FCA’s lofty proposals could push firms across tightrope

Philippe Petit’s successful death-defying tightrope walk between New York’s Twin Towers in 1974 was something few would have comprehended as even remotely possible.

The feat was immortalised in the aforementioned 2008 documentary, and now asset managers might have to adopt Petit’s can-do attitude for the financial industry’s potential follow-up.

The FCA consultation paper’s title, A new Consumer Duty, is fairly innocuous; its contents, though, are anything but.

It is hard to argue against the logic of trying to better protect consumers – and maybe nobody should – but before new rules are imposed, it is important to consider what rules already exist, the motive for new ones, and their potential side effects.

Good intentions

The new rules proposed in this consultation paper suggest firms dealing with retail clients should “consider the Consumer Duty at every stage of its process and at every level of its organisational structure”.

This sounds commendable, particularly after the recent debacle with Woodford Investment Management, whose collapse left thousands of retail investors nursing significant losses and unable to access their savings.

Woodford move proves: Shame has no geographical boundaries

As regulatory devotees will know, the PROD requirements introduced in 2018, the RPPD (the Responsibilities of Providers and Distributors for the Fair Treatment of Customers), and Principle 6 (known as Treating Customers Fairly), all cover the central theme in the new consultation paper similarly.

The existing rules require firms to look at the intended long-term outcomes of their products, review them, and ensure they are targeting the right market.

All these rules failed to prevent the high-profile collapse of Woodford’s investment empire, and it is unlikely this was because we didn’t have enough rules; rather the task of enforcing the existing ones is too gargantuan.

A tall order 

Nevertheless, let us presume these new rules are required: Why, then, are they being proposed?

Some may claim it is a reactionary step to the Woodford debacle, something we will likely never know, but another potential catalyst could be to put downward pressure on asset management fees.

Industry insiders believe the FCA has asset management margins firmly in its crosshairs.

The regulator might feel that if it amplifies its focus on outcomes and wants managers to paint a clearer picture for investors about what they can expect from individual products, then asset managers will inherently take less risk.

Lower risk products are potentially easier to forecast and therefore potentially come with a lower cost, the regulator’s logic might dictate.

However, within these new rules, there is also the suggestion of introducing a private right of action, which would enable customers to sue for damages for breaches of the Consumer Duty.

And this is where we start to enter the land of unintended consequences, and our proverbial tightrope really begins to wobble.

If asset managers are required to provide more detailed outcomes for clients, and the efficacy of such forecasts could land in front of a judge, then the compliance and legal departments of firms will inevitably swell.

This will create increased costs for firms, which will ultimately be passed on to consumers.

Furthermore, small- and medium-sized firms will struggle with large implementation and ongoing costs – which some predict could be as high as £1m and £700,000 per year, respectively – something that could reduce competition in the industry.

Besides this issue, the regulator already has somewhere in the order of 60,000 firms to regulate – a somewhat grueling task; making sure they’re complying with more rules could be problematic.

Although these proposed regulations do add some new dimensions to the existing regulatory paradigm, much of it feels like repetition – especially since the regulator hasn’t confirmed that CP21/13 would replace existing rules.

Many in the industry might not object to this paper outright, but they will be irked at being told the same thing several times in several papers.

Tightrope walker Petit said: “I know it’s impossible, but I know I’ll do it,” in his book To Reach the Clouds.

And if these rules do go ahead, fund managers might have to adopt equally stratospheric ambition.

David Ogden is head of compliance at Sparrows Capital

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