The regulatory challenges facing the financial services industry

By Chris Croft, compliance and regulatory specialist at Bellevue Law

Although it could sorely do with it, the financial services industry hasn’t enjoyed a moment of calm for a long time now – and there’s no sign of that changing anytime soon. Quite apart from the constant economic and political issues, there has been a constant flow of regulatory change.

The sector is just getting to grips with the Financial Conduct Authority’s (FCA’s) Consumer Duty, which has impacted all businesses with a customer-facing operation.

The constant regulatory changes have created much upheaval and profoundly altered the environment in which financial services companies operate. Many smaller providers, in particular, face an existential threat because it has become increasingly difficult for them to operate due to the regulatory and compliance burden they face. Times are already tough, but the full impact of this situation has not yet been felt across the industry.

An example of one of the changes whose effects have still to materialise fully is the increases in the size of claims that can be made to the Financial Ombudsman Service (FOS), which has risen from £150,000 in 2019 to its current level of £415,000. Originally set up as a resolution mechanism for small claims, it is likely that the FOS will now see far more and far larger claims being brought before it rather than these matters being resolved through a judicial process in court. The FOs is not a judicial forum, and the outcome of FOS complaints can be influenced by factors such as perceived fairness.

There is a  profound shift affecting financial services providers with the emergence of a general climate in which the industry is expected to pay when people lose money, regardless of whether or not the industry is actually at fault. The clearest recent example of this is authorised push payment fraud.

Consumer organisations have been extremely effective at demanding that the responsibility for remediation with the industry. Banks and Building Societies have gone to great lengths to warn customers, not to mention the huge amounts of publicity surrounding these kinds of scams and the often-repeated warnings that neither banks nor the police will ever contact people in the way that scammers do.

There has been a Supreme Court ruling recently that a bank is not legally required to protect its customers from push payment fraud, and indeed, the bank’s obligation generally is to honour its customer’s instructions.

And yet, almost immediately, the payments services regulator has announced that it is making it a legal obligation for payment services providers – i.e. banks, building societies and other payment providers – to reimburse their customers who have been subject to push payment fraud. From next year, this reimbursement must be made within five days.

These developments are part of a bigger political shift towards placing the responsibility for outcomes on the shoulders of the industry rather than those of consumers. We see this not least in Consumer Duty, an aspect of which is that financial services providers should deliver the right outcomes for customers, including the financial outcome that they expect. When consumers don’t get their desired outcome, they will be more likely to complain and expect the industry to compensate them – especially once they become more aware of the Consumer Duty, with which the industry has been preoccupied for the past 12 months but whose existence the general public is still largely ignorant of.

Ironically, however, I think that it is consumers who will ultimately lose out through these developments.

That’s because when the advice given by financial services providers is judged with hindsight – as it is with the Consumer Duty – and these companies are made liable for outcomes resulting from market forces, they have to protect themselves against this massive risk exposure. To do so, they are forced to use expensive technology to put in place the necessary monitoring systems for recording the assessments they made upon which their advice to consumers was originally based.

This, in turn, is bound to drive up costs, which will make smaller providers out of business and make obtaining sound financial advice prohibitively expensive to many ordinary consumers. In other words, the financial advice gap will widen, which is not a great democratic outcome.

So, what can operators do to deal with this highly challenging environment? The answer is largely provided by technology, but financial services providers will need to put in place systems that facilitate change and enable them to adjust rapidly to unpredictable market conditions.

The fact is that both the FCA and the Prudential Regulation Authority (PRA) are very keen on businesses having operational resilience, and providers need to ensure that they have robust enough systems and resources in place to withstand most unforeseen events. Ultimately, they must also have put the necessary measures in place to make their operations compliant with the new regulations. I am aware that some providers are already engaged in remediation projects to ensure that they are compliant.

For my part, I see absolutely no difference in my personal dealings with financial services institutions since the implementation of the Consumer Duty – no greater levels of transparency, no improvement in levels of service, and certainly no reduction in costs. Perhaps I am unlucky, but the cynic in me wonders if this piece of regulation isn’t a bit of a misnomer, as it’s questionable in my view as to whether consumers – or, indeed, the industry – really benefit from it.