The following article was first published by Mick on Linked In and can be accessed here.
Mick introduces this lengthy article with this introduction
Make no mistake-consumer protection and rights to effective redress have been weakened
The attached article analyses the series of major consultations and policy decisions produced recently by HM Treasury, Financial Conduct Authority (FCA), Financial Ombudsman Services (FOS), and The Pensions Regulator (TPR).
These will affect how pensions and investment products are sold, the value and performance of people’s pension funds, consumer protection in credit markets, and consumer rights and access to redress across financial services.
The reforms include: the introduction of Simplified Advice and Targeted Support in the financial advice market; the Value for Money Framework (VFM) in the pensions sector and The Pension Regulator’s (TPR) Corporate Strategy;[1] reform of the credit information market, proposals to reform consumer credit financial promotions, regulation of buy now pay later (BNPL), and reform of the Consumer Credit Act 1974; and reform of FOS and the redress system.
There is no question that the aggregate effect of these reforms will be a weakening of consumer protection and access to effective redress. These are a reversal of the progress made in driving up standards of conduct since the litany of misselling scandals and rip off products which left a legacy of mistrust in UK financial services.
The extent of the reversal will depend on how hard FCA/FOS fight to maintain operational independence in light of the growth and competitiveness objective, the response of the market itself, and civil society and media monitoring of the market.
The regrettable thing is that this deregulation and market liberalisation wasn’t necessary. Government and regulator objectives could have been achieved by safer, more progressive means. Moreover, there is so much more to be done to make markets work for the real economy, the environment, and society. Government and regulators shouldn’t even be thinking of risky deregulation and liberalisation.
[1] We should not forget that alongside the reforms discussed here the Government is actively trying to get UK pension funds, insurers, and asset managers to invest more in higher risk private assets. Indeed, the recent Pensions Schemes Bill includes powers that would allow government to mandate defined contribution pension schemes to invest a minimum proportion of funds in these assets.
WHAT DO THE RECENT REFORMS OF CONSUMER PROTECTION AND REDRESS IN FINANCIAL SERVICES MEAN FOR CONSUMERS AND PENSION SCHEME MEMBERS?
Mick McAteer
SUMMARY
· A number of major consultations and policy decisions produced recently by HM Treasury, Financial Conduct Authority (FCA), Financial Ombudsman Services (FOS), and The Pensions Regulator (TPR) will affect how pensions and investment products are sold, the value and performance of people’s pension funds, consumer protection in credit markets, and consumer rights and access to redress across financial services.
· The reforms include: the introduction of Simplified Advice and Targeted Support in the financial advice market; the Value for Money Framework (VFM) in the pensions sector and The Pension Regulator’s (TPR) Corporate Strategy;[1] reform of the credit information market, proposals to reform consumer credit financial promotions, regulation of buy now pay later (BNPL), and reform of the Consumer Credit Act 1974; and reform of FOS and the redress system.
· We have also got to consider the Financial Services and Markets Bill currently in Parliament, the forthcoming reviews of the critical charge caps on workplace pensions and payday loans (likely to be weakened), proposals to unlock £billions in ‘surpluses’ held in defined benefit pension schemes, and the review of the mortgage rules on creditworthiness.
· This article discusses the likely overall impact of the reforms. Links to Financial Inclusion and Markets Centre (FIMC) submissions to the specific consultations can be found at the end of the Introduction.
· The arguments made by finance lobbies, government, and regulators to justify these reforms are that: the existing regime hindered the ability of the finance sector to support economic growth, stifled competition and innovation, and limited the ability of firms to help consumers make better financial decisions; certain ‘legacy’ legislation and regulation is not in keeping with more flexible ‘modern’ forms of regulation especially in the digital era; [2] and the FOS was acting as a quasi-regulator. These arguments are misguided or disingenuous and are not supported by meaningful evidence or analysis.
· FIMC concludes that, while specific reforms relating to consumer credit are positive,[3] the overall reform package is decidedly pro finance industry and negative for consumer protection and access to redress across the range of financial services. Firms will be able to sell greater volumes of higher risk pension and investment products safe in the knowledge that if things go wrong liabilities for redress will be reduced, and extract even higher fees and charges from consumers’ pensions and investments. Pension scheme members will be exposed to higher risk, higher cost, poorly governed and regulated private assets (eg. private equity funds) which deliver questionable returns. Government is even reserving powers to mandate pension schemes to invest more in these high risk, costly assets. An important protection in consumer credit legislation is set to be repealed. The FOS will be brought further within the FCA’s orbit, risking its operational independence.
· Much progress has been made in cleaning up finance since the litany of huge misselling scandals, and rip-off products such as with-profits, which left a legacy of consumer mistrust in finance. The FCA and FOS deserves real credit for improving conduct of business standards and protecting consumers in one of the biggest and most complex financial markets in the world. FIMC is not saying we will return to the worst excesses of the past. But, there is no question that the aggregate effect of the current set of reforms is a weakening of consumer protection and a reversal of that progress.
· It is regrettable that the Government and regulators have chosen to pursue their objectives through: deregulating and liberalising retail financial services; and, in the case of pensions, pressuring pension schemes into investing more in private assets. The FCA had a choice. It could have pursued its goals of helping consumers make better decisions through more proactive use of its flagship Consumer Duty initiative. Instead, it chose to weaken consumer protections and rights to redress to satisfy finance lobbies. TPR and FCA could have prioritised driving down the costs and fees extracted from people’s pensions and investments. Instead, they’ve chosen to create opportunities for firms to extract more value from pensions and investments.
· What happens next, and the potential for harm, will depend on the response of the financial regulators and FOS, and how responsibly the market uses the opportunities provided by this weakening of consumer protection and rights to redress. The keenness of the regulators and FOS to show they support the Government’s finance sector growth agenda, the FCA’s pro market response to the most recent large scale scandal (Motor Finance misselling), and the way FOS is being brought further within the FCA’s orbit does not bode well. Civil society and the media will need to closely monitor market behaviours and the response of the regulators and FOS.
· This package of deregulatory measures and liberalising markets won’t create a finance sector that serves the interests of the real economy, environment, and society. It is wrong to be even thinking of deregulation and liberalising markets when there is so much more to be done. The reforms aren’t just a potentially risky reversal of the progress made in driving up standards in finance, they are a missed opportunity to make markets work for us.
INTRODUCTION
This article considers the likely impact of the recent series of reforms to financial regulation and the Financial Ombudsman Service (FOS) on consumer protection and access to redress. In terms of structure, the article:
· Explains why the reforms are negative overall, focusing on what these mean in three areas: how pensions and investment products will be sold as a result of the Targeted Support and Simplified Advice reforms; the reforms to FOS, and rights and access to redress; and the impact on pension schemes as a result of the ‘value for money (VFM)’ agenda, promotion of private assets, and The Pensions Regulator (TPR) Corporate Strategy.
· Considers the main justifications for the reforms put forward by the Government, regulators, and finance lobbies.
· Considers what might happen next. Some of the reforms are still in the consultation stage but the direction of travel – deregulation – seems to be set.
· Explains why this is not the time to be even considering financial deregulation or market liberalisation. There is so much more to be done to make finance work for the real economy, the environment, and society.
FIMC’s submissions to the relevant consultations can be found here:
FOS/FCA consultation CP26/9** Modernising the Redress System | The Financial Inclusion Centre
FOS-plans-and-budget-26-27-FIMC-response-210126.pdf
FCA consultation on buy now, pay later (BNPL) CP25-23 | The Financial Inclusion Centre
FCA consultation CP25/17 on ‘targeted support’ | The Financial Inclusion Centre
HM Treasury Consumer Credit Act Reform – Phase 1 Consultation | The Financial Inclusion Centre
To digress for a moment, one point we would like to make relates to how policymakers and financial regulators consult on reforms. We are obviously pleased that consultations take place. But, as a small non-profit organisation that doesn’t get funding for this type of work, the number of consultations can be overwhelming at times. It has been really difficult keeping up with the recent volume of consultations on top of our core work.
Civil society organisations are massively outgunned by finance lobbies in terms of financial and human resources. Finance lobbies have easier and greater access to decision makers and significantly outnumber civil society organisations in consultation submissions.
But, that is the way of the world, and we have to accept it until we change it. These consultations are important, so it has been noses to the grindstone for what seems like ages. Even if the regulators prioritise submissions from the industry, it is still important for civil society to engage if only to ‘keep the receipts’ for when things do not turn out the way the regulators expected.
However, it would be great if policymakers and regulators found better ways to consult and engage with civil society, and to report back on the contributions made by finance lobbies and civil society advocates. Quite often, we will read that XX% of respondents to a consultation supported a particular proposal. That is not very useful and is not a fair representation of the balance of views if industry respondents hugely outnumber civil society respondents.
If you have any questions or comments, please do contact mick.mcateer@inclusioncentre.org.uk
WHY ARE THE REFORMS NEGATIVE OVERALL?
To be fair, elements of the reforms will be positive for consumers. The proposals contained in the consultations on the credit information market study remedies[4] and BNPL[5] are positive and should deliver real benefits for consumers, even if there are gaps and room for improvement.
Efforts to streamline and simplify the regulatory handbook where this adds value should be supported as superfluous rules, which do not add to consumer protection or encourage effective markets, benefit neither consumers nor the industry . But, care must be taken not to throw the ‘baby’ of critical consumer protections out with the ‘bathwater’ of superfluous rules. For example, proposals in the Simplified Advice consultation could affect a consumer’s ability to make a civil claim for damages through a private right of action (PROA), and make a claim to the Financial Services Compensation Scheme (FSCS) where a firm fails. Moreover, while it makes sense as part of the reform of the Consumer Credit Act 1974 to move many of the provisions relating to information from the legislation into FCA regulation, the repealing of sanctions provisions contained in the legislation remove a measure which civil society experts considered to exert an important disciplining effect on market behaviours.
Notwithstanding those positives, to reiterate, the overall reform package is negative. FIMC’s specific concerns around each of the reforms can be found in the consultation responses. This briefly summarises our main concerns.
There are two important contextual points to keep in mind when thinking about the impact of these reforms. First, while the reforms contained within each consultation might appear to be fairly limited and not that much to worry about, we need to recognise the interconnected nature and potentially aggregating effects of the individual reforms. For example, the weakening of consumer protection contained in the Targeted Support and Simplified Advice reforms will affect rights to redress, compounded by the impact of the reforms to FOS and the wider redress regime. The reforms relating to wider implications issues, mass redress events (MREs), and referrals will give industry lobbies further opportunities to influence FCA policymaking to the detriment of consumers and also bring FOS further within the FCA’s orbit affecting its ability to operate independently.
Second, the FCA and FOS are under serious pressure from government and industry lobbies to promote the interests of finance.[6] Financial regulatory authorities should be judged on how well they ensure finance serves the interests of the economy and society, not on how well they serve and promote the interests of finance. However, just as the FOS is being brought more within the FCA’s orbit, the FCA’s own operational independence is under threat from the supposedly secondary growth and competitiveness objective which is now a de facto primary objective. This pressure on the regulators and FOS not only has implications for how legislative and regulatory reforms are framed and introduced, it has potential consequences for how robustly it is applied and enforced by the relevant authorities. The way the FCA responded to the Motor Finance scandal does not bode well for how the regulator (and FOS) will deal with mass redress events (MREs), wider implications issues, and referral mechanisms.
Let’s look at the main categories of concern.
Targeted Support and Simplified Advice We fully support the objectives of ensuring more consumers: have the support to make positive financial choices and avoid making suboptimal decisions;[7] and receive better value for money from the financial advice market. But, we question the means by which the Government and FCA have decided to pursue that goal.
Taken together, the package of reforms on Simplified Advice and Targeted Support further complexify an already complicated financial advice market, and add up to a weakening of consumer protection and rights to redress in pensions and investment markets.
Consumers in the process of making some of the most important financial decisions in their lives will now have to differentiate between six different types of service and understand the relative value and consumer protection standards that accompany those services – information only, guidance, targeted support, basic advice, simplified advice, and full scope advice. If ongoing advice services are included that makes seven types of service to consider. It is difficult to understand the logic of this. Consumers find it more difficult to make effective choices in complex markets. This is not a market designed around consumer needs; rather it is designed to accommodate the business model preferences and concerns of the market about falling foul of consumer protection standards (which are not even that demanding) when selling investment-based products.
Consumers with assets will be targets for firms using mass market ‘digital cold calling’ techniques enabled by AI/tech/big data to sell higher risk, higher cost investment products. Key to these reforms is how the FCA is consciously moving the boundary of responsibility for suboptimal outcomes away from firms to target-consumers and the creation of ‘safe harbours’ for firms. So, firms will be able to generate higher revenues and extract more value from consumers by selling higher risk products safe in the knowledge that consumer protection standards and rights have been weakened. If the boundary of responsibility is moved, thinking that the Consumer Duty would provide a backstop and retain the current level of consumer protection is just not a logical position.
Moving the boundary of responsibility and creating ‘safe harbours’ for firms doesn’t just weaken consumer protection. By definition, it must affect consumers ability to obtain redress in certain circumstances, so reducing firms’ potential redress liabilities.
Specific proposals in CP26/10 could potentially impact a consumer’s ability to make a civil claim for damages through a private right of action (PROA), including the ability to make a claim to the Financial Services Compensation Scheme (FSCS) where a firm fails. The FCA would also not be able to impose an industry-wide consumer redress scheme in relation to breaches of the Duty under section 404 of FSMA.
It is important not to criticise reforms without suggesting alternatives. To achieve the goals outlined above, the FCA could have utilised its flagship Consumer Duty initiative to greater effect. The FCA could have consulted on requiring firms via the Consumer Duty to be more proactive in identifying customers who are making suboptimal decisions eg. about drawing down too much of their pensions or leaving large sums of money on deposit in accounts generating low returns.
Moreover, while the focus of these proposals are groups of consumers underserved by the market, the FCA has identified a group of up to 1.5m potentially overserved advice takers who may paying too much for advice which provides little value.
As we explain in the consultation response to CP26/10, the growth in fees generated from retail investors has far outstripped general inflation raising concerns about value extraction. We estimate that total revenues for firms have risen at a rate of 7% per annum, while revenues from fees and charges grew at 15.8% per annum. By way of comparison, the inflation rate as measured by the Bank of England’s inflation calculator was 2.8% per annum over the same period.
Presumably, some of this increase in fees and charges will be linked to a rise in asset values over the period and have little to do with the sector adding real value. For example, we estimate that the FTSE All Share Index produced a total return (before charges) of 9.5% per annum from the end of 2013 to end 2024, and a simple benchmark 50/50 Gilts/ equities portfolio produced 5.8% per annum.
Whatever the cause of the significant increase in fees and total revenues, questions should be asked as to why these have risen so quickly compared to inflation. The FCA, along with The Pensions Regulator is concerned with the concept of value for money at the moment. The FCA should explore this growth in revenues further to determine whether the significant increase in fees/charges generated is justified by the delivery of better value for consumers. It is difficult to see the justification for this increase in revenues. Again, the Consumer Duty could have been used to ensure that the market is delivering value for money for investors.
Unfortunately, rather than actively use the Consumer Duty, the FCA has chosen to weaken consumer protection to incentivise the market. The key now will be for the FCA to issue clear guidance on what is not acceptable practice under this new regime and to make it clear that it will robustly enforce against harmful behaviours. Although, to be clear, the way the FCA is moving the regulatory boundary means the regulator may well be limiting its own ability to act.
Rights and access to redress, FOS reforms The reforms to the redress system relating to mass redress events (MREs), wider implications issues, and referral mechanisms will give the industry even more opportunities to influence how the FCA’s rules, including the Consumer Duty, are interpreted and applied, and in doing so limit the ability of the FOS to act independently on disputes. Moreover, changes to the way the FOS would be able to interpret ‘fair and reasonable’ when ruling on cases would also tie the FOS closer to the FCA.
The aggregate effect of these reforms will be to bring the FOS more within the FCA’s orbit, so risking FOS operational independence. This would undermine the UK’s tripartite system of legislation, regulation, and redress and could have an aggregate negative impact on consumer rights and access to redress.
The tripartite system[8] consists of: i. legislators (who determine the overall intention and direction of policy); ii. regulators (who produce rules and guidance that interprets and codifies the high level intent of legislation and enforces compliance with those requirements); and iii. the FOS which should provide an independent assessment of what is ‘fair and reasonable’ taking into account FCA regulations and other considerations when resolving disputes between consumers and firms.
On top of this, the industry wanted a ‘longstop’ on consumer complaints which the Government is duly introducing through a 10 year time limit in the new Financial Services and Markets Bill currently in Parliament. The FCA will be able to exempt certain longer-term products from this long stop. But, the FCA has shown itself to be willing to weaken consumer protection through Targeted Support and Simplified Advice to encourage the industry to sell higher risk investment products. If the industry lobbies against exempting investment products from the longstop (eg. on the basis that this will stop it selling long term investment products through Targeted Support) how likely is the FCA to resist especially given the intense pressure it is under from the Government to promote growth?
So, we face a new regime where the industry will have more opportunities to influence the FCA’s interpretation and application of its own regulations, and the FCA can constrain the capacity for FOS to reach independent decisions.
As mentioned, the repealing of sanctions provisions contained in the Consumer Credit Act 1974 legislation will remove a measure which civil society experts considered to exert an important disciplining effect on market behaviours. FCA proposals in the Simplified Advice consultation could affect a consumer’s ability to make a civil claim for damages through a private right of action (PROA), and make a claim to the Financial Services Compensation Scheme (FSCS) where a firm fails.
The pensions VFM agenda, promotion of private assets, TPR Corporate Strategy The negative effects of pension-related reforms include: pension scheme members will be more exposed to poorly regulated and governed higher risk, higher cost private assets which offer questionable value; pension savers likely to pay higher costs with firms, consultants, and advisers extracting more value from pension schemes; and trustees and scheme members being misled about the potential for future investment performance to outweigh high costs. Moreover, major risks such the transfer of pension scheme assets to poorly regulated life insurers and weak governance in the master trust market have been left unaddressed.
The so called Value for Money (VFM) agenda, by allowing the industry to increase the emphasis on investment past performance, will distract attention from the importance of costs. Costs matter; the more costs and fees extracted from pensions, the more people have to contribute to their pension to produce the same retirement outcome. The current market is fragmented and oversupplied with asset managers, funds, and products[9] and provides inconsistent levels of value.
As the Second Pensions Commission points out: ‘there is widespread differential pricing, with over two‑thirds of multi employer schemes charging different prices to different employers and therefore identical savers who just happen to work for different companies. These charges vary from around 0.1% for some employers to over 0.5% for other employers. This behaviour was foreseen by the first Pensions Commission and it is difficult to see a justification for such a spread of outcomes.’
The Second Pensions Commission also pointed out that: ‘The market created to deliver the second pillar of the UK’s pension system is different from that anticipated by the first Pensions Commission. The Government did not introduce the National Pensions Saving Scheme (NPSS) as a default scheme but decided to leave the market more open.’
The decision to create a more open market of private pension providers limited the potential for NEST (originally conceived as the NPSS) to deliver value for the maximum number of citizens. To be sure, price regulation in the form of charge caps enhanced efficiencies and brought down charges where competition and market forces singularly failed to do.
But, even better value could have been delivered if the original conception of NEST had been delivered. The Second Pensions Commission also reminded us that: ‘some very large default fund managers, like AP7 in Sweden, are able to operate with much lower charges than the UK – AP7 has charges closer to 0.1%.’ Therefore, an even greater focus on low costs and efficiency is needed.
With regards to investment performance, the available evidence does not support the view that scale necessarily leads to better investment performance. Indeed, TPR’s own research found that, while scale does indeed support cost-efficiency, ‘The current UK evidence linking scheme size with gross investment returns is weak’. [10]
Of course, investment returns do matter, and better performance may offset high charges. However, the value delivered by investment returns can only be recognised with hindsight. We cannot predict future superior investment performance based on past performance. It is critical to remember this point.
Therefore, it is important that pension scheme trustees (and retail investors for that matter) are not influenced by the use of past performance data in VFM assessments nor misled by claims by asset managers, consultants, and advisers about the potential for superior future investment performance to offset higher charges.
Yet, even though there is the obvious potential for performance claims to distort market behaviours, it is a matter for concern that TPR and FCA will enable costs and investment performance to be conflated through the VFM initiative. A key component of VFM assessments will be calculating investment performance netof costs. So, a fund with high costs could appear to deliver VFM if it happened to have delivered good past investment performance – performance which the evidence tells us should not be used to make decisions about future performance and therefore not be used to assess likely future VFM.
It is very risky for the regulators to allow attention to be diverted from the importance of costs. The VFM initiative will allow the market to extract higher fees without being able to guarantee better investment returns. Charges can be controlled, future investment performance cannot.
Moreover, there is a concerted drive to persuade pension schemes to invest more in poorly regulated and governed, high cost private assets[11] with questionable performance records. Government is even reserving powers to mandate schemes to invest a minimum proportion of scheme assets in private assets.
Linked to this, there are moves to increase the charge cap on workplace pensions to further facilitate greater investment in these private assets.
The combined effect of the VFM reforms, the pressure to invest in high risk/ high cost assets, and weakening of the workplace pensions charge cap risks could actually undermine pension outcomes. Pension providers, asset managers, and consultants will be able to extract greater value from pension schemes and expose pension savers to greater risks with little to suggest that this would result in better risk adjusted return outcomes for pension savers. This is likely to reverse the real progress made in injecting efficiency into the private pensions market and bringing down charges.
TPR’s Corporate Strategy 2026-31, embedding the VFM the private assets agendas, will expose pension scheme members and investors to greater investment risks, and enable greater value extraction from peoples’ pensions.
TPR’s Corporate Strategy does not properly address a range of key risks including: the emergence of AI; the growth in the pension transfer market run by poorly regulated life insurers; the transfer of risk to pension savers and greater individualisation of risk within the pension system; weak governance standards and inherent conflicts of interest in the contract based pension market and the master trust sector; the push to get pension savers to invest more in poorly regulated and governed private assets which offer questionable value in terms of risk-adjusted returns; and environmental-related risks.
Managing these risks is made more difficult due to the fragmented nature of the regulatory system. The various elements of private pension regulation – consumer protection, conduct of business regulation, prudential regulation, and management of systemic risks – is shared between TPR, FCA, FOS, The Pensions Ombudsman, FSCS, PPF, and PRA/ Bank of England. To address the fragmented regulatory system, we advocate that all matters relating to the prudential regulation of pension schemes be transferred to the PRA to better manage risks, with all conduct of business matters transferred to the FCA. This would allow TPR to concentrate on the critical role of ensuring schemes are run and administered effectively.
WHAT IS DRIVING THE REFORMS?
The main drivers of the reforms seem to be:
· the desire of the Government and financial regulators to promote the growth and competitiveness of the UK finance sector on the questionable basis that this will be automatically good for the UK economy and society;
· linked to this, the view that the current regulatory system stifles real innovation, effective competition, and sustainable economic growth;
· the view that certain ‘legacy’ legislation and regulation is not in keeping with more flexible ‘modern’ forms of regulation especially in the digital era; and[12]
· the view that the reforms would ‘liberalise’ markets in a safe way or that liberalisation is a price worth paying if it ‘encourages’ firms to persuade consumers and pension scheme members invest more in infrastructure and helps consumers make better financial decisions on pension planning and investing for the future.
Specifically, with regards to redress, the Government, FCA, and FOS seem to have also accepted the industry lobby line that the current redress regime ‘suppresses investment and innovation due to concerns about potential future redress’, that FOS ‘acts as a quasi-regulator’, and ‘FOS retrospectively applies different rules and standards’.
The regulators and FOS are under intense pressure from the Government to promote finance sector growth; indeed, they have been very keen to demonstrate publicly they support the growth agenda. This supposedly secondary growth and competitiveness objective is now a de facto primary objective. We fear the operational independence of regulators and FOS is being compromised.
The fact that the FCA and FOS write in the joint Foreword to the latest consultation on the reforms to the redress system that the proposals will help firms ‘to invest, grow and compete’ reinforces our concerns. It should not be the role of regulators and, certainly not Ombudsmen, to help the firms they are supposed to regulate to grow. The overall regulatory system should be judged on how well it ensures regulated industries serve the interests of the economy and society, not on how well the regulatory system promotes and serves the interests of regulated industries.
FIMC fully supports the goal of encouraging sustainable, fair, inclusive economic growth and campaigns for a finance sector that serves the interests of the real economy, environment, and society. Yet, despite the justifications for the reforms, HMT/FCA/FOS have not produced meaningful evidence or reasoning to back up the assertions about regulation stifling genuine innovation and real competition, and holding back growth; or FOS acting as a quasi/retrospective-regulator.
Policymakers have not properly considered the potential negative impacts on sustainable economic growth of treating the financial sector as the ‘golden goose’ and allowing it to become too dominant. There is compelling research that supports the view that allowing finance to become too dominant actually harms the interests of the real economy and society.[13] The lessons of history appear to have been forgotten.
Policymakers have not properly considered why the financial sector is so poor at what should be one of its primary functions, allocating resources to the real economy. None of the current reforms address the chronic, structural problems which limit the economic, environmental, and social utility of the UK finance sector.
FOS does not create, and never has created, retrospective regulation. Frustratingly, as mentioned elsewhere, the worthwhile goal of supporting consumers in making better pension and investment decisions could be better achieved through more robust application of the FCA’s flagship Consumer Duty rather than weakening consumer protection and creating ‘safe harbours’ to encourage firms to sell more products.
WHAT HAPPENS NEXT?
We have made real progress in driving up standards of conduct and behaviours across UK financial services over the decades, and making the mainstream banking system safer post 2008. In certain sectors, we have seen real improvements in value for money due to legislation and regulation.
This happened as a result of progressive financial legislation, tougher prudential regulation, product regulation[14] such as price caps on payday loans and workplace pensions and, to be fair, robust FCA interventions. The UK is one of the largest financial sectors in the world and probably the most complex. The FCA often gets blamed wrongly for events that are largely outside its control. It has to wait for policymakers to include activities within its remit. It should be acknowledged that the FCA and FOS has done a good job overall in driving up standards in areas within its remit – until now.
FIMC is not saying that the recent reforms will cause a repeat of the worst excesses of the past when a litany of misselling scandals and rip-off products left a legacy of consumer mistrust in finance. But, there is no question that the aggregate effect of the current set of reforms do represent a reversal. The extent of the reversal will now depend on how regulators police markets and whether the industry behaves responsibly.
The extent of the harm caused by the recent reforms will depend on three factors – how:
· the regulators police the new, more liberalised regime and FOS strives to maintain its operational independence;
· the market itself responds to the relaxation of consumer protection standards; and
· active civil society and media are in monitoring the behaviours of the regulators, FOS, and the market.
To be fair, there are many good firms and people in financial services who want to do the right thing. But, generally speaking, the market overall tends to respond to greed and fear. If it becomes obvious that certain firms are able to take advantage of the weakening of the rules to expand market share and sell greater volumes of higher revenue generating products with redress liabilities limited, then even the good guys will have to follow suit or risk losing out to rivals.
If consumers are to be protected from the negative effects of the profit-maximising imperative in this more liberalised environment, then firms will need to be kept in line through fear of the regulators. This will be a big test for the much vaunted Consumer Duty. But, given the current pro finance sector growth environment, can we really hope the FCA will wield the big stick?
Interestingly, the further shift to more outcomes-based, permissive regulation away from prescriptive regulation could actually make it more difficult for firms to interpret what is expected of them and for the FCA to supervise markets.
NOW IS NOT THE TIME FOR DEREGULATION OR LIBERALISATION – THERE IS MUCH MORE TO BE DONE
It is bad enough that the Government and regulators are embarking on a programme of deregulation and liberalisation which threatens to reverse the hard-won gains of the past decades. It is even more unfortunate given that there is still so much more to be done to make finance work for the real economy, environment, and society, to make markets safer and resilient, sustainable, more efficient, and fairer and more inclusive.
None of the current reforms address the chronic, structural problems which limit the economic, environmental, and social utility of the UK finance sector. The danger of prioritising the growth in finance has not been seriously considered. The legislative and regulatory regime remains far too slow to respond to emerging scandals, crises, and harms. The FCA and FOS in the latest consultation on redress talk about working ‘at pace across the whole of the regulatory system to support the Government’s broader reforms’, throwing into sharp relief how slowly the legislative and regulatory system tends to be in responding to consumer detriment in financial services.
Key issues that need to be addressed include:
· Financial markets continue to finance, at scale, activities which harm the environment which, in turn, will feedback to harm the financial system in the long term.
· The shift of risk from the mainstream banking system to the shadow banking system and the risks created by AI in the financial system warrants a much more precautionary approach to regulation, not a liberalised one.
· Financial markets are not very good at one of their primary functions of allocating resources to economically productive activities in the real economy.
· Financial services firms are prohibited, quite rightly, by legislation and regulation from enabling money laundering, insider dealing, sanctions evasion, and misselling. Yet, the City continues to be allowed to finance, at scale, activities which harm the environment.
· Much financial product innovation is spurious and/or potentially toxic rather than genuinely economically and socially useful.
· Technological and data innovations are too often used to exploit consumers’ behavioural and psychological biases and weaknesses, rather than better meet consumers’ needs – this is likely to be exacerbated by the growth in the application of AI in finance.
· We still see shameful levels of financial exclusion and discrimination affecting the most financially vulnerable households, communities, and regions which could be exacerbated by the use of AI/tech/big data.
· Large parts of the finance sector do not offer value for money and extract huge costs from consumers without improving outcomes. Rather than enable higher fee extraction, the regulators should prioritise clamping down on financial institutions which continue to extract unnecessarily high fees and charges from pensions and investments.
· There are a number of major risks specific to the pension system which need to be better managed including: the growth in the pension transfer market run by poorly regulated life insurers;[15] the transfer of risk to pension savers and greater individualisation of risk within the pension system; weak governance standards and inherent conflicts of interest in the contract based pension market and the master trust sector; the push to get pension savers to invest more in poorly regulated and governed private assets which offer questionable value in terms of risk-adjusted returns; and environmental-related risks.
· It is estimated that hundreds of £billions of ‘dirty money’ continues to flow through the UK every year.[16]
· Millions of consumers are victims of scams and fraud each year, which requires a much bigger response from tech firms, not just finance.[17]
· The legislative and regulatory regime remains far too slow to respond to emerging scandals, crises, and harms. The FCA and FOS in the latest consultation on redress talk about working ‘at pace across the whole of the regulatory system to support the Government’s broader reforms’, throwing into sharp relief how slowly the legislative and regulatory system tends to be in responding to consumer detriment in financial services.
Addressing those risks and priorities should have been the focus of financial policymakers and regulators, not promoting the interests of finance by weakening consumer protection and regulation.
FIMC
June 2026
[1] We should not forget that alongside the reforms discussed here the Government is actively trying to get UK pension funds, insurers, and asset managers to invest more in higher risk private assets. Indeed, the recent Pensions Schemes Bill includes powers that would allow government to mandate defined contribution pension schemes to invest a minimum proportion of funds in these assets.
[2] This is ‘vibes’ based policymaking not evidence based policymaking.
[3] The FCA’s proposals on reforming the credit information market are particularly welcome. The regulation of BNPL is very welcome but there is a significant gap as it only covers third party providers. Moreover, while the FCA’s specific measures including important measures relating to affordability, not enough ‘friction’ will be inserted into the customer journey. BNPL is a form of embedded finance and it will still be relatively easy for BNPL providers to use AI/tech/data to exploit consumers’ behavioural biases to encourage overconsumption of credit. And the repeal of sanctions contained in the Consumer Credit Act 1974 removes an important market disciplining mechanism. The proposals on consumer credit financial promotions would remove some important specific rules from the ‘rulebook’ with the FCA relying more on the Consumer Duty and giving firms more discretion on how disclose information when selling consumer credit.
[5] FCA consultation on buy now, pay later (BNPL) CP25-23 | The Financial Inclusion Centre
[6] TPR is also under pressure which will have implications for pension savers.
[7] For example, enhancing risk adjusted returns from their assets and drawing down too much from their pension funds
[8] There is also the Financial Services Compensation Scheme (FSCS) which pays compensation to consumers if firms within its remit go out of business. But, the FSCS does not determine firms’ standards of behaviour or consumers’ rights to redress from firms that are still in business.
[9] Note that with respect to specific parts of the market, the issue is overconcentration. The pensions transfer market is a clear case in point.
[10] DC consolidation and economies of scale: emerging evidence
[11] Note that a key driver for this push to get schemes to invest in private assets is the government’s view that this will unlock private capital for UK physical and social infrastructure and, in turn, produce better returns for pension schemes. It may well channel more private capital into infrastructure, but the return expectations means that this will be a more costly way to fund that infrastructure. The return expectations will be paid for by households through higher bills and/or service charges. It would be interesting to know whether pension scheme members realise that their contributions could be used to extract value from social infrastructure. Moreover, even if the gross returns might be attractive on paper, once the high fees, charges extracted by the supply chain of asset managers, consultants, and advisers are accounted for the net returns may not be that favourable.
[12] This is vibes policymaking not evidence based policymaking.
[13] See for example The finance curse – Tax Justice Network
[14] Product regulation has been shown to be a very effective intervention for ensuring value for money and protecting consumers in complex, high risk markets such as payday lending and pensions. Regulators should deploy product regulation more often rather than trying to ‘create the conditions for competition’.
[15] The Matching Adjustment provision in Solvency II/UK allows insurers to create artificial capital to make their balance sheets look stronger than they really are. See: HM Treasury reform of Solvency II consultation | The Financial Inclusion Centre Not only that further government liberalisation will allow the cushion of surpluses in defined benefit pensions to be reduced Billions in pension surpluses to be unlocked – GOV.UK
[16] £325 billion of dirty money flowing through the UK every year – Finance Innovation Lab
[17] Fraud and computer misuse in England and Wales – Office for National Statistics
