The FCA’s publication of research on consumer understanding of adviser disclosure documents, published as part of its initial phase of the thematic review, prompts me to think about the wider role of the regulator.
One reason for the FCA’s existence is to protect consumers. The regulator considers itself to be acting in their interests but my belief is that what the regulator thinks consumers’ interests are is not necessarily correct. Furthermore, the regulator’s view of consumers’ needs is too often conflated with its own interests.
Typically, a consumer using financial services will want something that is easy to understand and use, provides value for money and is reliable. A regulator’s interest is in nothing bad happening on its watch. This can lead to it overloading processes with rules for every eventuality.
In general, a regulator interposes itself between consumers and businesses and its rules become a barrier for firms trying to meet consumer demands. This is not a bad thing in itself. We have regulators in all walks of life to protect us from ourselves and ensure minimum standards of quality of service or products.
But the regulator can get in the way of the usual interaction between provider and customer. Care is needed to ensure a balance between letting anything happen and micro-managing firms’ behaviour. If the balance is wrong, it will harm consumer outcomes.
Which brings me back to the consumer research. Previously the FCA had said that part of its predecessor the FSA’s error was to rely too much on disclosure and providing information to consumers that went unread. The FCA talks about using behavioural economics to deal with consumers as they really are, rather than treating them as rational consumers in a classical economic model.
This is backed up by FCA-sponsored research, which unsurprisingly concluded that consumers tend to regard paperwork they are given as something to be filed and read later. It is largely disregarded because it is ‘financialpaperwork’ or ‘terms and conditions’. Or simply boring.
The FCA needs, first, to go back to its road map and original thinking. The review highlights the complexity of disclosure requirements. They need to be simple and straightforward concepts or people will switch off (the definitions of ‘independent’ and ‘restricted’ fail this test). The FCA should not worry about the detail of the approach. Distinctions that matter hugely to the regulator matter much less to the consumer who now deals with them. Getting the right information to consumers is important, but for firms it is a business issue communicating their proposition and the value they offer to clients. If they cannot communicate value they will lose business.
Second, the FCA needs to keep its role and interventions under review to check that furthering its aims is not diverging from protecting consumers’ interests. If the consumer is not engaging or does not understand, the regulator needs to ask itself whether it has made the process too cumbersome?
Chris Hannant is director general at the Association of Professional Financial Advisers