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Consumer Duty: Respondents concerned by unintended monetary consequences

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  • 27/07/2022
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Respondents to Consumer Duty consultation have raised questions about the monetary benefit of Consumer Duty, cost of implementation and unintended consequences of the regulation.

In its most recent cost-benefit analysis annex in its Consumer Duty policy statement, the FCA said that the majority of respondents agreed that updated consumer duty would benefit the industry and customers, but some had expressed concerns that benefits could not be quantified in monetary terms.

“Some argued that this makes it difficult to judge whether the overall benefits of our proposals will exceed overall costs. Others argued that these benefits largely depend on how we supervise and enforce the Duty, and so may be difficult to predict,” the regulator explained.

In its response, the FCA said that it did not believe that it was not “reasonably practicable” to quantify the benefits of Consumer Duty.

“Overall, we believe that the Duty will be net beneficial for the market based on our experience of the harms we are aiming to tackle, the potential scale of those harms and the cost and benefits of past interventions,” it said.

 

Estimates of cost are too low

The FCA continued that some firms had argued that estimates for its one-off and ongoing costs “appeared too low”, especially regarding IT changes, back‑book remediations, training and change projects.

In previous policy statement released in December the FCA estimated that total one-off costs would be between £688.6m and £2.4bn, and the ongoing annual direct costs would be in the range of £74.0m and £176.2m.

The FCA said in this report that only one firm provided an alternative estimate of the total cost of changes and no firm had given an expected breakdown of one-off and ongoing compliance costs.

The regulator said that some firms and sectors may have cost “above or below our average figure”, but respondents did not provide “detailed evidence or data” on their costs that would make it question whether its estimates were “representative”.

 

Unintended consequences for competition, innovation and financial inclusion

The regulator added that some firms had raised concerns that “unintended consequences” around competition, innovation or financial inclusion had not been “adequately considered”.

The FCA said that it understood concerns about unintended consequences but it did not agree that Consumer Duty would weaken competition or inhibit innovation.

“We believe that firms will be able to compete more effectively in the interests of consumers where all firms are held to a higher standard and consumers are put in a position to make informed decisions and act in their own interests.

“We would expect effective competition to encourage entry and innovation rather than hinder it, as firms are incentivised to improve their product offerings and compete effectively in consumers’ interests,” the regulator noted.

It added that it did not expect the new rules to restrict access to products as Consumer Duty was “underpinned by reasonableness”, and it intended to apply rules “proportionately”.

“We think that only in extreme cases will firms decide to withdraw a product or service and we expect competing firms to enter to fill any gap in the market,” it said.

 

Regulator will work closely with firms during implementation

The FCA said that it would “work closely” with firms during implementation to address issues that came up and it would monitor the effects of Duty for signs of unintended consequences. This would be included in its post-implementation review.

The regulator also disagreed that it would conflict with secondary objective of the increased competitiveness and growth of the UK economy.

“In our view, our consumer protection and competition objectives are key to achieving these outcomes. We believe that increased consumer confidence in financial services alongside more effective competition is an important driver for the increased growth and competitiveness of the UK economy,” it explained.

The FCA said that some sectors would be “affected more” than others, but Consumer Duty would “raise standards in all sectors”.

It added that it wanted a “consistent approach” across financial services, and it expected higher costs in some sectors would be offset by “greater benefits for consumers”.

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