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Regulatory change, pressure on cost management and growth, and increased investment in technology and data are dominating the financial services industry.
Welcome to our weekly round-up for UK financial services regulation. Paul Staples summarises the key announcements and developments. Be sure to subscribe to receive our updates in your inbox every week.
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This week we take a closer look at the Chancellor’s inaugural Mansion House speech, where she outlined a series of reforms to bolster the financial services sector. These reforms give added weight to the new growth-focused remits for regulators, with the first-ever Financial Services Growth and Competitiveness Strategy (due to be published next year), and the establishment of so-called pension mega funds to enhance investment (which mirrors similar models in Canada and Australia).
Also referenced in the speech, we explore the coordinated efforts of the Financial Conduct Authority (FCA) and the Financial Ombudsman Service (FOS) to modernise the redress system in light of previous and present large-scale complaint and redress events. As motor finance cases continue to gather pace, the FCA and FOS are seeking industry views to adapt the redress process.
Another area of focus is the advice guidance boundary, where the FCA aims to clarify the distinction between providing regulated advice and offering general guidance to ensure that firms can confidently support their clients without unintentionally crossing regulatory lines. We round off this week with new rules around critical third-parties and an update on motor finance complaints.
Chancellor driving growth in financial services
In her first Mansion House speech, Chancellor Rachel Reeves will announce reforms aimed at enhancing the UK’s financial services sector and ensuring its status as a global powerhouse. She argues that post-financial crisis regulatory changes have overly restricted risk-taking, hindering economic growth.
The reforms include growth-focused remits for regulators, the introduction of a Financial Services Growth and Competitiveness Strategy, and the creation of pension mega-funds to boost investment. The Government will propose focusing on five priority growth opportunities in financial services to take advantage of the UK’s existing strengths and maximise the potential for growth. These will include fintech, sustainable finance, asset management and wholesale services, insurance and reinsurance, and capital markets.
The Chancellor emphasises the importance of the sector, which employs 1.2 million and accounts for 9% of the economy, urging proactive measures to maintain its global standing. The reforms aim to unlock innovation, drive investment, and support sustainable economic growth while maintaining high regulatory standards.
The FCA and the FOS have issued a call for input to modernise the redress system. While the current system works well for individual complaints, it struggles with Mass Redress Events in terms of speed and impact. The FCA and FOS seek to define what constitutes a Mass Redress Event, as these may be treated differently. There's a perceived misalignment between the FCA and FOS on interpreting FCA requirements, which the consultation aims to address.
Short to medium-term options include:
reverting to the 2011 DISP process
removing the ability to challenge a FOS ruling
changing the charging structure for complaints submitted by Claims Management Companies
revising the FOS decision criteria
Longer-term options involve resisting more FCA control over the independent FOS and considering different rules for mass redress events.
Firms wishing to respond should do so by 30 January 2025.
The FCA has provided an update on the Advice Guidance Boundary Review, conducted jointly with the Treasury. This review aims to ensure consumers receive timely, affordable help to make informed financial decisions.
Key themes include:
the necessity for firms to offer flexible support that adapts to diverse financial needs over a lifetime
the importance of managing, rather than eliminating, risk to control costs
The review will leverage the Consumer Duty to set clear expectations for firm support and maintain consumer protection. While the review is ongoing, the FCA has clarified what firms can currently do without providing personal recommendations, such as explaining the differences between ISAs and pensions or pointing consumers to budgeting tools.
The review impacts firms providing financial advice and support, including life insurers, financial advisers, and investment platforms. This guidance is intended to help firms support consumers now, especially during the increased cost of living, pending broader regulatory reform. The FCA will consult on high-level proposals for targeted support in pensions in December 2024, followed by consultation in H1 of 2025 on better support for consumers in retail investments and pensions.
The Bank of England (BoE), the Prudential Regulatory Authority (PRA), and the FCA have jointly issued the 'Operational resilience: Critical third parties to the UK financial sector' policy statement. It provides feedback on responses to consultation paper CP26/23 and outlines the final policy regarding Critical Third Parties (CTPs) to the UK financial sector.
The main objective of this policy is to manage risks to the stability or confidence in the UK financial system that may arise due to failures or disruptions in services provided by CTPs, which are increasingly relied upon by firms. The policy includes several key documents that make up the CTP Oversight Regime, which detail the rules, supervisory statements, and enforcement approaches for CTPs.
CTP firms should:
perform a gap analysis against the final rules and take action to ensure compliance with the new requirements
interpret their duties in light of the overall objective of regulators to manage risks to the financial system
Firms have until 1 January 2025 to consider the impact and implement any changes required to comply.
Following the Court of Appeal’s judgment in a number of motor finance cases on 25 October, the FCA will consult on extending the time firms have to respond to complaints, and for consumers to refer them to the FOS. The complaints in question are those relating to motor finance where a non-discretionary commission was involved.
The judgments reached in the three cases in question are expected to result in increased volumes of complaints for firms. A potential extension to the complaint’s response timeframe, it's thought, would allow firms time to consider the best approach to each complaint to ensure good outcomes for customers and firms alike.
The Court of Appeal decided in each case that it was unlawful for brokers to receive commission from motor finance lenders without obtaining informed consent from the customer. The two lenders involved in the cases intend to appeal, with any extension expected to cover at least until the Supreme Court decides whether to grant permission to appeal.
The FCA is also considering the impact of these judgments on the ongoing review into historical discretionary commission arrangements, including for both its timeline and scope.
