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

This set industry a deceptively simple question: whether, where and how can the FCA simplify its requirements through greater reliance on high-level outcomes (including the Consumer Duty), while ensuring it continues to support and protect consumers. Firms have long bemoaned the complex web of rules in the FCA Handbook. A simpler, more streamlined set of outcomes could, it is argued, foster greater competition, innovation and reduce costs. 

To present simplification as a binary choice between prescription on the one hand and outcomes on the other, however, is to misunderstand how the FCA currently regulates. 

The FCA has many tools at its disposal when looking to regulate areas of financial services, with different combinations employed depending on the objective it is looking to achieve. Broadly, these can be separated as follows:

• Principles: articulate standards at a high level using broad concepts that can be applied flexibly to any given context; 
• Detailed rules: prescribe requirements to be applied to more specific situations;
• Conduct/process-based standards: regulate how firms should conduct themselves and how they should manage the conduct of their business; and
• ‘Outcomes’ based standards: prescribe the outcome firms need to deliver, leaving them free to determine how they organise and conduct themselves to deliver it.

Even within these four broad categories there are distinctions. Conduct/process-based standards may be drafted as high-level principles (e.g. the requirement that firms conduct themselves with due skill, care and diligence) or in a much more detailed or prescriptive way (e.g. specifying the precise wording of pre-contract disclosures). Similarly, ‘outcomes’ can be defined at a high level, as in the Consumer Duty, or in greater detail, such as under the Operational Resilience rules. Which approach to use will depend on the regulatory objective the FCA wishes to achieve and the risk of harm to consumers or the market if the relevant regulatory standard is not met. The CFI posits what is arguable a false dichotomy between rules and outcomes; the reality is significantly more nuanced. 

The CFI also proceeds on an assumption that outcomes-based regulation will automatically simplify the regulatory rulebook. The recent introduction of the Consumer Duty is a timely example of why this is not necessarily the case. In essence the Duty requires compliance with a single straightforward standard – to act to deliver good outcomes for retail customers. Sitting below this, however, are three broadly articulated cross-cutting rules and then a further raft of quite prescriptive rules governing the delivery of the Duty in the context of product manufacture, value assessments, customer understanding and customer support. Firms must also consider formal ‘Non-Handbook Guidance’ and a proliferation of additional material including policy statements, Dear CEO letters, speeches, feedback statements and webinars, all of which the FCA expects firms to take into consideration regardless of whether the specific communication relates to their sector. Few if any firms can efficiently ingest and respond to this volume of output. If this approach is adopted as a template for future cases of ‘outcomes-focused’ regulation, there is a real possibility that we have far less clarity about what is expected of firms.

Prescriptive rules offer standardisation and legal/supervisory certainty. Making judgements about the application of high-level outcomes often increases firms’ compliance burdens. The picture is, therefore, far more varied than the FCA presents it in its CFI. This needs to be properly understood before the FCA produces any proposals aimed at simplifying regulation.

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