Good customer outcomes: the outlook for conduct regulation in 2020

As we enter 2020, regulators across EMEA are adopting a more outcomes-based approach to conduct regulation and supervision. While regulators have traditionally tended to concentrate on firms’ processes and controls, they are now increasingly focused on firms' delivering good customer outcomes, including in some cases economic outcomes. 

This includes looking at value for money, as well as outcomes for customers with non-typical needs, including those deemed vulnerable. While not new, particularly in the UK, we expect these trends to grow in importance in 2020 and beyond. Firms will need to demonstrate that good customer outcomes are core to everything they do. In the UK, firms will also increasingly be asked to justify the fairness of their pricing decisions, including between different consumer groups within their business.

In the UK, 2020 will see a number of new rules designed to deliver better value for money and fairer and more open pricing of financial products take effect. Investment managers have faced intense scrutiny over the value they provide to investors, and will be required to publish their first assessments of the value their funds deliver this year. While we may not see a large-scale reduction in fees, it will become increasingly difficult for firms to justify poor value products in the face of rising scrutiny, facilitated through regulatory initiatives, by the media, distributors and institutional investors. In particular, firms will need to ensure that they do not charge excessive fees for “active” funds that nonetheless closely track an index, and that differences between the charges paid by retail and institutional investors are demonstrably fair rather than simply a result of different levels of market understanding and buying power.

UK insurers will work towards implementing the remedies of the FCA’s GI pricing review, whose final report is expected in Q1 2020. We expect the FCA to put in place tight restrictions on firms’ ability to raise prices for consumers who continue to renew with the same insurance provider, to limit firms’ ability to use auto-renewal policies, and to introduce a new responsibility for a senior manager to take responsibility for the value of products. Firms will need to consider how any ban or restrictions on pricing will affect their business model and look to improve their pricing and product governance to ensure they deliver good customer outcomes.

The FCA has also proposed new rules requiring deposit-takers to offer a Single Easy Access Rate (SEAR), essentially a minimum variable interest rate for all their easy access savings accounts and cash ISAs after they had been open for a set period of time. Firms will have to rethink their savings business models, balancing the interest rates offered across their range of products against their wider deposit funding needs.

In South Africa, 2019 saw the publication of a draft Conduct of Financial Institutions Bill. Although the bill will take time to become law, it sets out an extensive overhaul of conduct regulation that firms need to start preparing for now. In Europe, 2019 saw EIOPA publish a new framework for identifying conduct risk, the UK’s FCA released guidance on how firms should treat vulnerable consumers, and new rules to improve client protection in Switzerland were finalised. We expect 2020 to be the year in which supervisors test firms to ensure that they are putting in place measures to deliver the outcomes these frameworks seek to achieve.

At EU level, efforts to improve customer disclosures are intended to help retail clients understand which products will provide the best value for them. For example, a key objective of the PRIIPs Regulation was to make investment product costs and risk disclosures easier to understand and more comparable across product types. The European Commission is currently working with the ESAs to review PRIIPs and this work is expected to continue in 2020. Key areas under review include performance scenarios, costs, investment options and differences between different product types. In the meantime, firms will need to ensure that their disclosures are clear, and can provide explanatory materials where necessary.

More recently, we have seen EU authorities take an interest in specific rules on value for money, such as the FCA’s new rules for investment managers, especially in light of ESMA’s finding that retail investors in UCITS funds pay twice as much as institutional investors. Therefore we see a possibility that the new European Commission will, in due course, propose legislation on value for money at EU level, mirroring at least some of the developments already well underway in the UK.