UK’s EPA Chief Says Proposed ‘Consumer Duty’ Mandate Will Backfire, Stifle Innovation

“Notoriously difficult and hard to implement.” That’s the initial feedback from the head of the Emerging Payments Association (EPA), Tony Craddock, on a new set of rules put forth by the U.K.’s Financial Conduct Authority (FCA) that would dictate the “duty” that businesses have to consumers when processing transactions.

While the government regulator had asked for feedback from the industry on its recently published proposal, the trade group’s response pulled no punches in saying the plan would do more harm than good.

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The 56-page consultation paper called “CP21/13: A new Consumer Duty” was issued by the FCA in May and is targeted at firms in the payments industry. According to the regulator, the administrative requirement is necessary to ensure that companies “consistently focus on consumer outcomes” and by doing so, put retail clients “in a position where they can act and make decisions in their interests.”

Unintended Consequences

In a conversation with Karen Webster, Craddock said the FCA’s proposal to regulate how firms encourage a culture of customer centricity through the “consumer duty” mandate is “fraught with risk.”

Although he acknowledged that the FCA is well-intentioned in seeking a higher level of consumer protection in retail financial markets, he said the regulator is overstepping its boundaries by trying to govern how the marketplace operates. Demanding firms to report to the FCA in “a formal, bureaucratic, structured, administratively overburdened way is the wrong route to go,” and will ultimately result in a lot of unintended consequences, he warned.

He also questioned the relevance of the “duty” to the payment industry, which is already a heavily regulated sector. Moreover, the rules could undermine the status of the Financial Ombudsman Service (FOS), which was created as a redress mechanism for consumers and has already proven to work very well across a range of industries.

Consumer-Facing Companies Only

Craddock, whose association promotes collaboration and innovation across payments in the U.K., the EU and Asia, also opposes generalizing the mandate to include all payments firms. He is urging the FCA to make an exemption for retail companies that are not consumer facing.

Credit card transactions, for example, can have up to 10 different companies involved with the transaction process and “that means I will be dealing with six other people before they reach the end retail consumer, and for all those people, I will be responsible for their competence,” he said.

These companies that don’t have direct links to consumers include small businesses that will be crushed by the additional costs and extra layer of administrative burden the mandate will require. He said the bigger companies that have economies of scale will most likely get ahead, and young and smaller players will either fail or not come into the market altogether.

Fair Value Test

In the paper, the FCA identifies four key outcomes representing the important facets of the firm-consumer relationship: communications; products and services; customer service; and price and value. The first three elements focus on the firm’s responsibility to the consumer, while the last centers on payments the consumer makes to the firm.

Craddock said regulations in the U.K. payments industry have typically been supportive of innovation and allowed organizations freedom to establish, but moving down this line, particularly with the price and value outcome, will “create a whole breed of new legislative or regulatory barriers to innovation” for users of payment services and eMoney. In the proposal, the FCA said this fourth outcome is important because price is key in determining whether a product or service “is fit for purpose and offers fair value.”

But the EPA boss said price controls should not be the go-to regulatory tool in this context, as firms will struggle to show how they are complying with the proposed “fair value” test. It’s a very slippery slope, he said, one that will make it difficult for a consumer to establish pricing value, “particularly in an environment where ecosystems are bringing together lots of different products and services and the dynamics of platform businesses is that you subsidize one thing in order to get the benefit from another.”

Too Much, Too Little Time

The FCA is taking an inclusive approach and asked consumers for feedback on the consultation paper. Responses will be taken into consideration in drafting a second consultation by the end of year before any new rules are set by July 31, 2022.

Craddock said more people need to get involved in the discussion to get the message across to the FCA. Moreover, the proposed timeline is too tight and will not allow enough time to implement the mandate.

Overall, the risk of hurting competition in addition to product innovation slowing down will ultimately mean consumers will get less choice, he told Webster, adding that “the U.K. will end up with less of a competitive advantage on the world stage because companies won’t want to invest in a market like that.”