There has been a flurry of activity in recent months from the Financial Conduct Authority (FCA), with new duties and obligations on regulated firms and individuals on the horizon. In this article, BCL associate Matt Davies explores areas where the FCA is focusing its attention and provides insight and tips for firms wishing to stay in the regulator’s good books.
FCA consumer duty
In July, the FCA announced that it would require regulated firms to adhere to a new Consumer Duty. This obliges firms to act to deliver good outcomes for retail customers; the consequences of this are likely to be profound. It is expected the new rules and guidance relating to the Consumer Duty will come into force on 31 July 2023 for products or services that are open to sale.
The aim of the duty is to improve standards of consumer protection across financial services and for firms to put their customers’ needs first. It is similar to existing obligations on firms under Principle 6 of the FCA Handbook, which requires a firm to “pay due regard to the interests of its customers and treat them fairly”.
Alongside the Consumer Duty, the FCA is looking to amend its Conduct Rules, requiring staff to “act to deliver good outcomes for retail consumers” when such conduct is within scope of the Consumer Duty.
Outcomes relating to the Consumer Duty relate to products and services; price and value; consumer understanding; and consumer support. Firms are required to make judgments as to what is required by different concepts such as “foreseeable harm” and “fair value”.
Firms were required to agree implementation plans by 31 October 2022, providing evidence that they had scrutinised and tested the plans to resilience and deliverability.
At first blush, it is not immediately clear how the new duty differs from obligations under existing Principles. However, the consequence of the Consumer Duty for regulated firms is that the FCA appears to expect firms to embody a culture of placing consumers first in the conduct of retail-facing business. Although the Duty is not expected to come into force until next year, firms’ approach to consumers, noting the current cost of living concerns, is sure to be a key consideration for the FCA.
Firms will need to consider how their customers can make informed decisions and that their desired outcomes can be achieved. Inevitably, this will require firms to implement a comprehensive data collection process so they can keep track of their customers’ interactions with their business. This can help evidence customers receiving good outcomes. Given that existing obligations under the treating customers fairly regime are unlikely to be sufficient, firms would be well advised to undergo a gap analysis, bottoming out any further necessary work.
One example where businesses may look to strengthen their position by the time the Consumer Duty is implemented is staff training. As described above, an amendment to the Conduct Rules will require staff to understand what their obligations are and how not to fall foul of the proposed rule change. If firms are able to demonstrate an understanding of what their customers are seeking to achieve, it may go some way to showing that they are on top of these new requirements.
Financial promotions and Buy Now Pay Later (BNPL)
An area of concentrated enforcement by the FCA is financial promotions. Between July and September this year, the FCA intervened to amend or withdraw 4,151 financial promotions – its highest rate since it started publishing the data.
A worrying trend is the number of unauthorised firms and individuals taking advantage of the present cost of living crisis to promote financial products. Under FCA rules, a person cannot communicate an invitation to engage in investment activity unless they are an authorised person.
Recently proposed rules, if approved, will require firms that approve financial promotions to demonstrate they have the right expertise to do so. Firms would also be required to regularly report to the FCA on the financial promotions they have approved.
Though not within its remit, the FCA has intervened in 66 BNPL promotions from one firm, for misleading information about applicable fees and unfair risk warnings. BNPL firms sit in a “grey” area for the FCA – although the underlying credit products are not within the scope of FCA regulation, that has not stopped it from applying pressure on firms through enforcement of its financial promotion rules.
BNPL and other “quick finance” products are likely to be an increasingly attractive option for those customers who are the most at risk from the present cost of living issues. Furthermore, “Black Friday” and Christmas are expected to be very busy periods for consumers looking at these products and this may result in an uptick of enforcement action for those firms looking to play fast and loose with financial promotion rules.
The FCA has threatened providers of BNPL products with criminal and regulatory enforcement action if they do not comply with financial promotion requirements. Given the FCA muscle-flexing in this space, companies would be well-advised to keep one eye on the regulator’s activities. Although it will intervene on financial promotions, it would seem likely that the FCA will also seize the opportunity to increase its presence in the BNPL arena.
Companies looking to market sustainable investment products should be aware of potential new FCA rules aimed at protecting consumers and improving trust, with the FCA turning its gaze to greenwashing. Greenwashing is where a company, product or investment exaggerates it credentials as to how ‘green’, ‘sustainable’ or ‘ESG-friendly’ it is. Typically, such action aims to attract investment or attention from those wishing to invest in sustainable products.
It is expected that any new rules would complement existing consumer protections that the FCA demands. These include Principle 7, which requires communications to be clear, fair and not misleading. Companies offering financial products, for example an investment fund, that are green or sustainable in nature must have a crystal-clear understanding of why they can market their products with those labels. Companies must conduct thorough due diligence of any underlying “green” investments to ensure they are not merely parroting inaccurate claims.
Although the FCA greenwashing consultation lasts until January 2023, it is expected to introduce restrictions on how sustainability-related terms can be used in product names and marketing – which also concerns the FCA’s focus on financial promotions. In-scope businesses should consider the disclosures they will need to make to investors, with heightened accessibility and ease of understanding as priorities.
The US Securities and Exchange Commission (SEC) has already shown proactivity with regard to ESG and greenwashing matters. Earlier this year, the SEC filed an action in the US District Court for the Eastern District of New York against an iron ore producer.
The complaint centres on the circumstances surrounding the collapse of a dam in Brazil in January 2019. A strand of the SEC’s complaint focuses on misleading statements as to the ore producer’s public statements abouts its “commitment to sustainability”. It is likely that we will see increased regulatory intervention with regard to greenwashing claims and the suitability of certain investment labels.
Greenwashing is expected to continue as a hot topic for potential regulatory action for the near future. It is already an area of interest for the Competition and Markets Authority (CMA), who last year published their Green Claims Code. This Code sets out different principles that businesses must meet when outlining their environmental claims, including truthfulness, accuracy, unambiguity, and substantiated.
Although this Code considers greenwashing from a consumer protection perspective, the FCA may well take inspiration from the CMA in drafting rules aimed at protecting consumers and promoting financial products.
The FCA continues to try and keep pace with current market developments and customer behaviour. Even though it may take time for specific rules to come through, tenets which are core to the FCA – treating customers fairly and that communications to customers are clear, fair and not misleading – will remain constant. BNPL and greenwashing are just two areas of customer-facing financial services that are in vogue for the regulator. The FCA is willing to apply its existing (and very-wide) toolkit to an adapting market and it is likely that the regulator will consider the possibility of using enforcement action to send a strong statement to the market that it is watching.