Over the weekend I was told a story about a “friend of a friend” who had been persuaded to invest around £300,000 in a “trading scheme” that guaranteed “19% returns”. Even without the details, it is not hard to predict that this “exclusive wealth generating offer” didn’t fulfil its extraordinary promise.
This was an adult woman, not unfamiliar with the financial services industry, who ignored several warnings from friends that this financial arrangement seemed, in British slang, ‘a bit dodgy’. However, this was also a woman who had just gone through an acrimonious divorce, with the £300,000 being from the sale of her former marital home. It wasn’t money she could afford to lose. Today, she finds herself trying to rebuild her life, without a nest egg to build on.
You can have sympathy or not. But this story came after I attended a discussion on the UK’s recent Consumer Duty rules, hosted by law firm Goodwin in London. For those not in the know, the new UK rules came into effect in July of this year and are meant to set a higher standard of consumer protection in financial services, according to the Financial Conduct Authority (FCA).
Broadly, the Duty means consumers should get the support they need, when they need it, communications that can be understood, and products and services that meet their needs and offer fair value.
That seems straightforward, but the Duty’s description is broad and subject to interpretation — and it is that way by design. More often than not, when a new regulation is released, the industry spends the next few years debating its meaning (define ‘fair value’; go ahead, I dare you) and ironing out the ‘unintended consequences’. Then it all starts again, with the formulation of the second iteration of the regulation. I fear the Consumer Duty is no different.
The lawyers at the Goodwin event argued that there is nothing really new about the UK Consumer Duty rule, with many of its stipulations covered by earlier regulations. However, the July 2023 rules are the FCA telling the industry: ‘This is your final warning, consumer-facing financial services — this time we really mean it!’ (Or so I imagine the fine folks at the FCA talking among themselves.)
Another thing to understand about this renewed focus on customer care in financial services is that the Duty covers both incumbent financial institutions and emerging fintech companies. However, while most large UK banks have plenty of regulatory lawyers on staff to support adherence to, and finding opportunities from, the new Duty, most small to medium-sized fintech firms do not.
These firms are going to rely on consultants, who use standard templates, which may or may not comply with the new Duty.
Meanwhile, the FCA has also introduced rules that require firms wishing to promote crypto assets in the UK to be authorised or registered by the FCA, or have their marketing approved by an authorised firm. As a result, crypto exchange Binance has stopped accepting new users in the UK while it works to find a partner to help it comply with the new controls.
While I applaud the closer scrutiny of crypto businesses, the lack of clarity and direction in the rules seems to lead us towards more confusion and chaos, rather than consumer protection.
Getting back to the UK Consumer Duty, according to the FCA, the Duty should require firms to be “open and honest, avoid causing foreseeable harm, and support you to pursue your financial goals”.
Consumers come in all shapes and wealth sizes. Many investments are risky, and usually come with a disclaimer that initial deposits could be lost (anyone still holding onto their NFTs?). A long time ago, an investment manager said to me: “The only advice I can ever give is to put your money in a long-only tracker fund and walk away from it.”
We all think we can spot a scam a mile away, turn our nose up at ‘too good to be true’ promises of returns, and be immune to the flattery of ‘being invited to an exclusive deal’. But consumers could also find themselves tired from dealing with family lawyers, and dealing with young children watching their parents pack their suitcases, and fall victim to predatory con artists who know just what to do with their spare £300,000.
In our fragmented financial services landscape, where every other fintech company claims to ‘democratise finance’, consumers deserve clear rules and public enforcements, not rejected consultant templates and endless debates on the real meaning of ‘fair value’.
Liz Lumley is deputy editor of The Banker. Follow her on X (formerly known as Twitter) @LizLum
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