PIMFA welcomed the introduction of a new Consumer Duty, but said the new duty must be accompanied with greater clarity over any new regulatory expectations placed on firms and “a reasonable assessment of firms’ ability to discharge their obligations” under the duty.

The trade body added that “it is unclear to us why the FCA feels it requires new powers when it already has many powers at its disposal”.

PIMFA is particularly concerned that the new duty could lead to a situation in which the Financial Ombudsman regulates in hindsight with firms falling foul of elements of a duty they didn’t know existed. The trade body said ultimately, this will lead to firms “trying to second guess how the regulations should be applied unless they are given quite clear and specific guidance”, driving up costs for some firms or leading to regulatory failure for others.

PIMFA is also urging the FCA to give due consideration to the broader regulatory architecture and how its proposals may interfere inadvertently with business models – specifically in the Execution Only market. Previous work linked to the Financial Advice Market Review concluded that almost any recommendation with any degree of personalisation crossed the boundary. This would create a tension between what services firms have permissions for and are willing to provide, and the execution of a consumer duty.

Liz Field, chief executive of PIMFA, said: “We share the desire of the Regulator to eliminate many of the harms which it identifies in its Consumer Duty consultation. However, it is yet to clarify why it needs new powers to address these harms rather than use the ones that it already has.

“The very real risk that we see in these proposals introduce a higher level of expectation on firms, without providing the necessary clarity, granularity and guidance, which underpin the FCA’s proposals for a Consumer Duty.

“In doing so, they increase the chances of regulatory failure for firms which are currently unwilling, or unable, to meet their obligations, and place increased cost and administrative burdens on firms which do. 

“This is indicative of a long-standing criticism we have of the Regulator. When harm occurs in the market, it seeks to introduce new rules rather than understand whether or not the rules already in place could be enforced better and be accompanied by fit for purpose supervision.

“In giving due consideration to a consumer’s best interests, we are particularly concerned that under Consumer Duty proposals, firms will now be required to provide recommendations and services to people with a degree of personalisation. This runs a significant risk of forcing firms to cross into giving a form of advice which would in turn, create a tension between what services firms have permissions for, and are willing to provide, and the execution of a consumer duty.”

In May the FCA launched plans for a new ‘Consumer Duty’ for regulated firms which will set a "higher level" of protection for consumers buying retail finance products and services. 

The regulator said it has seen evidence of continuing practices that cause consumer harm, including firms providing misleading or confusing information to consumers.

The watchdog says this hinders consumers ability to properly assess financial products and services.

The proposed new Consumer Duty will have 3 key elements:

• The Consumer Principle: 'a firm must act in the best interests of retail clients' or 'a firm must act to deliver good outcomes for retail clients'.
• Cross-cutting rules: this would require 3 key behaviours from firms, including taking all “reasonable steps” to avoid foreseeable harm to customers, taking all reasonable steps to enable customers to pursue their financial objectives and to act in good faith.
• Suite of Rules: a suite of rules and guidance will set more detailed expectations for firm conduct in relation to 4 specific outcomes – communications, products and services, customer service and price and value.

The FCA wants to raise standards of consumer protection amid signs many consumers do not trust financial services. It said 1 in 4 respondents to the FCA’s 2020 Financial Lives Survey said they lacked confidence in the financial services industry and only 35% of respondents agreed that firms were honest and transparent.

To improve outcomes for consumers, the FCA is proposing to expand its existing rules and principles to ensure firms provide a “higher level of consumer protection consistently” which will enable consumers to get good outcomes routinely.

The new ‘Duty’ requirements will drive a "shift" in culture and behaviour for firms, according to the FCA.

Firms which do not follow the new Consumer Duty rules - currently at proposal stage - may face regulatory action, including enforcement investigations, the FCA warned.