FCA’s Consumer Duty Adds Costs, Making London the Most Demanding Market for Retail Firms

The
FCA’s Consumer Duty has made the UK one of the most challenging brokerage environments
in the world, although much work remains to be done to ensure brokers are
complying with all its requirements.

In
the 16 months or so since the Financial Conduct Authority introduced a new consumer
principle requiring firms to act to deliver good outcomes for retail customers
there has been much discussion in private about the implications of adding to
an already heavy compliance workload.

According
to one broker, the FCA’s consumer duty led to a 25% increase in compliance
costs in the first year.

Uncertainty About Market Dynamics

Since
the FCA does not actively
monitor the number of brokers operating in the UK it is difficult to say
whether the introduction of the consumer duty has precipitated a flight to less
stringently regulated markets.

However,
it is reasonable to assume that recent moves by UK-licensed brokers to expand
their operations in other markets – most notably Dubai – are at least in part a
respond to a consumer protection regime that goes beyond anything imposed in
any other major financial market.

David
Morrison, senior market analyst at Trade Nation describes it as one of the most
stringent regulatory frameworks globally and more far-reaching than either the
EU’s MiFID II & consumer protection laws or the FINRA and SEC regulations
in the US.

“It
embeds customer outcomes within the regulations, which requires active
outreach, monitoring and follow-up action,” he says. “The approach of the
Australian Securities and Investments Commission is similar but is focused more
on the provision of financial advice and product design. The UK’s Consumer Duty
is broader in scope as it covers all aspects of the customer experience.”

Rising Compliance Costs and Building Trust

Ross Maxwell, global strategy and operations lead at VT Markets

The
downside, acknowledges Morrison, is that all new requirements increase
compliance costs. “It feels as if compliance has been the single biggest area
of growth in financial services, at least in my lifetime,” he adds. “But if it
helps build trust and confidence, then it can’t be all bad.”

While
other major markets have regulations aimed at protecting consumers, the UK’s
emphasis on outcome-focused regulation creates higher expectations for firms in
terms of delivering good consumer outcomes across the entire customer journey agrees
Ross Maxwell, global strategy and operations lead at VT Markets.

Gerry Perez, CEO of Interactive Brokers UK

Gerry
Perez, CEO of Interactive Brokers (UK) says firms must reevaluate their
purpose, processes, procedures, pricing and policies in order to deliver on the
duty’s core principles. “It raises the UK’s industry standards and increases
the financial sector’s credibility but it also makes some operations costly and
more complex, especially for smaller firms,” he adds.

Balancing Complexity and Innovation

The
UK’s rules have raised the bar for customer-centricity, going beyond
box-ticking to focus on ensuring good outcomes for clients suggests Kourosh
Khanloo, director of corporate strategy at Tradu.

“While
this creates additional operational complexity, it elevates industry standards
and builds trust with customers,” he says. “Smaller brokers may face challenges
due to the increased resource requirements, but the framework drives
innovation, differentiation and competition.”

Some
brokers were already behaving to a high standard when it came to treating
customers fairly but many were not and the new regime has put pressure on those
who fell below the standards required according to Morrison.

David Morrison, senior market analyst at Trade Nation

“Brokers
must provide clear breakdowns of all fees, charges and commissions, helping
customers understand exactly what they are paying for,” he says. “In addition,
the price of a product must be justified by the benefits it offers. This should
help customers assess whether the value they are receiving aligns with the
cost.”

Earlier
this month, the FCA published a review of the first annual consumer duty board
reports from 180 firms across a range of sectors. It found that some firms did
not have sufficient data quality to justify conclusions or provide adequate
assurance that they were meeting their obligations under the duty and that many
action plans and improvements were not accompanied by further details such as
timescales, action owners and clarity on the data that would be used to
evidence good outcomes.

Assessing Implementation Gaps

This
followed on from a review of payments firms’ implementation of the duty, which
revealed that of the 23 firms surveyed almost half had only partially
implemented the duty and required significant work to comply with it.

Despite
this patchy implementation, Perez reckons unclear fees and communications have
become a thing of the past in the FX brokerage space and that improved openness
and transparency should give customers greater confidence when evaluating and
selecting brokers.

“With
post-interaction surveys and real time feedback, clients can determine if what
they are paying delivers the expected benefits,” says Khanloo.

Joshua Raymond, the CEO of XTB UK

XTB
UK managing director, Joshua Raymond notes that his firm has created simplified
legal documentation, conducted more enhanced training for front office staff to
help identify customer vulnerabilities and improved its monitoring systems to
be proactive in presenting what could be adverse outcomes for customers.

Shaping Future Products and Value Propositions

The
objectives of the consumer duty are also evident in eToro making sure fairness
is built into new products in its pipeline and that it is communicating these benefits
to customers effectively, so that they know they are getting the best value out
of the platform explains Daniel Moczulski, managing director of eToro UK.

Dan Moczulski, the managing director of eToro UK

He
reckons European rules will move closer to the UK in terms of customer
protection. “There are much more defined rules for consumer duty in the UK now,”
says Moczulski. “Regulations in Europe have looser concepts of fair value and
customer protection, but we do expect them to develop along the lines of what
exists in the UK.”

Similar
views are expressed by Raymond, who believes the FCA will take a proactive
approach to enforcing these new rules and refers to similar considerations on consumer
duty across the EU raising expectations of changes in the single market.

“Consumer
duty will mean higher costs associated with legal and compliance-related
systems and a tightening of the processes connected to the onboarding and
servicing of customer accounts,” he says. “It will also mean barriers to
certain profiles of customers being accepted on respective platforms.”

Finance Magnates reached out to the FCA but did not receive a quotable comment.

The
FCA’s Consumer Duty has made the UK one of the most challenging brokerage environments
in the world, although much work remains to be done to ensure brokers are
complying with all its requirements.

In
the 16 months or so since the Financial Conduct Authority introduced a new consumer
principle requiring firms to act to deliver good outcomes for retail customers
there has been much discussion in private about the implications of adding to
an already heavy compliance workload.

According
to one broker, the FCA’s consumer duty led to a 25% increase in compliance
costs in the first year.

Uncertainty About Market Dynamics

Since
the FCA does not actively
monitor the number of brokers operating in the UK it is difficult to say
whether the introduction of the consumer duty has precipitated a flight to less
stringently regulated markets.

However,
it is reasonable to assume that recent moves by UK-licensed brokers to expand
their operations in other markets – most notably Dubai – are at least in part a
respond to a consumer protection regime that goes beyond anything imposed in
any other major financial market.

David
Morrison, senior market analyst at Trade Nation describes it as one of the most
stringent regulatory frameworks globally and more far-reaching than either the
EU’s MiFID II & consumer protection laws or the FINRA and SEC regulations
in the US.

“It
embeds customer outcomes within the regulations, which requires active
outreach, monitoring and follow-up action,” he says. “The approach of the
Australian Securities and Investments Commission is similar but is focused more
on the provision of financial advice and product design. The UK’s Consumer Duty
is broader in scope as it covers all aspects of the customer experience.”

Rising Compliance Costs and Building Trust

Ross Maxwell, global strategy and operations lead at VT Markets

The
downside, acknowledges Morrison, is that all new requirements increase
compliance costs. “It feels as if compliance has been the single biggest area
of growth in financial services, at least in my lifetime,” he adds. “But if it
helps build trust and confidence, then it can’t be all bad.”

While
other major markets have regulations aimed at protecting consumers, the UK’s
emphasis on outcome-focused regulation creates higher expectations for firms in
terms of delivering good consumer outcomes across the entire customer journey agrees
Ross Maxwell, global strategy and operations lead at VT Markets.

Gerry Perez, CEO of Interactive Brokers UK

Gerry
Perez, CEO of Interactive Brokers (UK) says firms must reevaluate their
purpose, processes, procedures, pricing and policies in order to deliver on the
duty’s core principles. “It raises the UK’s industry standards and increases
the financial sector’s credibility but it also makes some operations costly and
more complex, especially for smaller firms,” he adds.

Balancing Complexity and Innovation

The
UK’s rules have raised the bar for customer-centricity, going beyond
box-ticking to focus on ensuring good outcomes for clients suggests Kourosh
Khanloo, director of corporate strategy at Tradu.

“While
this creates additional operational complexity, it elevates industry standards
and builds trust with customers,” he says. “Smaller brokers may face challenges
due to the increased resource requirements, but the framework drives
innovation, differentiation and competition.”

Some
brokers were already behaving to a high standard when it came to treating
customers fairly but many were not and the new regime has put pressure on those
who fell below the standards required according to Morrison.

David Morrison, senior market analyst at Trade Nation

“Brokers
must provide clear breakdowns of all fees, charges and commissions, helping
customers understand exactly what they are paying for,” he says. “In addition,
the price of a product must be justified by the benefits it offers. This should
help customers assess whether the value they are receiving aligns with the
cost.”

Earlier
this month, the FCA published a review of the first annual consumer duty board
reports from 180 firms across a range of sectors. It found that some firms did
not have sufficient data quality to justify conclusions or provide adequate
assurance that they were meeting their obligations under the duty and that many
action plans and improvements were not accompanied by further details such as
timescales, action owners and clarity on the data that would be used to
evidence good outcomes.

Assessing Implementation Gaps

This
followed on from a review of payments firms’ implementation of the duty, which
revealed that of the 23 firms surveyed almost half had only partially
implemented the duty and required significant work to comply with it.

Despite
this patchy implementation, Perez reckons unclear fees and communications have
become a thing of the past in the FX brokerage space and that improved openness
and transparency should give customers greater confidence when evaluating and
selecting brokers.

“With
post-interaction surveys and real time feedback, clients can determine if what
they are paying delivers the expected benefits,” says Khanloo.

Joshua Raymond, the CEO of XTB UK

XTB
UK managing director, Joshua Raymond notes that his firm has created simplified
legal documentation, conducted more enhanced training for front office staff to
help identify customer vulnerabilities and improved its monitoring systems to
be proactive in presenting what could be adverse outcomes for customers.

Shaping Future Products and Value Propositions

The
objectives of the consumer duty are also evident in eToro making sure fairness
is built into new products in its pipeline and that it is communicating these benefits
to customers effectively, so that they know they are getting the best value out
of the platform explains Daniel Moczulski, managing director of eToro UK.

Dan Moczulski, the managing director of eToro UK

He
reckons European rules will move closer to the UK in terms of customer
protection. “There are much more defined rules for consumer duty in the UK now,”
says Moczulski. “Regulations in Europe have looser concepts of fair value and
customer protection, but we do expect them to develop along the lines of what
exists in the UK.”

Similar
views are expressed by Raymond, who believes the FCA will take a proactive
approach to enforcing these new rules and refers to similar considerations on consumer
duty across the EU raising expectations of changes in the single market.

“Consumer
duty will mean higher costs associated with legal and compliance-related
systems and a tightening of the processes connected to the onboarding and
servicing of customer accounts,” he says. “It will also mean barriers to
certain profiles of customers being accepted on respective platforms.”

Finance Magnates reached out to the FCA but did not receive a quotable comment.

This post is originally published on FINANCEMAGNATES.

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