“You are not an international oil trader or metals trader or commodities trader earning a million a year staring at eight screens at your desk in the City. No, you are that guy on the train home after work with his smartphone in his hand or that bloke sitting on the toilet upstairs with his iPad balanced on his knees as his wife cooks a meal downstairs”
Chris Stringman (2017) Win, Lose, Repeat: My life as a Gambler from Coin-pushers to Spread-betting, Ortus Press.
On 7th December the Financial Conduct Authority (“FCA”) published Consultation Paper 21/36 (“CP21/36”). CP21/36 provides details of feedback received to the FCA’s initial proposals to introduce a Consumer Duty (also, the “CD”) that were tabled in Consultation Paper 21/13 (“CP 21/13”). Furthermore, CP 21/36 sets out draft rules and guidance. The FCA is seeking further input from interested parties on these materials.
The retail broking sector has grown accustomed to regulatory interventions in recent years. The proposed CD is the latest initiative emanating out of Stratford that will require senior managers at retail broking firms to review their business models. This is because:
“The Consumer Duty would…apply across all retail sectors we regulate, to firms of different size with different business models and approaches.” (Paragraph 1.28, CP21/36).
This article sets out the highlights of CP21/36 for senior managers at retail brokers, together with some self-assessment questions to help kick start a business model review.
What is the ‘Consumer Principle’ and why is it significant to retail brokers?
The Consumer Principle holds that “A firm must act to deliver good outcomes for retail clients”.
The CD adopts a principles-based approach as opposed to prescriptive rules.
First, this makes it easier for the FCA to track market and technological developments. For example, the FCA could respond quickly to new online consumer behaviour trends such as those cited in connection with self-directed investors trading in high-risk investments such as CFDs in Understanding self-directed investors (2021), published by Britainthinks.
Second, the outcomes-based nature of the CD requires firms to try and mitigate foreseeable harm. A non-exhaustive set of good and poor practice examples are given to help steer firms in the right direction. However, the CD eschews a legalistic approach as this might create loopholes that could be abused.
Self-assessment questions:
- How does the firm ensure that this principle is embedded in the firm’s strategy? How would the firm seek to demonstrate this if called upon to do so by the FCA?
What outcomes is the CD seeking?
Cross-cutting rules introduced by the CD help firms to achieve the following four outcomes:
- Products and services: are subject to a rigorous product approval process that clearly identifies the needs and vulnerabilities of stated target markets. The anticipated performance of products is tested and their actual performance subject to ongoing monitoring post launch.
- Price and value: firms’ charging structures are clear, fair and do not exploit customer behaviour.
- Consumer understanding: communications issued by firms help clients make informed decisions.
- Consumer support that is responsive, empathetic, and accessible.
Self-assessment questions:
- Are your firm’s target markets clear? Can your firm easily demonstrate that it has considered the characteristics and needs of its target markets?
- Have your products (and any literature issued in support of them) been tested:
- to gauge the likely level of their being understood by intended recipients, i.e. “that guy on the train home after work” (Stringman, 2017) rather than financial and legal professionals?
- Is this level of understanding likely to be consistent across a range of different mediums, from a spreadbetting “supplement from the FT” (Stringman, 2017) to short television and social media adverts?
- How does senior management ensure that the products and services designed by the firm:
- do not exploit big data, customer inertia or vulnerabilities and/or information asymmetries? An example of a practice related to customer inertia that the regulator could choose to examine is the charging of inactivity fees. This practice was examined by the Cyprus Securities and Exchange Commission in thematic review C398 (published 7th July 2020).
- Do not incorporate ‘sludge practices’ that exploit behavioural biases?
- Although produced in the context of the gaming industry, it is worth watching ‘Paul Merson: Football, Gambling and Me’ (2021), BBC One, available on BBC IPlayer at: https://www.bbc.co.uk/sport/football/58859342 to gain an insight into the types of practices the FCA and consumer groups may choose to look at once the CD goes live.
- How do you gain assurance that your customer support service is easily accessible through a variety of channels? Have you used any mystery shoppers to test this? Are the merits of customer service reviews left on sites such as Trust Pilot considered? Are any trends identified reported to the firm’s senior management in management information that is presented consistently?
- Similarly, how are insights from complaints and client turnover used to inform product development and review?
- What training does your firm provide to external promoters and other partners to help them understand the FCA’s expectations?
What, if any, relationship will there be between the CD and the Senior Managers and Certification Regime (“SMCR”)?
As currently proposed, the following new rule would be inserted into the individual conduct rules (“COCON”) to cover conduct rules staff who are involved in the provision of services to retail clients:
“act to deliver good outcomes for retail clients”.
This would replace existing COCON rule 4 insofar as a conduct rules employee is engaged in retail activities. However, the existing COCON rule 4 will continue to apply to any wholesale activities that an employee also performs.
Self-assessment questions:
- How proactive is your firm in using the resources set out below in training employees involved in the provision of retail activities?
- Lessons learned from internal complaints data.
- Feedback directly received from clients, e.g. through written correspondence or indirectly, e.g. through online review forums such as Trustpilot.
- Resources produced by third parties such as:
- Financial Ombudsman Service
- BeGambleAware
(https://www.begambleaware.org/)
- GamCare
- Gambling Watch UK
What is the current timeline for implementation of the CD?
The FCA recognises that the implementation of the CD will represent a significant change for firms, particularly where: (a) they have a lot of products and services to review; or (b) their resources are stretched. Accordingly, the FCA is proposing an implementation deadline of 30th April 2023.
The closing date for comments on CP21/36 is 15th February 2022.
The FCA plans to publish a policy statement containing final rules by 31st July 2022.
Self-assessment questions:
- Has your firm:
- established a working group to oversee the implementation of the CD?
- Considered assessing the likely impact of the implementation of the CD on the firm, with the results being reported to the firm’s governing body?
- Have these results been used by the governing body to determine whether the working group has sufficient resources at its disposal to ensure the effective implementation of the CD?
How will the FCA monitor the implementation of the CD?
The FCA has decided against introducing a private right of action for firms’ breaches of the CD, preferring existing redress mechanisms, e.g. via the Financial Ombudsman Service.
With regards to continuous monitoring, the FCA sets out its expectations in CP21/36. Thematic work is one of the main supervisory tools the FCA will deploy to test if firms are meeting these expectations.
Summary
You might not be the “bloke sitting on the toilet upstairs with his iPad” placing spread bets, but to successfully navigate the CD you’ll need to put yourself in his shoes.
A version of this article was originally published by Thomson Reuters © Thomson Reuters.
