UK retail conduct requirements: FCA launches Call for Input following introduction of Consumer Duty

How can Hogan Lovells help?

This rulebook review by the FCA was already on the cards before the July 2024 General Election and was incorporated into the now-government’s Plan for Financial Services (January 2024) as part of its policy priority to enhance the international competitiveness of the UK’s financial services sector.

Now is the time for firms to seize the opportunity to help in shaping a leaner, less complex retail conduct regulatory regime more conducive to effective innovation and competition both nationally and internationally.

Hogan Lovells’ depth and breadth of knowledge of the legal, regulatory and policy drivers affecting financial services means we can help you get a grip on events, navigate uncertainty and capitalise on opportunities to shape your regulatory and policy environment.

Please get in touch with one of the listed contacts if you have questions on any of the issues raised by the CfI.

Why has the Call for Input (CfI) been published?

The FCA explains that firms, particularly smaller firms, have longstanding concerns about the length and complexity of the FCA’s rules and guidance. The introduction of the Consumer Duty has provided it with an opportunity to consider whether it could help firms and support innovation by removing detailed and prescriptive requirements that cover similar issues, and where similar customer outcomes could be achieved with greater flexibility.

In addition, the FCA now has a secondary objective to facilitate the international competitiveness of the UK economy (including the financial services sector) and its growth in the medium to long term, subject to aligning with international standards. It has also just published its first report on how it has taken forward this new secondary objective.

The FCA wants its approach to the Duty to support the above aims by allowing for more effective competition and innovation.

What’s in the CfI?

The FCA’s CfI is asking for views on whether, where and how it can refine its retail conduct rules and guidance, while ensuring that it continues to support and protect consumers. It particularly wants to:

• address potential areas of complexity, duplication, confusion, or over-prescription, which create regulatory costs with limited or no consumer benefit; and

• include appropriate flexibility in its rules to be responsive to future changes and innovation.

Issues on which the FCA invites comments include:

• Which detailed rules or guidance could be simplified to rely on high-level rules (eg, removal of prescriptive mortgage disclosure rules and reliance on the Duty), or have interactions with other rules which could be clarified. The FCA would like input on this issue both where there is currently overlap with the Consumer Duty and where there isn’t but, for example due to changes in the way business is now transacted some existing rules may be largely redundant. It also seeks views on where maintaining detailed rules/guidance might be more appropriate (eg the product governance requirements under the Product Intervention and Product Governance Sourcebook (PROD)), and on where it might be appropriate to have a hybrid approach using both high-level and detailed rules (eg in relation to some issues coming out of its Retirement Outcomes Review).

• How any steps to simplify the FCA’s rules and guidance affect its statutory objectives.

• The appropriate balance between high-level and more detailed rules.

• The potential benefits and costs from simplifying its rules. The FCA recognises that while the Duty provides greater flexibility, it also means firms must be comfortable taking more subjective decisions which can lead to additional costs – particularly for some smaller firms, start-ups, fintechs and mutuals who may not have access to the compliance resources of larger firms and therefore may need additional support to understand the FCA’s expectations if it simplifies or removes rules and relies on the Duty’s high-level requirements.

The FCA also wants to understand how different types of firms may be affected by changes to its approach, to avoid any damage to competition. There is specific mention of small firms and new entrants.

This exercise is separate to the planned post-implementation review of the Consumer Duty, so the FCA is not seeking suggestions for changes to the Duty at the present time. Likewise, where it has recently consulted on and introduced new rules, it wants to allow time for those rules to embed before considering changes (eg the recent changes to strengthen the UK’s position in global wholesale markets).

What about the impact of Handbook changes on private rights of action?

The FCA acknowledges that issues around a private right of action (PROA) might be raised when considering potential changes to its Handbook. As it points out, it can switch off a related PROA when making or changing a rule and no PROA is currently attached to any of the requirements under the Duty. It states that it may need to consider the impact this has if, in the future, it relied on the Duty to remove rules to which a PROA applies. However, it is not seeking input on this issue at this stage as it would need to be considered in the context of specific proposals.

How does the CfI fit in with existing reviews of the FCA’s conduct requirements?

Chapter 2 of the CfI outlines some of the existing reviews of the FCA’s conduct requirements in addition to the current CfI, which include:

• The Rule Review Framework: This includes a feedback tool to gather feedback and evidence on where the FCA’s rules are not working as intended. Where a rule needs to be reviewed, the FCA builds this into its business planning and prioritisation.

• The Smarter Regulatory Framework (SRF): The FCA is working with HM Treasury (HMT) on the transfer of assimilated EU financial services law into the FCA Handbook and making changes, where appropriate, to suit the domestic context (see Repeal and replacement of assimilated law | FCA). The FCA explains that where SRF work is already advanced on individual SRF files, it won’t always be possible to take account of feedback to the CfI for practical reasons, ie to avoid creating a delay.

The FCA states that this CfI supports these existing initiatives by adopting a wider, thematic approach to where it can refine its retail conduct rules and guidance.

The CfI also highlights some relevant regulatory initiatives, including its participation in HMT’s reviews of relevant policies and legislation, as set out in the twice yearly Regulatory Initiatives Grid. Examples of ongoing reviews affecting the FCA Handbook and how the FCA could take account of the Consumer Duty in future work in these areas include:

• Consumer Credit Act (CCA) 1974 reform: Consumer Credit Act 1974 reform: As part of its review of the CCA, HMT previously proposed repealing the CCA’s information requirements and for the FCA to recast them in its Handbook to create a more modern and flexible regime. The FCA explains that it would need to balance the extent to which prescriptive rules might be needed, so that consumers are given the information that they need, against providing enough flexibility for firms to deliver good outcomes for their customers under the Duty. To achieve this, it would need to carry out research to understand how consumers best engage with and understand the information presented to them.
• The Advice Guidance Boundary Review: Following the December 2023 joint HMT/FCA discussion paper on the Review, the FCA is still developing its thinking on how regulation may best support industry development to help meet consumers’ needs in this area. However, it expects that the Duty will play a central role in making sure that consumer protection remains at the core of any future regime.

How will the FCA decide on which feedback to prioritise?

Factors that the FCA is likely to consider in deciding which aspects to prioritise from submissions to the CfI include:

• its objectives and how it can meet its primary objectives in a way that also advances its secondary objective of facilitating the international competitiveness of the UK economy and its growth in the medium to long term;

• other regulatory requirements, such as the regulatory principles set out in FSMA;

• the importance and scale of the issue highlighted both for firms and the market as a whole;

• the likely impact on consumers and consumer protection;

• the evidence available, including on the costs and benefits of any suggested ideas for simplification, as set out in Chapter 4 of the CfI;

• how a suggested simplification interacts with the factors set out in Chapter 4 on whether high-level or detailed requirements are more appropriate for particular areas of its rules and guidance.

The FCA will coordinate any action taken following the CfI with the other ongoing reviews of aspects of its rules and guidance set out in Chapter 2 (see ‘How does the CfI fit in with existing reviews of the FCA’s conduct requirements? Above). It states that it may be more appropriate to assess some feedback as part of these other reviews, and it will aim to avoid duplication.

More to come…

The primary focus is on the retail conduct rules and guidance. The FCA makes it clear that it doesn’t intend this CfI to start a complete review of all its wider rules and guidance. It will consider when it is right to conduct a review of other parts of its rules and guidance, including using the feedback received to this CfI (although it does state elsewhere in the CfI that it also invites ‘comments on our wider rules and guidance’).

In the meantime, the FCA will continue to make changes to its Handbook, reporting and website, including modernising the website to take advantage of the latest technologies and improve site navigability, digitising forms at the Gateway, building a firm portal within RegData (its data collection platform for gathering regulatory data from firms), and improving its data processing to simplify the way firms submit data to it.

What’s next with the CfI?

Comments are requested by 31 October 2024. The FCA will carry out a programme of engagement with interested parties over summer and autumn 2024. The FCA intends to outline its approach in the next publication in early 2025.

Other publications issued with the CfI

Alongside the broad rule review announced via the CfI, the FCA is considering simplifying rules in the commercial insurance sector and has published a discussion paper DP24/1: Regulation of commercial and bespoke insurance business which closes on 16 September 2024.

As mentioned above, the FCA has also published its first report on how it has taken forward its secondary objective to support UK competitiveness and economic growth over the medium to long-term.

In addition, the FCA has confirmed that from 1 August 2024, it will consult a new independent panel of experts when preparing cost benefit analyses. This applies to proposed regulations which have an estimated net annual direct cost to industry of £10m per year and above. See: FCA Cost Benefit Analysis Panel webpage and FCA Statement of Policy on Cost Benefit Analyses.

Authored by Virginia Montgomery.