A row between the UK government and the Financial Conduct Authority (FCA) could be laid bare in parliament on Wednesday.
FCA chairman Ashley Alder will appear alongside chief executive Nikhil Rathi in front of the Treasury Select Committee.
MPs could ask the pair questions about allegations that the Economic Secretary to the Treasury, Andrew Griffith, is concerned about the FCA's new consumer duty rules, which are due to come into effect at the end of July.
The regulations, which mean financial services firms will be required to prove they have acted in their customers’ best interests, are being introduced in an effort to change culture at banks, insurers and investment firms and to prevent a recurrence of the mis-selling scandals from endowment mortgages to pensions and payment protection insurance.
However, according to the Financial Times, Mr Griffith, who is the minister in charge of financial regulation, was “scathing” about the duty at a recent closed-door dinner with senior figures from the sector.
'Cultural shift in financial services'
A representative for the FCA told The National: "The consumer duty will bring about a cultural shift in financial services, setting higher and clearer standards for firms and requiring them to put their customers’ needs first. We believe it will encourage innovation while driving competition and growth in the financial services industry in the UK."
The consumer duty means financial services companies need to consider how their behaviour ultimately affects the end result for their customers.
"This means considering everything from product design, costs and pricing along their value chain, customer interactions and handling complaints," Gavin Haran, head of policy for asset management at Macfarlanes, told The National.
"For some firms this will mean substantial changes and for others it might not mean huge operational reforms at the outset, but it will mean a shift in mindset and a constant gathering of evidence about how well the firm is serving its customers and making improvements."
For Alice Guy, head of pensions and savings at Interactive Investor, the consumer duty does not actually rewrite the rules, and broader conduct concepts such as delivering good customer outcomes, acting in good faith and ensuring value for money, are by no means new.
"The duty brings together and codifies, through new rules, themes FCA has previously commented on and/or provided non-handbook guidance on," she told The National.
The consumer duty originally emerged from consumer-focused demands from the House of Lords, following which the FCA was asked by ministers to strengthen consumer protections.
However, the FT claims that Mr Griffith is concerned that the consumer duty will add to the red tape burdens of financial firms at a time when the government is seeking to promote the City of London as a post-Brexit financial centre with a light regulatory touch.
That vision of an open, sustainable, technologically advanced and globally competitive UK financial services sector was unveiled in early December by Chancellor Jeremy Hunt as 30 policy initiatives, collectively known as the "Edinburgh reforms".
"This shows the potential for conflict between the government and the regulators over the future of UK financial services," Mr Haran told The National.
Sheldon Mills, FCA executive director for competition and consumers, told a conference recently there had been some "initial resistance", but hard work now should mean fewer expensive mistakes down the line.
"As the duty raises the bar for the firms we regulate, it will prevent some harm from happening and will make it easier for us to act quickly and assertively when we spot new problems," Mr Mills added.
Fewer products
Firms must nominate a board member to champion the new duty across their companies' operations, from designing a product to selling it, even through third-party distributors.
Last month, the FCA said a survey of firms showed some would not be ready by July unless they picked up the pace on preparations.
However, even given extensive preparations, some financial firms are expected to drop some of their products, Mr Haran told The National.
"Some offerings will not achieve the required standard, or at least firms will struggle to demonstrate the tangible value versus their competitors’ offering," he said.
"The FCA will no doubt be pleased with this result, which would improve competition in financial services."
"Less helpfully, compliance with the rules means that some businesses' lines will simply become uneconomic, or firms will become risk averse and withdraw from or not offer new services.
"The Treasury would be concerned about this outcome given its priority to improve the dynamism and competitiveness of UK financial services," he added.
Others do not see the issue as one of potential conflict between government and regulator, because the aim of the consumer duty is to promote good practices, which can only enhance the reputation of the UK's financial services industry.
"We fail to see how legislation that enshrines good consumer outcomes into financial services, giving people greater clarity of what they are getting for their money, so they can plan properly, could be anything other than positive," Jemma Jackson at Interactive Investor told The National.
"Being competitive and treating consumers properly should never be mutually exclusive, and we see no conflict with the City and government."
Pension reform
Writing for The Times, former Conservative leader William Hague said vital reform was needed to incentivise a dramatic consolidation of UK pension funds. "The chancellor’s 'Edinburgh reforms' and the changes to the EU directive known as Solvency II have raised hopes of freeing up more capital to invest in new businesses." he wrote. "But the vast British pension industry is very fragmented and has become so risk-averse that the UK has become, in the words of one expert, 'the only major economy where local pension funds have in effect abandoned investment in domestic companies'. We should all hold our hands up, over successive governments, to adding new regulations or tax penalties to those funds. But no ministers ever intended that we would be down to only 4 per cent of our pension assets invested in UK equities, from half 20 years ago.”
