Consumer Duty – Unintended Consequences (part two)

As discussed in our previous article, there are a variety of unintended consequences that the industry could face from Consumer Duty.

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

The previous article looked at issues that directly impact products and customers, such as price convergence, differentiation, and the challenges that higher risk customers may face. Today, we look at those that impact the broader industry.

Disconnect between FCA and PRA?

Whilst the FCA and PRA continue to work closely together, the variance in focus between regulators – and therefore the potential for disconnection - has been greater recently. Whilst most large regulatory change programmes, such as MiFID II or SMCR, are typically ‘twin peaks’ regulation, the Consumer Duty is driven exclusively by the FCA.

This raises questions over whether the focus on conduct and the additional cost of compliance with Consumer Duty will narrow margins and in turn impact firms’ ability to retain capital. In that scenario, prudential objectives could be undermined. There is of course the hope that the Duty will raise standards, reducing enforcement, remediation and redress, which would help improve confidence in the stability of the financial services sector. Additionally, the FCA in its guidance in relation to Price & Fair Value has clearly stated that firms are expected to take a profit margin and are likely to issue further guidance on undertaking fair value assessments in the coming weeks and months.

Deterrent to external investment

Concerns were raised that the intensity of the Consumer Duty – and the increased administrative burden associated with it – will drive away international investment, especially from the US.

Whilst this is a valid concern, and investment is already being channelled to other countries, there is evidence to suggest that this could be overstated. With over 3,000 FinTechs, and 149 Unicorns, the UK remains the start-up and FinTech hub of Europe, with cities like Edinburgh also providing a significant number of start-ups away from London. It is likely that we are seeing a growing global opportunity for VC and start-ups, rather than a dwindling UK VC community.

Moreover, within the FinTech space, we continue to see firms wanting to break into the UK first – often because of its high regulatory burden and approach. The mindset is often “if we can make it work in the UK, we can roll it out elsewhere more easily”. We have seen this mindset for several years, and it is positive that it appears to be persisting.

Obtaining funding remains a significant challenge. Therefore, it is more important than ever to have a clear and compelling objective, target market, proposition and path to profitability. All of these demonstrate to regulators that you understand and are acting in the best interests of your customers, therefore there will be significant crossover between your funding pack and your Regulatory Business Plan.

Conclusion

Undoubtedly these unintended consequences do create challenges. However, successful navigation of these challenges can provide a strategic edge, by communicating with your customers better, obtaining favourable funding, managing a productive dialogue with regulators, and simply having a clear vision internally. Developing any of these capabilities represent an edge for ‘focused firms’ in a highly competitive market and could result in better identification and targeting of underserved consumer groups.

If this happens, we will look back at Consumer Duty as a catalyst for significant positive change that has encouraged recalibration of the sector to the ultimate benefit of consumers, competition and market stability.

We have experience and expertise supporting clients review and adapt their strategy, customer experience and deliver their customer driven change We also have former regulators to ensure that as you build your competitive edge you also meet regulatory expectations. 

Do get in touch if you would like to discuss any aspect of these articles, and you can see more of Johnston Carmichael’s views here.

Notes to editor