Consumer Duty Call for input: The FCA provide the much needed carrot to go with the stick. And more importantly, a chance for us to be Homer Simpson

Background

We are aware that the Consumer Duty has required an intense amount of work for all firms captured. More so, and beyond the work required, it has resulted in firms needing to materially change not only their product and services offerings, but the way in which they think. The overall requirement to strive for "good outcomes" is a game changer. 

However, there is an existing conflict between the requirement to achieve "good outcomes" which are to be determined by firms, and complying with the rigors of prescriptive rules in the regulatory Rulebook. 

As an example, if a firm decides that a good outcome for a client is to provide them with very simple information in relation to a product – in a form which a 12 year-old could understand, – why do I want to put a KID in front of them as well? Is this providing an information overload? Do we really think that retail clients can understand a KID? Why on Earth is a product risk scored from 1 to 7 (and who thinks the number 7 is the top score of anything)!? 

Therefore, if we are to really move towards outcomes- based regulation, and meaningfully empower firms, it must be the case that many of the rules with which we have to follow - which often do not translate very well to particular micro-services and products offered by clients- need to be reconsidered.

This is potentially the genesis behind the FCA's Call for Input as discussed below.

The FCA has approached the market with a view to understanding which rules and regulations could be simplified or removed. This is a massive moment for the UK market. If we are to become more competitive, and more purpose and outcomes driven, we must all look to help the FCA with this request, and hopefully the FCA will respond with the much anticipated "carrot" and do what they can to accommodate. 

Moreover, there may be areas where the FCA cannot accommodate in the short-term, but will at least understand that some of the rules and regulations that exist should take a backseat to the overriding "good outcome" requirement (i.e. if following the rule may not provide a "good outcome" then perhaps this will be acknowledged to some degree by the FCA).

Below we have set out the FCA's general proposals, and at the end we provide some initial suggestions of rules that can or should be cut.

Proposals

The FCA is seeking views on retail conduct rules where the Consumer Duty could be relied on instead of specific rules and guidance. This could be areas where there are broadly similar requirements or expectations of conduct (such as in relation to providing appropriate redress), or where the same consumer outcomes can be achieved. The FCA also sets out examples where detailed/prescriptive rules may be needed (such as sectoral rules addressing specific harms).

Accordingly, the FCA invites feedback on:

• which specific rules or guidance could be simplified or clarified;
•  how any steps taken to achieve the above may affect the FCA's statutory objectives;
• the appropriate balance between high-level and more detailed rules; and
• the potential benefits and costs from simplifying its rules.

Homer Simpson, you're cut!

When thinking about which rules and regulations could be removed from the rulebook, we were immediately (showing our age) reminded of the famous Simpson's episode where Homer (as a Softball Coach) was empowered to cut certain members of the Softball squad. For important reference, we have set out the transcript below.

While the FCA may not want to go as far as Homer Simpson, we have put together a list of five areas where we think consideration should be given - with a view to freeing up retail services providers to provide "good outcomes" to clients without being ring-fenced or overly burdened by various rules. In this article, we concentrate more on MiFID firms (however, some of these thoughts will go across service lines).

1. The financial promotion rules and exemptions. Put simply, there are multiple financial promotions rules that cover so many different products. Is there a way of harmonising this in order that we don't have so many varying definitions with respect to the types of products caught and the various promotions that can/cannot be made? We acknowledge that this is perhaps the most ambitious of our suggestions, however, it would go a long way to simplifying regulatory processes for firms. It would however be terrible for lawyers.

2. PRIIPs: KID. Surely the KID is not appropriate for the vast amount of retail services? Do we really think that there is evidence that the man on the street understands the KID and/or that this is the best way in presenting relevant information? If it can't completely be cut, can we provide better regulation around this? We fear that the FCA's compromise position that we may see over the next year or so will not go far enough.

3. Market Abuse: investment recommendations. If you understand the topic, you understand the pain that complying with the investment recommendations regime causes firms. It is completely unnecessary. This should be deleted in its entirety and replaced simply with a conflicts obligation. If you are writing with respect to a security whereby you or your employer has an interest, of course, this should be disclosed. How a firm chooses to do this will be fact dependant. The market abuse regulation requirements go way beyond this and are inhibiting. 

4. (We are not sure if this is a cut or a new proposal). The FCA should provide a regulatory sandbox with respect to providing personalised nudges, prompts and information which do not constitute investment advice. Research should be carried out as to the effect of such offerings on retail clients and whether the investment advice/personal recommendation rules in the UK can therefore be further adapted to accommodate this. At present, the "advice gap" and guidance around "self-directed advice" do not go nearly as far as they should, and are not clear enough to provide firms with any certainty as to which side of the line they fall.

5. Lastly, some professional cuts. While we appreciate that the Consumer Duty concentrates on retail, we cannot miss the opportunity to point out that some of the information requirements to per se professional clients under MiFID are outrageously pointless. They can be cut. 

Below you will find Homer Simpson doing a far better job of "cutting" than we are able to do. However, it's on all of us now to help the FCA and respond to this consultation. We will be organising Roundtables in order to discuss which rules have become obsolete, which rules are positively counter-productive and to identify the areas where the finer cuts should be made.

***

Homer: "Ok it's time for the easiest part of any coach's job… the cuts. Now while I wasn’t able to cut everyone I wanted to, I have cut a lot of you!"

Homer: "Wendell is cut, Rudy is cut, Janey you're gone, Steven.. I like your hustle. That's why it was so hard to cut you."

Homer: "Congratulations! The rest of you made the team… except, you, you and you."

Homer: "[…] All right everyone, give me 5 laps and hit the showers. Oh Rod, you don't have to, you're cut."