The latest retail conduct risk outlook – the first published by the Financial Conduct Authority – gives a valuable insight into the way the new regulator views the immediate post-retail distribution review landscape and the initial areas where it may be seeking to increase scrutiny and demand improvement.
Broadly speaking, it contains no surprises but do not be tempted to overlook it or take it for granted. It clearly signposts the areas where the new regulator is likely to be active and is a clear statement of intent for the next 12 to 18 months.
Compared to previous FSA versions, the language used and organisation of subject matter is different, but the underlying message is the same: firms must align their practices and govern themselves to ensure the fair treatment and well-being of customers. Failure to do so risks incurring a sense of humour failure on the FCA’s behalf.
It is unlikely that all the areas that have been singled out will be relevant to your business, but you would be well advised to identify which of the activities or product areas highlighted you are currently, or plan to be, involved with.
The document seeks to analyse what the FCA sees as some of the most important root causes of poor consumer outcomes, risks to market integrity and ineffective competition in financial markets. These include:
* Failures in supply (information problems) and demand weaknesses (inbuilt biases) which may be worsened by low consumer financial capability.
* Structural and behavioural factors: design structures and processes, including culture and incentives (allowing potential for mis-selling).
* Environmental factors. The current general economic climate, regulatory and technological changes and trends, plus structures and behaviours that drive firm and consumer decisions.
The FCA admits that regulatory intervention alone will not be sufficient to mitigate these risks.
Instead it advocates this will be achieved through shared responsibility with firms and consumers, all of who should act in a “principled manner” when engaging with one another. In simple terms, advisers must always consider their clients’ interests as paramount and act accordingly.
Particular attention should be paid to serving existing clients and the search for new income streams – specifically the security of your technology, testing models for treating customers fairly and how you ensure operational security.
The FCA has also published its business plan for 2013/2014 which, in addition to mitigating the three causes of poor consumer outcomes outlined above, seeks to deal with its operational objectives of delivering consumer protection, enhancing market integrity and building competitive markets. Crystallised risks, such as payment protection insurance, the issues surrounding Libor and interest-rate swaps are also addressed.
The plan is another good weathervane for how the FCA will supervise firms. Last year it was made clear in the FSA’s Journey to the FCA publication that a more proactive approach to regulation was planned, with increased emphasis on issues that impact on consumers and their financial well-being.
Transparency is vital in the way you advise on and administer contracts and your relationships with customers. Products and services offered, charging structures and incentives will form an integral part of the FCA’s focus on business models and firms’ underlying cultures.
