Financial Services and Markets Bill

Written evidence submitted by the Personal Investment Management & Financial Advice Association (PIMFA) (FSMB31)

Financial Services and Markets Bill Committee
Houses of Parliament
London
SW1A 0AA

Dear Committee Members,

RE: PIMFA Evidence to Financial Services and Markets Bill Committee

PIMFA is the UK’s trade body for the investment management and financial planning industry, representing over 7,500 member firms. Our mission is to champion a thriving culture of financial health, advocating for the optimal operating environment in which to serve UK consumers. Collectively, our industry manages over £1.6tn of the UK’s retail savings, ensuring people across the country are able to save to meet their financial objectives – saving for their first home, planning for retirement, ensuring access to and ability to meet any long term care needs, and everything in between. Uniquely for the financial services industry, over 60% of PIMFA’s membership sits outside London, ensuring that our membership is able to offer professional support and employment opportunities to communities all over the UK.

We are broadly supportive of the aims of the Financial Services and Markets Bill (FSMB). Getting the UK’s regulatory architecture ‘right’ for the post-Brexit, post-COVID financial services industry is essential. It will not only provide the context in which the regulators operate and set the mandate against which their activities are assessed, but it will also determine whether the financial services industry can continue to evolve and deliver the services and products that consumers want and need.

To that end, we believe that the Bill broadly delivers as intended. It will provide the impetus to remodel the regulatory handbook to ensure that it is fit for purpose, promoting a healthy and successful financial system fundamental to the UK economy, providing jobs and growth opportunities as well as fundamentally serving UK consumers. However, we consider that there are a number of areas in which the Bill could be sensibly improved to ensure better outcomes; namely by:

- Reinserting small, technical tweaks to the Bill as initially considered within the Future Regulatory Framework (FRF) Review exercise which would, in our view, create a more efficient regulatory environment giving clarity for firms to operate in;

- Increasing levels of accountability on the Financial Ombudsman Service to ensure it does not adversely impact on the Regulator’s statutory objectives; and

- Giving due consideration to the incorporation within the FSMB of certain provisions of significance to the financial services industry as set out in the seemingly stalled Online Safety Bill.

Finally, we are aware of representations which will be made to this Committee regarding the advice/guidance boundary. As a long-term advocate of the development of a simplified advice regime, we consider that the foundations for this necessary development are already provided for within the Bill but have set out our thoughts below for completeness.

Areas of focus

Changes related to the outcome of the Future Regulatory Framework Review process

1. FCA to be given responsibility for delivering workable regulation

We support the aims of the Bill in repealing retained EU law and, where appropriate, replacing it with suitable provisions in the relevant regulator’s rulebook. In our view, any replacement rules need to be properly tailored to UK markets.

Aside from the purely administrative benefits, we see little value in replacing regulation by statute with regulation by rulebook if the opportunity is not taken at the same time to review the efficacy of those rules. By this we mean consideration should be given to whether the replacement rules are effective in delivering the looked-for outcome for consumers and whether or not they have been correctly and consistently implemented and applied by regulated firms.

Feedback from member firms suggests that that in the current regulatory construct, the FCA is seemingly reluctant to provide a steer to firms on how EU-derived provisions should be interpreted and applied (even in the period since the UK formally left the EU). We do not consider this to be an appropriate stance and would strongly urge that the Committee give consideration to placing a duty on regulators to provide clearly drafted and readily comprehensible rules and guidance. In scenarios where widespread non-compliance or industry confusion indicates the absence of clear rules, we consider it vital that the regulators act promptly to address the uncertainty surrounding the rules and clarify what firms need to do in practical terms.

2. Introducing a regulatory principle of accessibility

The initial FRF consultation exercise made provision for an additional regulatory principle which required regulators to have regard to the accessibility/navigability of their rulebooks. Notwithstanding the complexity of some aspects of regulatory policy, we believe that it should be possible for individuals working within firms to understand those parts of the rulebooks that are directly relevant to their roles without having to rely, as they do now, on the detailed interpretative input of compliance staff and lawyers.

As well as taking advantage of technological innovations to make rulebooks easier to use, we believe that the rulebooks should provide a consolidated, codified resource for regulated firms, containing all the regulatory material to which firms are subject. At present, the FCA Handbook takes an inconsistent approach to the requirements that apply to regulated firms under various EU Directives and Regulations – in some instances, the content of that legislation is "copied out" into the Handbook (e.g. as with the majority of MiFID II requirements) while in others, it is simply referred to (e.g. the application of the entire PRIIPs regime is covered by one rule).

Finalised Guidance, Dear CEO letters, portfolio strategy letters and thematic review reports are among the many types of documents that set regulatory standards/expectations that firms must comply with – however, at any given time, it can be difficult to ascertain which of the documents are still considered to apply and which have fallen into abeyance or been superseded. It seems to us reasonable that a regulator’s rulebook should be required to make clear all the rules, guidance and regulatory expectations to which regulated firms are subject.

3. Accountability and scrutiny

We are sympathetic to the concerns of Treasury Select Committee members about the level of resource available to adequately provide scrutiny and challenge to the regulators. However consideration needs to be given to whether or not the existing and suggested accountability mechanisms proposed within the Bill are commensurate with the greatly enhanced powers that the FCA and PRA will have in the absence of the EU legislators and the European Supervisory Authorities. W therefore see significant merit in the idea of creating a dedicated financial services sub committee to the Treasury Select Committee for this purpose.

Increasing levels of accountability of the Financial Ombudsman Service

The Financial Ombudsman Service plays a vital role in the UK’s financial services industry. We absolutely support the principle that consumers are able to refer complaints about financial businesses to an impartial body without facing the costs, procedural complexity or delays currently associated with the court system.

Whilst we support the role of the FOS, we are concerned by aspects of its performance which directly affect our membership; namely:

· Inconsistency: our members report similar cases often result in differing outcomes;

· Retrospection: the FOS often applies current requirements to complaints that predate them; and

· A propensity for the FOS to set common law principles in deliberation of other cases: there is, we consider, an ongoing issue whereby FOS judgments in effect become common law principles under which similar cases are judged. This concern is amplified by what we consider to be a tendency for the FOS to rely on its own opinions on what is fair, just and reasonable [1] especially given that there is no avenue for appeal for firms beyond a Judicial Review [2] .

Our membership is concerned that the introduction of the Consumer Duty [3] will make concerns around the final bullet point more acute. In instances where the FOS is able to effectively determine what is, and what is not, a good outcome, allied to its tendency to set common law principles, the FOS in effect becomes more than an independent arbitration service and assumes the role of quasi-regulator.

This outcome has the potential to directly impact on the FCA’s ability to meet its statutory objectives of promoting competition, given the likelihood of firms becoming more risk adverse as a result. We consider it likely that firms will adopt a risk averse approach in their product and services offering – only offering vanilla products and services which will likely not carry grounds for complaint. This will impact on the ability of the financial services industry to put productive capital to work within the UK as well as leading to a homogenisation of the retail financial services sector whereby the product offerings between competitors are largely the same leaving little incentive for UK consumers to shop around and switch.

This reticence among providers and move towards risk averse offerings will be driven by fear of complaint to and deliberation by the FOS. We consider that given this risk, a more effective method of accountability of the FOS should be legislated for within the Bill in order to ensure that decisions made and interpretations of Principle 12 do not adversely impact on the Regulator.

We consider the Bill should be amended to give the FCA a power to override FOS decisions. Our proposed amendment to the Bill would be an adaptation of the override power already available to the Bank of England in respect of other regulators under Section 100 of the Financial Services (Banking Reform) Act. [4]

Giving due consideration to the inclusion of provisions contained within the Online Safety Bill

We, along with a coalition of other industry bodies and consumer groups, are concerned about the apparent suspension of the Online Safety Bill (OSB). Whilst we appreciate that there are a number of provisions within the Online Safety Bill which have caused discussion across both benches, we consider it important that issues pertaining to the advertisement of fraudulent financial products are addressed with urgency. We would be very happy to work alongside the Committee to consider how these provisions could be brought forward and addressed within this Bill.

Advice/Guidance

We are aware of representations which will be made to this Committee regarding the advice/guidance boundary, and the need for legislation to specifically address the provisions set out in MiFID requiring a personalised recommendation for investment advice. As the principal proponent of a simplified advice regime, we are extremely sympathetic to these calls and would support a broader review of the boundary.

However, we also consider that the Bill already provides for such a review to the extent that the Bill provides the government with powers to review aspects of MiFID and consider whether or not they are fit for purpose for the UK Handbook. We unequivocally support such a review and consider that there is significant scope to look in particular at the disclosure regime and its impact on firms.

In considering any review of advice/guidance we would urge members to ensure that there is a clear distinction between the two. We do not consider it to be an appropriate outcome for product providers to directly sell to consumers under the banner of ‘enhanced guidance’ where the consumer might potentially consider that they are receiving advice. There is value in raising the floor on how providers can communicate to clients – using data collected to signpost them towards better products and being able to personalise communications in a manner which ensures they engage.

However, we are clear that HM Treasury must resist any moves which would, in effect, restrict the need for consumers to shop around, by providing providers with the power to in effect enact a direct sale to a consumer without having to undertake even a basic exercise of suitability.

Next steps

We would be very happy to elaborate further for the Committee on how our suggested improvements could be incorporated into the Bill.

Yours sincerely,

Simon Harrington, Head of Public Affairs, PIMFA

October 2022