Senior bosses at City firms could face fines and have their bonuses docked if they fail to put consumer needs first, in one of the biggest overhauls of financial regulation in a decade.
Rules being rolled out by the Financial Conduct Authority (FCA) will force financial firms – including banks, insurers and investment firms – to focus on delivering “good outcomes” for customers, in a move expected to reduce call wait times, end rip-off charges and fees through clearer promotions, and make it easier to cancel or switch investments.
The new consumer duty, which will start to come into force from next summer, will replace current rules that say firms must treat customers fairly.
The regulation will put greater responsibility on senior managers and directors to ensure the rules are applied. It will mean tying manager’s bonuses to those outcomes, and placing them at risk of fines if the rules are breached.
“Our new consumer duty is going to fundamentally change industry behaviour by setting higher and clearer standards of consumer protection,” said Sheldon Mills, an executive director at the FCA. He said it would “advance credibility and the stature of [the] financial services industry” in the UK.
“Where we identify serious misconduct that breaches that duty, we will use our full range of powers to tackle that … issuing fines, removing permissions and securing redress for consumers,” Mills said. “And we will hold firms, including senior managers and boards, to account for delivering these outcomes.”
Companies will be expected to produce an annual report outlining how they are putting consumers first and meeting the new requirements, though these will only be available to the regulator on request and will not be released to the public.
The new rules come as the FCA tries to draw a line under recent scandals. It has been criticised for the way it supervised firms and failed to protect consumers caught up in the collapse of London Capital & Finance and Neil Woodford’s flagship investment fund.
Mills said the duty would ensure consumers are at the centre of City firms’ decision making when they create, market and sell advice or new investment products. This could reduce problems long-term and make it easier for the regulator to crack down on wayward firms.
“When we require those in this industry to test and demonstrate how they’re delivering good consumer outcomes, the duty will mean we’re better able to act quickly and assertively where we identify practices that don’t meet our expectations. It will also help us to stop some harm from happening in the first place,” Mills said.
He said the regulator had enough staff and funding to enforce the duty from summer 2023. From 2024 the rules will be applied to the treatment of customers who hold closed book products that are no longer on sale.
Mills said the regulator would start applying the new rules even sooner if it becomes clear firms are failing consumers, particularly during the cost of living crisis.
Rocio Concha, the director of policy and advocacy at the consumer group Which?, welcomed the rule changes. She said there were “too many instances where the financial services market does not meet consumer needs or provide customers with adequate protection”.
She said: “The financial industry must get onboard with these new protections, and firms that are in a position to do so now shouldn’t wait for them to be formally introduced to deliver positive change for consumers. Where businesses fail to meet the new rules, the FCA must stand ready to impose tough penalties.”