The FCA's Consumer Duty has made the UK one of the most challenging brokerage environments in the world, although much work remains to be done to ensure brokers are complying with all its requirements.

In the 16 months or so since the Financial Conduct Authority introduced a new consumer principle requiring firms to act to deliver good outcomes for retail customers there has been much discussion in private about the implications of adding to an already heavy compliance workload.

According to one broker, the FCA's consumer duty led to a 25% increase in compliance costs in the first year.

Uncertainty About Market Dynamics

Since the FCA does not actively monitor the number of brokers operating in the UK it is difficult to say whether the introduction of the consumer duty has precipitated a flight to less stringently regulated markets.

However, it is reasonable to assume that recent moves by UK-licensed brokers to expand their operations in other markets – most notably Dubai – are at least in part a respond to a consumer protection regime that goes beyond anything imposed in any other major financial market.

David Morrison, senior market analyst at Trade Nation describes it as one of the most stringent regulatory frameworks globally and more far-reaching than either the EU’s MiFID II & consumer protection laws or the FINRA and SEC regulations in the US.

“It embeds customer outcomes within the regulations, which requires active outreach, monitoring and follow-up action,” he says. “The approach of the Australian Securities and Investments Commission is similar but is focused more on the provision of financial advice and product design. The UK’s Consumer Duty is broader in scope as it covers all aspects of the customer experience.”

Rising Compliance Costs and Building Trust

The downside, acknowledges Morrison, is that all new requirements increase compliance costs. “It feels as if compliance has been the single biggest area of growth in financial services, at least in my lifetime,” he adds. “But if it helps build trust and confidence, then it can’t be all bad.”

While other major markets have regulations aimed at protecting consumers, the UK's emphasis on outcome-focused regulation creates higher expectations for firms in terms of delivering good consumer outcomes across the entire customer journey agrees Ross Maxwell, global strategy and operations lead at VT Markets.

Gerry Perez, CEO of Interactive Brokers (UK) says firms must reevaluate their purpose, processes, procedures, pricing and policies in order to deliver on the duty’s core principles. “It raises the UK’s industry standards and increases the financial sector’s credibility but it also makes some operations costly and more complex, especially for smaller firms,” he adds.

Balancing Complexity and Innovation

The UK’s rules have raised the bar for customer-centricity, going beyond box-ticking to focus on ensuring good outcomes for clients suggests Kourosh Khanloo, director of corporate strategy at Tradu.

“While this creates additional operational complexity, it elevates industry standards and builds trust with customers,” he says. “Smaller brokers may face challenges due to the increased resource requirements, but the framework drives innovation, differentiation and competition.”

Some brokers were already behaving to a high standard when it came to treating customers fairly but many were not and the new regime has put pressure on those who fell below the standards required according to Morrison.

“Brokers must provide clear breakdowns of all fees, charges and commissions, helping customers understand exactly what they are paying for,” he says. “In addition, the price of a product must be justified by the benefits it offers. This should help customers assess whether the value they are receiving aligns with the cost.”

Earlier this month, the FCA published a review of the first annual consumer duty board reports from 180 firms across a range of sectors. It found that some firms did not have sufficient data quality to justify conclusions or provide adequate assurance that they were meeting their obligations under the duty and that many action plans and improvements were not accompanied by further details such as timescales, action owners and clarity on the data that would be used to evidence good outcomes.

Assessing Implementation Gaps

This followed on from a review of payments firms’ implementation of the duty, which revealed that of the 23 firms surveyed almost half had only partially implemented the duty and required significant work to comply with it.

Despite this patchy implementation, Perez reckons unclear fees and communications have become a thing of the past in the FX brokerage space and that improved openness and transparency should give customers greater confidence when evaluating and selecting brokers.

“With post-interaction surveys and real time feedback, clients can determine if what they are paying delivers the expected benefits,” says Khanloo.

XTB UK managing director, Joshua Raymond notes that his firm has created simplified legal documentation, conducted more enhanced training for front office staff to help identify customer vulnerabilities and improved its monitoring systems to be proactive in presenting what could be adverse outcomes for customers.

Shaping Future Products and Value Propositions

The objectives of the consumer duty are also evident in eToro making sure fairness is built into new products in its pipeline and that it is communicating these benefits to customers effectively, so that they know they are getting the best value out of the platform explains Daniel Moczulski, managing director of eToro UK.

He reckons European rules will move closer to the UK in terms of customer protection. “There are much more defined rules for consumer duty in the UK now,” says Moczulski. “Regulations in Europe have looser concepts of fair value and customer protection, but we do expect them to develop along the lines of what exists in the UK.”

Similar views are expressed by Raymond, who believes the FCA will take a proactive approach to enforcing these new rules and refers to similar considerations on consumer duty across the EU raising expectations of changes in the single market.

“Consumer duty will mean higher costs associated with legal and compliance-related systems and a tightening of the processes connected to the onboarding and servicing of customer accounts,” he says. “It will also mean barriers to certain profiles of customers being accepted on respective platforms.”

Finance Magnates reached out to the FCA but did not receive a quotable comment.

The FCA's Consumer Duty has made the UK one of the most challenging brokerage environments in the world, although much work remains to be done to ensure brokers are complying with all its requirements.

In the 16 months or so since the Financial Conduct Authority introduced a new consumer principle requiring firms to act to deliver good outcomes for retail customers there has been much discussion in private about the implications of adding to an already heavy compliance workload.

According to one broker, the FCA's consumer duty led to a 25% increase in compliance costs in the first year.

Uncertainty About Market Dynamics

Since the FCA does not actively monitor the number of brokers operating in the UK it is difficult to say whether the introduction of the consumer duty has precipitated a flight to less stringently regulated markets.

However, it is reasonable to assume that recent moves by UK-licensed brokers to expand their operations in other markets – most notably Dubai – are at least in part a respond to a consumer protection regime that goes beyond anything imposed in any other major financial market.

David Morrison, senior market analyst at Trade Nation describes it as one of the most stringent regulatory frameworks globally and more far-reaching than either the EU’s MiFID II & consumer protection laws or the FINRA and SEC regulations in the US.

“It embeds customer outcomes within the regulations, which requires active outreach, monitoring and follow-up action,” he says. “The approach of the Australian Securities and Investments Commission is similar but is focused more on the provision of financial advice and product design. The UK’s Consumer Duty is broader in scope as it covers all aspects of the customer experience.”

Rising Compliance Costs and Building Trust

The downside, acknowledges Morrison, is that all new requirements increase compliance costs. “It feels as if compliance has been the single biggest area of growth in financial services, at least in my lifetime,” he adds. “But if it helps build trust and confidence, then it can’t be all bad.”

While other major markets have regulations aimed at protecting consumers, the UK's emphasis on outcome-focused regulation creates higher expectations for firms in terms of delivering good consumer outcomes across the entire customer journey agrees Ross Maxwell, global strategy and operations lead at VT Markets.

Gerry Perez, CEO of Interactive Brokers (UK) says firms must reevaluate their purpose, processes, procedures, pricing and policies in order to deliver on the duty’s core principles. “It raises the UK’s industry standards and increases the financial sector’s credibility but it also makes some operations costly and more complex, especially for smaller firms,” he adds.

Balancing Complexity and Innovation

The UK’s rules have raised the bar for customer-centricity, going beyond box-ticking to focus on ensuring good outcomes for clients suggests Kourosh Khanloo, director of corporate strategy at Tradu.

“While this creates additional operational complexity, it elevates industry standards and builds trust with customers,” he says. “Smaller brokers may face challenges due to the increased resource requirements, but the framework drives innovation, differentiation and competition.”

Some brokers were already behaving to a high standard when it came to treating customers fairly but many were not and the new regime has put pressure on those who fell below the standards required according to Morrison.

“Brokers must provide clear breakdowns of all fees, charges and commissions, helping customers understand exactly what they are paying for,” he says. “In addition, the price of a product must be justified by the benefits it offers. This should help customers assess whether the value they are receiving aligns with the cost.”

Earlier this month, the FCA published a review of the first annual consumer duty board reports from 180 firms across a range of sectors. It found that some firms did not have sufficient data quality to justify conclusions or provide adequate assurance that they were meeting their obligations under the duty and that many action plans and improvements were not accompanied by further details such as timescales, action owners and clarity on the data that would be used to evidence good outcomes.

Assessing Implementation Gaps

This followed on from a review of payments firms’ implementation of the duty, which revealed that of the 23 firms surveyed almost half had only partially implemented the duty and required significant work to comply with it.

Despite this patchy implementation, Perez reckons unclear fees and communications have become a thing of the past in the FX brokerage space and that improved openness and transparency should give customers greater confidence when evaluating and selecting brokers.

“With post-interaction surveys and real time feedback, clients can determine if what they are paying delivers the expected benefits,” says Khanloo.

XTB UK managing director, Joshua Raymond notes that his firm has created simplified legal documentation, conducted more enhanced training for front office staff to help identify customer vulnerabilities and improved its monitoring systems to be proactive in presenting what could be adverse outcomes for customers.

Shaping Future Products and Value Propositions

The objectives of the consumer duty are also evident in eToro making sure fairness is built into new products in its pipeline and that it is communicating these benefits to customers effectively, so that they know they are getting the best value out of the platform explains Daniel Moczulski, managing director of eToro UK.

He reckons European rules will move closer to the UK in terms of customer protection. “There are much more defined rules for consumer duty in the UK now,” says Moczulski. “Regulations in Europe have looser concepts of fair value and customer protection, but we do expect them to develop along the lines of what exists in the UK.”

Similar views are expressed by Raymond, who believes the FCA will take a proactive approach to enforcing these new rules and refers to similar considerations on consumer duty across the EU raising expectations of changes in the single market.

“Consumer duty will mean higher costs associated with legal and compliance-related systems and a tightening of the processes connected to the onboarding and servicing of customer accounts,” he says. “It will also mean barriers to certain profiles of customers being accepted on respective platforms.”

Finance Magnates reached out to the FCA but did not receive a quotable comment.