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Global Trustee and Fiduciary Services News and Views
| Issue 47 | 2017
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But solutions that allow
individuals to save for
retirement through
investing and then manage
their later-life income will
require a reengineering of
existing products.
Consumer responsibility
The
second trend
is the desire to grapple with
the concept of consumer responsibility. Debate
about how much a regulator should intervene
— either across a sector through rules or with
an individual firm through supervision — has
for years been hobbled by the absence of any
clear articulation of the nature and limits of
consumer responsibility.
6
Andrew Bailey, the
FCA CEO, announced in July that there would
be a public consultation on whether some
consumers should be prioritised over others
and the wider balancing exercise of firm,
consumer and regulator responsibilities.
7
The paper is now out and all interested groups
can now debate the best way forward.
8
Importantly, this debate will occur after two
key groups have altered their approaches to
the issue. The first are consumers themselves,
together with the political class. The 2008
financial crisis can be understood to have
reversed the burden of proof on financial
services and related themes. Beforehand,
despite being a licenced activity, there was a
broad assumption that financial services, more
liquidity and universal banks each brought
benefits. Now it is understood that there
are boundary conditions to each of these
assumptions, viz they are true up to a point.
Since the financial crisis, society expects the
financial services industry to demonstrate that
what it proposes will not cross that line.
Equally important, when considering its
approach to consumer responsibility, the
FCA is changing its mindset. It is embracing
behavioural economics. Rather than presume
consumers have unlimited capacity to learn and
choose, regulators have noticed that “a rapidly
growing literature on behavioural economics
shows that some errors made by consumers are
persistent and predictable.”
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Taken together,
we can expect a regulator to spend much more
time understanding what responsibility means
in light of real-world biases and to adjust rules
accordingly. There will be no bonfire of rules,
but there will be pruning and replacing.
Brexit needn’t be expected to cause any
significant alteration of consumer protection.
Indeed in the EU, the UK has been either a
source or a supporter of many EU consumer-
focused initiatives. But the UK will be freer to
follow these trends to a different and potentially
faster timetable than the EU. Even if equivalence
with the EU is a key constraint on future UK
regulatory initiatives — and how much the UK
is willing to so limit itself is still a very open
issue — it is likely that all these approaches, such
as following a mission based on an articulated
position on consumer responsibility, using
product intervention, carrying out further
market reviews using competition and then
implementing corrective rules after — will pass
an equivalence test. However, the associated
concern related to any passing of such test will
be the safeguards attached to its granting and
how easily they can be withdrawn.
These trends are part of a bigger question,
however, that the UK government at or after
Brexit must address. What is the right level of
paternalism in relation to financial services?
10
Again, this question will be asked in a new
sociopolitical context. The first decade of
UK regulation could be said to have been
focused on investors, with all the higher-net-
worth, discretionary-spend impressions that
such terms can give. Some in the industry
understandably still prefer terms like “clients”
and “investors” but these terms do not sit
so well with a new cohort of individuals
whose interests and long-term security in
particular UK governments of every political
persuasion will seek to promote: those saving
for retirement and later life. Around 8 million
people already save into a private pension
and contributions are around GBP20 billion a
year.
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The numbers will increase significantly.
This political refocus from considering
people as investors to considering them as
individuals saving for retirement through
investing will challenge how regulation draws
a distinction between products and services
and the boundaries of advice.
Historically,
regulation has
distinguished
between products
and services.