FCA response to the independent panels’ 2023/24 annual reports

The Smaller Business Practitioner Panel, Practitioner Panel and the Consumer Panel encouraged us to be proportionate in implementing the Consumer Duty (the Duty). They encouraged us to progress work on the realised cost and benefits, provide clear guidance and examples of good and bad practice to support consistent interpretation and implementation, and focus on fair value.

Our response

The Duty came into force for all products on 31 July 2024 (when it also came into force for closed products and services). Its focus on consumer outcomes gives firms greater flexibility to innovate in the interests of consumers and better enables the regulatory regime to respond to market developments. We have continued to see firms act on its requirements and make changes to improve consumer outcomes. We have shared these good practices with industry.

The panels have given us insight into the way the duty has been implemented and some of the challenges firms have faced. For example, the SBPP has highlighted the issues smaller firms have when carrying out root cause analysis on complaints, given they are likely to have fewer complaints. SBPP suggested that smaller firms should be identifying other opportunities to capture insights, and this is reflected in the published findings of our review into firms’ approaches to complaints and root cause analysis. We recognise firms in different sectors or of different sizes are affected differently by the Duty. We have focused on setting clear expectations through supervisory messages and publications on good and poor practice, such as in our multi-firm review of payments firms’ implementation of the Duty.

We have also focussed our communications with specific messages for smaller firms. For example, in our recent update on good and poor practice on fair value. We continue to engage closely with the SBPP. Our approach to supervision supports this.

While supporting firms through the implementation of the Consumer Duty, we are also engaging proactively with firms where we see a problem. And we will act where necessary, such as in the GAP insurance market and in the treatment of cash balances on investment platforms.

We have taken action to address the concerns of consumer organisations, including the Consumer Panel, and other stakeholders. For instance, issuing new guidance on how firms and others should communicate financial promotions on social media in line with the Duty. Our work on fair value continues to focus on those areas where we see the greatest market wide concerns and where we can draw wider implications. Our work on cash savings is a good example of this.

Consistency in interpreting the Duty is important. We are working closely with the Financial Ombudsman Service and other members of the Wider Implications Framework, to identify and mitigate any emerging concerns that may have a wider impact across financial services. This includes sharing information on where complaints are arising and joining up our thinking on those areas of concern.

We estimated implementation costs of the Duty before it came into force and indicated the scale of its likely benefits. We are committed to a post-implementation review of the Duty. We will start that once sufficient time has passed to allow a proper assessment of the costs and benefits. Our data strategy is designed to collect information that supports understanding of the impact of the Duty.

Now the Duty is in place, we want to simplify our requirements on firms and create greater opportunities for innovation. Our Call for Input in July invited views on which of our Handbook requirements could be changed to foster greater competition and innovation, and contribute to growth. The Call for Input closed in July. We had over 170 responses and will be communicating our next steps in Q1 2025. We will continue to seek the Panels’ input to shape our approach.

The Consumer Panel, Practitioner Panel and Smaller Business Practitioner Panel agreed on the importance of consumers having access to high-quality and affordable support and advice. But they gave differing feedback on our AGBR proposals aimed at achieving this.  

Our response

We share the Panels’ view on the importance of our work to help consumers access the help, guidance and advice that they need, when they want it, at a cost they can afford, so they can make informed decisions about their finances. We want consumers to be offered a continuum of support. So, we will develop proposals to improve consumer outcomes at all stages of their financial lives.

We have undertaken consumer testing on consumer interest for targeted support on pensions. We are undertaking similar research on retail investments as well as accompanying quantitative research.

These insights will help us develop our thinking and policy on the advice guidance review, including:

• How we build in appropriate consumer protections.
• The extent to which we need prescriptive versus outcomes based regulation.  
• How to make sure we provide room for innovation.

The Consumer Duty sets a high standard of care that firms must give to retail customers and we expect it to be at the core of any future regime.

We are working closely with the Ombudsman and the wider regulatory family in developing the regulatory framework. We will continue to engage closely with the Panels as this work develops. 

The Listing Authority Advisory Panel emphasised that we should address finding the right level of consumer protection and a reset of risk appetite. They considered Defined Contribution (DC) pensions key to mobilising domestic investments to invest in more growth assets. While the Practitioner Panel and Smaller Business Practitioner Panel both encouraged us to make sure the VFM framework aligns with the wider AGBR work.

Our response

We have been working with the Department of Work and Pensions (DWP) and the Pensions Regulator (TPR) on a new VFM framework for defined contribution workplace pensions. Value for money is about long-term performance and service quality as well as costs and charges. A focus on value for money in this broader sense should encourage greater consideration of growth assets that, while higher risk, can offer significantly better returns and improve diversification. We consulted on detailed proposals in August 2024 and are considering feedback as we develop and refine the framework.

We want a pensions system that provides good products with value for money, supports savers to make well informed decisions, and ensures confidence in pensions and consumer protection. The VFM framework aims to ensure the provision of good products with value for money, including for disengaged pension savers. The AGBR work will support savers to make well informed decisions. 

We are working with other regulators to make sure that changes in the pensions regulatory framework are consistent, regardless of the type of scheme that is regulated and whether we or TPR are responsible.

The Practitioner Panel emphasised that it is important for us to retain focus on operationalising the UK’s secondary international competitiveness and growth objective (SICGO). Alongside the Smaller Business Practitioner Panel, Markets Practitioner Panel and Listing Authority Advisory Panel they also encouraged us to build on and refine metrics to track progress against our new secondary objective.

Our response

We have already made a number of changes to support the new objective, by considering growth and competitiveness at every point in our decision-making processes and making it part of our forthcoming Strategy and will continue to embed these changes.

We have delivered several measures to support growth, from the overhaul of UK listing rules to the reform of UK retail disclosure rules; from changes to the remuneration regime with the PRA to new proposals to provide better value for money for workplace pension savers; as well as our newly launched AI lab to support innovators new AI models and solutions, to name but a few.

We have begun to publicly discuss the risk appetite and trade-offs, particularly where society could tolerate more risk for greater growth opportunities in financial services. We are also deepening our understanding of how regulation supports competitiveness and growth, including the link between growth and financial inclusion.

We will continue examining our regulatory framework and processes with an eye to reducing unhelpful barriers and costs while complying with our objectives and other duties. We have launched a Call for Input following the introduction of  the Consumer Duty asking for feedback on areas of complexity, duplication, confusion, or over-prescription, which create regulatory costs with limited or no consumer benefit. We also want to include appropriate flexibility in our rules to be responsive to future changes and innovation. We are currently considering the responses to that Call for Input before we determine any future workplan. We are committed to working with other regulators, industry, the government and policymakers, to advance this work.

In line with the Panels’ recommendations, we will continue to consider whether additional growth and competitiveness-related metrics would be appropriate for measuring our performance against the secondary objective. These considerations will be key as we develop outcome metrics for our next Strategy, starting in March 2025.   

Many of the secondary objective-related metrics published in July 2024 were published for the first time. We will use these as a base line to help us build on our success in the future. We agree our performance against the secondary objective should also take account of wider existing data sets, so far as they inform our regulatory competitiveness.

The Markets Practitioner Panel and Listing Authority Advisory Panel encouraged proactive collaboration to mitigate risks and enhance international coordination across jurisdictions. The Practitioner Panel, Smaller Business Practitioner Panel and Markets Practitioner Panel encouraged us to provide comprehensive Sustainable Disclosure Requirements (SDR) guidance, highlighting the regime’s benefits, ensuring clarity for advisers.

Our response 

International Policy / International Sustainability Standards Board (ISSB)

We remain committed to consulting on amending our rules to move from the Taskforce on Climate-related Financial Disclosures (TCFD) aligned disclosure regime to the UK-endorsed ISSB Standards, known as UK Sustainability Reporting Standards (UK SRS).  Following the updated timeline from the UK government for the ongoing UK endorsement process, we revised the timescales for our consultation in Primary Markets Bulletin 49. Once the UK endorsement is completed in 2025, we will consult on amending our rules to move from TCFD to UK-endorsed ISSB disclosure standards.

We have encouraged companies to familiarise themselves with the ISSB Standards and consider reporting voluntarily against ISSB Standards before the conclusion of the UK endorsement process. We are working with the Government to ensure a coordinated implementation of UK SRS. To achieve this we are participating as observers at the Technical Advisory Committee (TAC) and as members of the Policy Implementation Committee (PIC).

We continue to engage with the ISSB, bilaterally and with our IOSCO partners. We co-chair the IOSCO workstream on sustainability reporting, under the Sustainable Finance Taskforce. This work includes influencing the ISSB’s next 2-year work plan and supporting a globally consistent approach to sustainability reporting using ISSB standards.

Sustainability Disclosure Requirements (SDR)

We are considering the consultation feedback  to make sure the regime protects consumers and takes account of any practical challenges for firms. We intend to publish a policy statement and further information about implementation in Q2 2025.

We are engaging with stakeholders to inform them about the SDR regime and promote the use of labels through webinars, roundtables, speeches, podcasts. We regularly answer firms’ queries via the SDR webpage.  

We will be assessing and monitoring the expected outcomes and will conduct a post-implementation review in 3 years, as set out in our Policy Statement. Advisers play an important role in this area but we recognise that not all advisers are comfortable talking to clients about sustainability. We felt that advisers need practical guidance and materials to help them support their clients in meeting their objectives. So, we asked industry to establish the Advisers’ Sustainability Group (ASG).

We look forward to the ASG’s guidance at the end of 2024. And we hope that the advice industry embraces this opportunity to raise standards. We asked industry experts to help raise the standards but FCA guidance and rulemaking remain part of our toolbox. 

The Practitioner Panel and Markets Practitioner Panel were concerned with the current pace of establishing regulatory controls in contrast to the speed at which generative AI capabilities appeared to be emerging. They also emphasised the need to address existing disparities and to consider how to approach the emergence of future imbalances in Big Tech.

Our response

In April 2024, we published an AI update, which outlined our technology-agnostic, principles-based and outcomes focused approach to AI. Our focus is on how firms can use AI safely and responsibly, with a clear understanding of its impact on consumers and markets.

We have shared our approach to AI and our current approach to market monitoring with the Panels. The findings from the joint FCA and Bank of England AI survey indicate that 17% of all AI use cases, as reported by surveyed firms, are foundation models, including Large Language Models (LLMs). Operations and IT are the areas with the largest number of such use cases, accounting for around 30% of all foundation model use cases.

Of the total number of use cases reported by respondent firms, 62% were rated as low materiality, 22% as medium and 16% as high. Low and medium materiality use cases were most common in operations and IT. High materiality use cases were most common in general insurance, risk and compliance, and retail banking.

A third of all AI use cases are third-party implementations. The top three third-party providers account for 73%, 44%, and 33% of all reported cloud, model, and data providers respectively.

The survey notes that AI can simultaneously increase cyber risks and help mitigate them.

We have published research into biases that may arise in certain machine learning models used to make predictions or help in decision-making about consumers. This work is aligned with the DRCF’s work on AI fairness and also contributes to the broader debate on AI bias. For example, the Consumer Panel’s publication on Potential bias in firms' use of consumer data.