Acceptable levels of consumer harm – the FCA seek guidance in balancing risk with reward

30 January 2025. Published by Damien O'Malley, Associate

The chief executive of the Financial Conduct Authority (FCA), Nikhil Rathi, has called for the UK government to define an 'acceptable level of consumer harm' in response to the government's demand for reduced regulations.

The prime minister and his cabinet have made it clear that economic growth is a central priority and that regulators from all sectors need to do what they can to support this mission. On Christmas Eve 2024, the chancellor, business secretary and prime minister wrote to 17 different regulators in the UK, ordering them to put forward pro-growth proposals. This follows the prime minister's speech in October where he promised to "rip out the bureaucracy that blocks investment" and ensure every regulator in the UK "takes growth as seriously as this room does". These words leave no room for doubt in how the current government views the relationship between regulation and innovation.

However, the head of the FCA has warned that such growth will come with risks that the government must be alive to. Speaking on the issue on 22 January, the head of the FCA warned that more could go wrong as a result of these demands to slash regulations and has asked that the government clearly outline what they feel is an acceptable level of harm to consumers. Whilst the proposals offered by the FCA may allow for the freedom for growth that the government is seeking, the FCA have made clear that these proposals come with a real risk of consumer harm.

The Proposals

On 16 January 2025 the FCA wrote to the prime minister, setting out their recommendations to support the government's mission on growth. These proposals include:

  • Streamlining the FCA Handbook following input from the industry on rules that could be simplified or removed.
  • Removing the need for a Consumer Duty Board Champion, now that the Duty is in effect.
  • Reducing conduct requirements for wholesale insurers.
  • Simplifying responsible lending advice rules for mortgages, supporting home ownership and opening a discussion on the balance between access to lending and levels of defaults.
  • Consulting on removing maturing interest-only mortgages and other outdated guidance.
  • Embracing a 'digital first' approach to support the government's AI plan. Avoiding creating additional regulations for AI by relying on existing frameworks.
  • Reforming online tools designed to explain pensions, improve transfer times and finalise next steps for the pension dashboards.
  • Removing the £100 contactless limit both for physical cards and digital wallets.
  • Create new digital service standards, allowing firms to accept digital identity authentication and verification.

These are a small number of the lengthy proposals outlined by the FCA, all of which can be found here.

Concerns/Commentary

The FCA's 16 January letter makes clear that the FCA believes these proposals would assist in bolstering the growth aim of the government. It also makes clear that growth is a cornerstone of the FCA's own strategy. However, the FCA is clearly concerned about the potential additional risk it perceives arises from these proposals.

Consumer Duty Board Champions

The Consumer Duty Champion position was created by the FCA to ensure that the Duty is regularly raised and discussed at board level. There is concern that the decision to remove this role is coming too soon, noting that the role has only existed for 18 months. The FCA's own review into the progress of the Consumer Duty had noted that progress was being made amongst firms, but there was still work to be done across the board. It is questionable whether removing this position will serve as an aid to bolster growth, or whether it will see firms slide back into old patterns of working and whether the Consumer Duty will take a back seat in the minds of professionals. The FCA have made clear over the last year that the consumer must be at the forefront of the professional's service. Removing the champion role now may undermine this message.

No further AI regulation

Whilst not putting further regulation in place to hamper AI will undoubtedly allow for innovation in the sector, this could lead to increased risk to consumers. The Financial Ombudsman Service's (FOS) previously published complaints data revealed that complaints regarding fraud had reached record quarterly highs, with authorised push payment (APP) scams being one of the most common. Unregulated AI has only amplified the risk of these types of frauds becoming more common. Fraudsters are already able to spoof phone numbers, but AI technologies allow these schemes to become more complex. AI voice-cloning allows them to replicate the voice of a trusted person, AI chatbots can mimic conversations with banks, and deepfakes can manipulate images to mislead consumers. The FCA has yet to take substantive action to regulate these technologies, and if the FCA's proposal to not put any further regulation in place is followed through with, the risks to consumers from these AI-supported frauds may increase.

Relaxed lending rules

The proposal that has sparked perhaps the biggest fear is the proposal to relax the lending rules, which some fear may see a return to the 'light touch' approach that led to the 2008 banking crisis.

The head of the FCA warned that the proposals for easing controls on mortgage lending could increase defaults and repossessions of homes, stating "On mortgages, [what] if there are more defaults if we relax [rules]?... one or two things are going to go wrong here and not everybody is going to play completely by the rule book, and is there acceptance of that?".

There may be merit to relaxing the lending rules to enable more people to get on to the property ladder, which is particularly difficult in the current climate. Many in the country are simply unable to afford the high costs associated with a first-time purchase and relaxing the rules could assist with this. However, it has to be asked whether this will ultimately exacerbate the situation. Relaxing the lending rules may help buyers, but without looking to the issue of the current lack of supply, it may only worsen the situation of general unaffordability.

Conclusion

The FCA's proposals to support this growth are not without merit, in particular, streamlining the Handbook seems like a logical next step given the apparent move towards outcomes-based regulation. However, the FCA is clearly concerned that prioritising growth could lead to additional consumer harm and the query to the government about what level of harm is acceptable clearly highlights the potential difference of approach here. Any measures to support growth must be weighed against the associated risks that will follow these changes, whilst being conscious of the fact that very little in life is risk free.

Whilst it is a difficult task to create a clear metric on 'acceptable levels of risk' that a regulatory body such as the FCA could use, it is something that should be openly discussed between the regulator and the government so that a clear framework can be agreed upon. Regardless, the FCA will face a challenge in attempting to balance the demand for growth with their regulatory responsibilities.

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