On 21 October 2019, Christopher Woolard, Executive Director of Strategy and Competition at the Financial Conduct Authority (FCA), delivered a speech discussing the ‘Future of Regulation’ (Speech).
The Speech explores how regulation can evolve to adapt to changing consumer needs and attitudes. Nowadays consumers are faced with many more options regarding their finances (such as their pensions), which means that they have to make more (and often complex) decisions. In addition, innovation, such as Artificial Intelligence (AI) and machine learning is changing the financial services landscape.
Among other things, Mr. Woolard announced the FCA’s plan to consult, during 2020, on a Duty of Care in the financial services sector. This follows the FCA’s Feedback Statement to Discussion Paper DP18/5, which effectively rejected the idea of introducing a statutory duty of care.
A key theme in Mr. Woolard’s Speech was the need to move from a ‘rules-based’ to an ‘outcomes-based’ approach in regulation. Narrow compliance with the letter of the law is not enough, when it is not coupled with delivering the right outcomes for the users of financial services. To that end, as a first step, regulators must identify the positive consumer outcomes and communicate them clearly to firms. In this regard, Mr. Woolard indicated that the next FCA Sector Views and Business Plan of the FCA will be much more focused on outcomes.
In addition, Mr. Woolard questioned the efficiency of disclosure as a regulatory tool to protect consumers. He highlighted that, even though disclosure has been the “go-to” solution for regulators and policymakers, behavioural economics suggest that its impact is limited. He also suggested that a more “interventionist” solution might be warranted and that it would be preferable to move to a “tougher” remedy (if one is necessary) sooner, rather than later.
According to Mr. Woolard, another priority should be the simplification of the FCA rules. He highlighted, however, that this does not mean adopting a “light-touch” approach, but rather ensuring that the rules are easier to understand. In this regard, the FCA aims to simplify and streamline its rulebook through its Handbook Review. Moreover, Mr. Woolard suggested that the FCA should, as part of its Principles Review, revise the Principles of Business rule requiring firms to communicate in a way which is fair, clear and not misleading, to clarify that firms should go further and actually “ensure consumer understanding”.
As a final remark, Mr. Woolard suggested that regulators should explore how technology can be used to bridge information asymmetry between consumers and firms. For instance, disclosure could be coupled with mobile applications that test consumers’ understanding of the products they intend to purchase throughout the sale process.
In terms of next steps, the FCA will be launching an open invitation for discussion on the above matters. Following this, the FCA will publish detailed reports, including an analysis of future market dynamics, a Discussion Paper about the FCA Principles, and a Consultation Paper on the Duty of Care in the financial services sector.