Chancellor Rachel Reeves has urged regulators to cut red tape, but firms are questioning the impact on Consumer Duty and financial sector stability. David Ogden, Compliance Officer at Sparrows Capital, shares his thinking.
Just before Christmas news broke that the Chancellor of the Exchequer, the somewhat beleaguered Rachel Reeves, had written to regulators to seek potential policy input in a quest to generate economic growth. The seventeen regulatory bodies identified across a wide range of sectors were invited to present their proposals for deleting unnecessary ‘red tape’ from their rulebooks and were informed that those proposals would be scrutinised with a view to reducing unnecessary burdens on the sectors involved.
On first impression, this move was puzzling, and it certainly attracted plenty of opprobrium from firms which are subject to regulation across various sectors. To me, it seemed a strange starting point. Surely, the firms who are subject to regulation are acutely aware of the impact of rules and regulations on their activities and, to a degree, on the benefit that their customers may accrue? I would have though professional bodies would be the first port of call, or at least be involved in the debate at the outset.
Regulators have an unenviable task. There seems to be a general assumption that they can prevent failures but that just isn’t possible. After all, having a police force doesn’t eliminate crime. The sort of requirements that would come close to establishing a zero-failure environment would make today’s rulebooks look like a pamphlet! But if they decide to scrap certain rules and there are subsequent failures, which are in any way related, then there is a cast-iron guarantee that they will be hung out to dry. For that reason, among others, it is a lot harder to row back on rules than it is to develop new ones.
So the FCA, as no doubt the other regulators have consulted, have presented their initial thoughts on the subject to the Chancellor. There are some interesting possibilities in there, some which would affect our areas of involvement directly and others rather less so – but the overall health of financial services is clearly of interest to all, given that the whole sector contribution is approaching 10% of GDP. One thing that attracts my attention is to enable a new market for private companies to develop. That would seem challenging given the well documented travails of the AIM market. There are no details of how that might happen, but I very much hope it does; smaller companies need encouragement.
Of more specific interest are two proposals, neither of which is particularly hi-tech.
First up is a suggestion to review the proportionality of reporting requirements and remove redundant returns. The latter surely doesn’t need thinking about but there is most certainly a case for proportionality. Perhaps it would benefit practitioners if they had a greater understanding of the extent to which some returns, which are particularly onerous, are analysed. From reading comments on related articles there is certainly a feeling that a lot of information is supplied with which very little is done. That may or may not be a fair conclusion but once such a viewpoint gets traction it tends to become accepted fact, regardless of whether that is actually the case.
Another proposal that gets my vote is to reduce the anti-money laundering obligations which apply to smaller transactions. I have long thought that not only are requirements disproportionate to risk, but that the diversion of resources to address such matters actually increases risk in the types of activity that are more likely to facilitate criminal activity. In the absence of unlimited resources, reviews must always be risk-based and I do not think the risk/reward ratio is appropriately balanced on this subject at present.
The suggestion that really leaps out, however, is to remove the need for a Board level Consumer Duty Champion. Less than two years since the implementation of the Duty it is hard to believe that there is convincing evidence that the principles of the Duty have been fully embedded throughout all the firms to which they apply. To date the only review that has been distributed has been into the relatively small market for gap insurance and platform cash. That seems to be a scant basis on which to stand down board level champions. Andow much work would such a move really save? There’s no suggestion that there is any watering down of obligations and the need to demonstrate how outcomes are being assessed, so is this really a material cutting of unnecessary red tape?
It is probably inappropriate to look at one very specific subject on the context of the very wide-ranging application of the Duty. But the ongoing review into the practices of consolidators appears to speak of potential regulatory disquiet on a subject, conflicts of interest that strikes at the very heart of customer outcomes.
The principles of Consumer Duty are unarguable but one could of course had said the same of Treating Customers Fairly (TCF), the introduction of which was nearly two decades ago. The simple fact that Consumer Duty came along at all is clear evidence that TCF did not deliver on its objectives and, given that inescapable conclusion, anything that even smacks of a marginal watering down of obligations relating to the Duty, feels a little premature.
