client categorization framework, such as changing standards for firms to identify individuals capable of being treated as professional clients. The aim here being that firms will have greater confidence to identify these clients and, with their consent, take them out of the scope of the Duty and other retail protections.
- Draw a clearer line when the Duty applies and when it doesn’t by assessing how existing exemptions are working and consider whether they go far enough, alongside implementing changes to outline when and how firms can rely on each other in distribution chains, such as when designing and selling structured products.
- Propose to remove business with non-UK customers from the scope of the Duty as this creates complexity and cost, and can have a substantial impact on firms with an export focus.
The fate of the FCA
The FCA finds itself in a difficult position, caught between the “rock” of government expectations that it supports the growth agenda and that “hard place” of an industry clamouring for clarity. It isn’t the first time the FCA has been in a similar bind – we do not have to venture back too far to remember the scuffle around its proposals to “name and shame” firms under investigation.
The regulator’s response on the Consumer Duty feels like a reaction to the change in the tide of industry, and government, priorities. However, the regulator is clear in its commitment to support innovation, reduce uncertainty, and allow firms to act with confidence. As the financial services industry enters a period of empowerment via reduced regulation, we must question whether the FCA will continue to react to the pressures of industry and government. And, most importantly, will the regulator meet the call of the Consumer Duty and ensure that the investing public are protected.
Want to learn more about the Consumer Duty? Click here.
