Financial Services Growth and Competitiveness Strategy Call for Evidence response - Which? response

Summary

• We welcome the government’s focus on driving economic growth, which ultimately could benefit all consumers by improving living standards. We understand the government’s focus on the financial services sector, which plays a crucial role in funding and facilitating consumer spending which accounts for around 60% of UK GDP. For example, it is right for the government to consider how best to ensure pension schemes have sufficient scale and the necessary governance to deliver the long-term returns needed for people to have adequate incomes in retirement.
• We also welcome the opportunity to provide input into the government’s call for evidence on the draft strategy for financial services growth and competitiveness, and the efforts being made to ensure the right evidence is in place to have an informed debate about the specific barriers the industry is facing. We do not see a conflict between the FCA’s secondary objective to support growth and international competitiveness and its primary goal to protect consumers from harm. We believe that by meeting its primary objectives, ensuring that financial services markets are competitive and fair, and securing an appropriate degree of protection for consumers, the FCA will naturally support the wider economy and meet its secondary objective. Informed, empowered consumers who are confident of access to redress are more likely to try new services, supporting competition and rewarding innovation. We understand that supporting international competitiveness and growth will be a focus for the FCA in the coming years and agree with its assessment that this means delivering a predictable and proportionate regulatory environment.
• However, in developing policy to support the growth of the financial services sector, it is also critical that the government considers the fundamental role this industry plays in the lives of UK consumers.
• Many innovations benefit consumers. In recent years, consumers have benefited from increased choice in banking driven by app-only banks, offering a greater range of money management tools, and increasing access to a variety of savings and investment products. Proportionate regulation supports this innovation by giving consumers confidence to try new products and services, ultimately driving business to more productive firms. However, innovation gone awry can have long term consequences for people’s financial wellbeing and security, as shown by multiple mis-selling scandals over the last two decades, for example payday loans. These innovative products boomed at the cost of serious financial hardship to consumers who were lent money they could not afford to pay back, at usurious rates of interest. Inadequate redress processes meant consumers experienced further psychological harm, feeling alone and overwhelmed in the face of demands for repayment without signposting to support.
• Similar problems could easily arise today with other financial services. Financial products are often complex and difficult for consumers to engage with, particularly where present bias and loss aversion affect our decision making. Our research also finds that people often assume, quite reasonably given the highly regulated nature of the market, that the financial services and products offered to them meet a certain standard of quality, and that they will be protected if things go wrong. However, this is not always the case: for many years, consumers who fell victim to authorised push payment scams suffered again when discovering that they did not have protection against fraud in the same way they would have done if they had paid with a debit or credit card. Consumers can be exposed to considerable risk of harm, often without realising this is the case. Regulatory uncertainty also brings costs for businesses; we note with interest that several major providers have welcomed the government’s plans to regulate Buy Now Pay Later (BNPL) credit, recognising that the certainty of regulation will both boost consumer acceptance of these products and support sustainable innovation.
• The role of the regulator in this complex market is to balance responsible regulation with the cost of compliance. We are concerned that some of the proposals being considered as part of attempts to drive growth and competitiveness involve major changes to consumer protections that, if not properly considered, could increase consumer harm and constrain sustainable long term growth. The push to remove parts of the FCA’s rulebook following the introduction of the Consumer Duty, for example, is premature, given the impact of the Consumer Duty is not yet clear. Similarly, proposals in the FOS/FCA Call for Input on Modernising the Redress System outline potentially major changes which could affect consumers’ access to redress. While we acknowledge that there are opportunities for improvements in how the FCA and FOS operate, we were surprised this review was launched without prior consultation with consumer organisations. It is important that any changes that would affect consumer access to redress are evidence-led, and at present we feel that the consumer voice is not adequately reflected in these discussions. This risks an outcome which while beneficial to industry in the short term, undermines consumer protection in a way which could hamper uptake of innovation and sustainable economic growth.
• We need the regulatory system to help ensure that markets reward firms that compete on good customer outcomes. Where the market doesn’t do that sufficiently, it is for regulators to step in to enforce rules and consumer law. Ultimately, this will require penalising those firms that are not playing by the rules and gaining an unfair advantage against other firms, via enforcement and/or redress for those customers who were unfairly treated.
• We believe the government’s other objectives in financial services, outlined in paragraph 3.8 of the call for evidence, specifically supporting financial inclusion, rolling out banking hubs and tackling financial and economic crime, all will play an important role in supporting economic growth by ensuring consumers are able to access the means to transact, and have confidence that they are protected from the scourge of fraud. We encourage the government to look at these areas alongside, rather than separately to, the strategy for growth and competitiveness in financial services. This will also help the government to achieve its commitment to ensuring that growth benefits everyone across the country, and makes everyone, not just a few, better off.