Article Simplifying the FCA rulebook post Consumer Duty

Back in July 2024, the Financial Conduct Authority (FCA) published its Call for Input around possible changes to the FCA rulebook in light of the implementation of Consumer Duty. The FCA invited firms and industry bodies to give their views on whether, where and how it could simplify its 10,000 page rulebook, while ensuring it remains focused on safeguarding the interests of consumers.

We, Aegon, sent in our views by the 31st October deadline. While we wait on the FCA’s response, here are my thoughts on where there’s possible scope for removing or simplifying requirements as a result of Consumer Duty as well as potential implications. In particular:

• Disclosure
• Illustrations
• Digital first
• Investment pathways
• Advice Guidance Boundary Review
• Value for money

The FCA’s Call for Input post Consumer Duty

In regulatory terms, the Consumer Duty is still relatively ‘new’. It came into effect for ‘open’ books in July 2023, and for ‘closed’ books a year later. July 2024 also saw the first Board reports from firms on their compliance. Ahead of the Election, Labour had said it would direct the FCA to carry out a review of its rulebook, and just weeks after Labour took power, the FCA issued this call for input, aiming to address any areas which caused ‘complexity, duplication, confusion, or over-prescription’.¹ This in turn might support innovation.

The FCA invited comments on issues including:

• Which detailed rules or guidance could be simplified to rely on high-level rules including Consumer Duty
• Interactions with other (non-FCA) rules which could be clarified
• The appropriate balance between high-level and more detailed rules
• The potential benefits and costs from simplifying rules¹

The FCA intends to outline its future approach in early 2025. It could then move to make changes, or consult further on specifics.

Disclosure

There are many instances where prescriptive product disclosure rules, and the lengthy documents these lead to, can be in conflict with the Consumer Duty obligation to make communications understandable and to support individuals with their financial futures.

Consumers should be protected through the FCA continuing to set core information but with greater flexibility around overall method and content of communication.

A more radical approach could be for the FCA to identify certain disclosure rules where firms might have more discretion. The firm could be empowered to decide if the disclosure is needed or appropriate in the context of the business and relationship with the customer, taking consumer understanding obligations into account.

I also believe that the aims of disclosure documents are different for those being auto-enrolled into workplace pensions from those for retail customers making self-driven purchases. I’d like firms to be able to design disclosure material with that difference in mind. In an auto-enrolment situation, it’s not about having all the information needed to decide whether to purchase – it’s more about understanding what you’re joining.

Illustrations

The rules around illustrations could be seen as a subsection of disclosure rules but they merit specific consideration. While there are FCA requirements, there are also other regulations here. The Financial Reporting Council sets projection rules. The DWP sets out legislation on Statutory Money Purchase Illustrations. And there are also distinctions between pre- and post-sale requirements which can confuse customers.

A move to generic illustrations pre-sale which are designed to communicate the broad aims and potential outcomes of the product could be beneficial. Client specific illustrations could then be used post-sale. They have different purposes.

The benefit again could be improving understandability and removing the confusion created by different projections in different contexts.

Digital first

An overhaul of the rules with a focus on digital first, rather than paper, would also be very welcome. In today’s world, consumers are used to dealing with a wide range of firms on a digital basis. This brings considerable benefits. From a financial service perspective, it offers huge scope to present information in a more powerful and helpful way, tailored to the individual’s preferences, enabling deeper understanding. It also allows firms to track engagement – we’re more likely to know if an email has been opened, but not if an envelope has been. We can also better track actions taken.

Investment pathways

This is a recent example of particularly prescriptive regulation. While I support the concept, there’s significant scope to move to a more outcomes-based and less prescriptive approach here.

Advice Guidance Boundary Review

The introduction of targeted support as a regulated activity will require a review of sections of the rulebook. I hope the approach to rewriting rules will be outcomes based, making use of the Consumer Duty, rather than creating further prescription. If the FCA has concerns over potential consumer harm, it can offer good and poor practice guidance.

Value for money

In the Consumer Duty and elsewhere in FCA rules, there are frequent references to ‘value for money’ and ‘fair value’. The FCA’s Consultation Paper CP24/16, issued less than a week after this Call for Input, proposed a highly prescriptive additional layer of regulation around the ‘value for money’ of workplace pensions.² It’s essential that we don’t end up with duplicative or conflicting definitions of ‘value’.

Looking ahead

It’s encouraging to see the FCA consulting on simplifying its rulebook by removing the duplication or prescriptive rules no longer needed post-Consumer Duty. However, on the other hand, Consumer Duty was only fully implemented in July 2024, meaning it may be somewhat early to reach conclusive decisions.

The Consumer Duty is also settling in alongside a wider change in the FCA’s approach to regulation, with the FCA having made clear they plan to shift to a more assertive, data led and outcome-based regulatory approach.³

At this early stage, it’s also difficult to determine to what extent the Consumer Duty could drive growth and support the regulator’s competition objective. Some firms could see an outcomes-based approach as an opportunity to evolve for their customers, and removing prescriptive regulations may help in this instance. On the other hand, others – perhaps smaller firms – may not have the confidence to innovate if less rules create a fear of not aligning with FCA outcomes-based expectations. When drafting our response, I did have in mind that as an industry we should always ‘be careful what we wish for’.