Long reads

Consumer Duty will require institutions to deliver good outcomes for retail customers

Paige McNamee

Paige McNamee

Senior Reporter, Finextra

This is an excerpt from The Future of Risk Management and Compliance 2023 report.

The UK ’s long awaited Consumer Duty is due to come into force on the 31st of July 2023, and financial institutions are being encouraged to “eat the frog” in the coming months and ensure they are fully prepared for the impending regulation. The FCA’s Consumer Duty will require institutions to act to deliver good outcomes for retail customers, by offering a higher standard of customer protection, customer care, and by helping consumers make more effective financial decisions.

The Duty impacts any firm which distributes or manufactures products and service to retail customers, requiring a vast number of financial institutions to take action and deploy what UK Finance refers to as the “FCA toolkit ,” though behavioural economics and data science.

During January 2023, the FCA released findings around the status of firms’ Consumer Duty implementation plans, highlighting three key areas that companies need to improve on ahead of the July deadline. PWC explained that these three overarching areas of failures include:

  1. Effective prioritisation: Some plans had not provided clear rationale for the prioritisation of implementation work, often not aligned to where the greatest risk to poor consumer outcomes could arise.
  2. Embedding substantive requirements: Firms had not engaged sufficiently with the detail of the Duty’s requirements, in some cases displaying an overconfidence in the adequacy of existing policies and processes.
  3. Working with other firms: Firms’ plans had limited focus on the need to engage and share information with other firms in the distribution chain

The Edinburgh Reforms will underscore ESG and innovation in UK

In December 2022, Chancellor of the Exchequer, Jeremy Hunt, unveiled the Government’s financial services package, The Edinburgh Reforms. The set of 30 measures has been designed to catalyse competition and growth in the UK’s financial services sector. The Reforms are intended to add to the Financial Services and Markets Bill, and highlighted interest in the pursuit of a central bank digital currency, and the UK’s Net Zero target among many other objectives.

Divided into four key categories: a competitive marketplace promoting effective use of capital, sustainable finance, technology and innovation, and consumers and business; the reforms aim to position UK financial services as a regulatory-leader.

Responding to the Chancellor’s statement, David Postings, chief executive of UK Finance, commented: “The banking and finance industry is the engine of our economy, delivering jobs and investment up and down the country. The comprehensive package of reforms the Chancellor has announced today, coupled with the landmark Financial Services and Markets Bill, form a major step in ensuring the sector remains strong and internationally competitive. We will continue to work with the government in supporting the economy through the current challenges and in creating growth for the future.”

On Net-Zero, the Government stated that the UK is the world’s premier financial centre for sustainable finance, and is acting to ensure the UK retains global leadership in this rapidly growing sector, helping to unlock the private financing needed for Net Zero. The steps tied to sustainability announced in the Reforms include:

  • Publishing an updated Green Finance Strategy in early 2023
  • Consulting in Q1 2023 on bringing Environmental, Social, and Governance ratings providers into the regulatory perimeter

In response to the Reforms, Lord Christopher Holmes, Peer, House of Lords, penned that he was particularly pleased to welcome reforms relating to sustainable finance. He stated: “If we are to ensure the UK is the world’s premier financial centre for sustainable finance then we need to push forward on this agenda, we need to unlock the private financing needed for Net Zero and we need to do much more on regulation and standards. I look forward to the Green Finance Strategy - as I have argued most recently at Finextra’s Sustainable Finance Live, ESG must be considered existential, seismic, and global. Our actions must be proportionate to the scale of the challenge.”

Crypto regulation will gather pace across the West

While jurisdictions are moving at different paces, given the turmoil of the crypto markets throughout 2022 which reached a crescendo with the FTX saga in December, regulating the crypto space is an unavoidable priority for governments and regulators across the globe. Some view this focus as a means to protect the consumer and to bring obligations and protections in line with existing financial products, others see crypto regulation as the opportunity of a lifetime – a chance to push their economy to the fore by offering a framework and ecosystem in which the crypto industry can thrive.

Indwar states that while crypto regulation has been in the pipeline for some time, the coming year will be pivotal as new restrictions start to apply to cryptoasset businesses and the path is laid for further regulation in the years to come. “Both the UK and EU are prioritising the regulation of stablecoins. These are cryptoassets which have at least the promise of maintaining a stable value by being pegged to an underlying (and typically well-tested) asset. As part of its “staged and proportionate” approach to regulating cryptoassets, the UK government is starting with the regulation of stablecoins which can be used as a means of payment. This will be done through the Financial Services and Markets Bill which allows the Treasury to develop a regulatory regime for digital settlement assets.”

While currently being scrutinised by Parliament, the FSMB is expected to receive Royal Assent in spring 2023. The Bill was designed in efforts to create a more competitive financial services landscape in the UK post-Brexit, and repeals the inherited financial services framework from the European Union and establishing a secondary objective for regulators to promote economic growth and competitiveness.

Indwar explains that the UK’s approach will inevitably be compared to the EU’s Markets in Cryptoassets Regulation (MiCA).

MiCA, though delayed as a result (reportedly) of translation challenges, is expected to enter into force in April 2023. “Like the UK, the rules relating to stablecoins are prioritised and will start to apply first, probably in spring 2024. Other aspects of MiCA will start to apply later in 2024 although transitional measures should allow implementation to be delayed further. Cryptoasset businesses which want to continue to access the EU market should start engaging with the legislation to understand what they need to do and by when.”

According to ComplyAdvantage, numerous jurisdictions have set out their proposals around regulating the space, with some moving into the legislative stages, concerns around fragmentation are being more loudly expressed. As governments around the globe work toward building out a framework for crypto regulation, this increases the risk of international inconsistencies.

Ansari believes that given the easy access to these assets for anyone with Internet access, this fragmentation will “perpetuate the race to the bottom” as crypto entities seek the least regulated jurisdictions. “Further, without coordinated international action, the inaction of certain jurisdictions will potentially create headwinds against others, as regulators and legislators may not bother with the trouble of enacting such rules only for crypto organisations to end-run them by relocating elsewhere.”

In early February 2023, the UK Government proposed new rules to bring cryptoassets into the same regime as traditional financial services.

HM Treasury’s consultation document reads: “Effective regulation will create the conditions for cryptoasset service providers to thrive in the UK, and give people and businesses the confidence to invest with an understanding of the often high risks involved. We have already begun to deliver on this ambition through the Financial Services and Markets Bill, by laying the legislative foundations to bring stablecoins and cryptoassets into financial services regulation.”

Lauder welcomes movement toward establishing robust crypto supervision, stating that the sector has been unregulated for too long, been abused by criminals, and allowed innocent investors to have their assets wiped out (FTX being a prime example). “There is a need for crypto but it needs to be reputable, stable and well managed. At the moment, the crypto environment is like the Wild West.”

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