Investing in outcomes: a regulatory approach to deliver for consumers, markets and competitiveness

Speech by Nikhil Rathi, FCA Chief Executive delivered at the Morgan Stanley European Financials Conference.

Speaker: Nikhil Rathi, Chief Executive
Event: Morgan Stanley European Financials Conference
Delivered: 14 March 2024
Note: This is a drafted speech and may differ from the delivered version

Key points:

  • We want a deeper, more open relationship with investors, analysts, and the markets as a whole – particularly now that we have more freedom to tailor our rules to our markets. 
  • We will be pragmatic when looking at enforcement of the Consumer Duty, tackling breaches that pose the greatest risk of harm but looking favourably on firms that have made reasonable efforts to address concerns. 
  • We are not a price regulator and we will not stand in the way of well-run businesses making profits in the face of effective competition. 
  • In dealing with motor finance claims, we have intervened now to establish the facts and are aiming for earlier clarity than previous redress events. The more quickly and comprehensively firms cooperate with requests for data, the sooner we can conclude our work.
  • Firms and their investors need honest conversations about the balance between short-term shareholder returns and long-term investment to ensure medium-term competitiveness. 


I usually open speeches with a joke or anecdote. Some of you – who have heard my jokes before – will be relieved to hear not today. 

We have too much to get through. At the FCA, we are keen to build a deeper, more open relationship with the market and the analyst community. 

And I am grateful to be invited here this morning. 

To offer reassurance where I can and encourage a fair dose of reality too. 

Three years ago, I set out to transform the FCA to become a more innovative, adaptive, assertive regulator.

To place data at the heart of everything we do. 

To test and use our powers to the limit.

To deliver a step change in our operational performance, as we have done when it comes to authorisations, including to support financial services competitiveness. 

To sharpen our focus on outcomes with clearer metrics so we can be held to account.

We are now approaching the final year of that strategy – and not a week goes by when we are not vigorously held to account!

Compared to our peers around the globe, we have a relatively unique regulatory set up. And a broad consumer and wholesale markets mandate.

Successfully achieving 3 primary objectives – market integrity, consumer protection, promotion of competition – requires a constant balancing act. 

And one that has become finer now that our previous mindfulness of UK growth has been formalised in a secondary international competitiveness and growth objective – which we embrace. 

We have been asked to – and have also embraced – the regulatory opportunities of Brexit, at the same time as Parliament asked us to consider strengthening consumer protection through a duty of care, what we call the Consumer Duty

We are becoming accustomed to finding that delicate balance and want to communicate this more clearly, so the market and investors are clear about our approach.

Today I will set out more on topics we have heard investors are interested in: the Consumer Duty, redress, prudential impacts, and digital and data infrastructure.

And also highlight our shift to outcomes-focused regulation. A steady move away from prescriptive rules, beloved of compliance consultants.

Turning first to the Consumer Duty, which requires firms to act to deliver 4 good outcomes for retail customers.

Are the products and services well designed for their target market; are they sold honestly, and can people understand them; do people get fair value from them; and do they receive appropriate customer service? 

We believe the Duty will mean fewer detailed or reactive rules. In fact, if firms get it right, analysts will spend less time talking about provisions for redressing issues of the past. That, over time, should reduce the Financial Services Compensation Scheme (FSCS) levy, which has already started to stabilise.  

Many firms have approached the Duty in the right spirit, putting themselves in customers’ shoes. They have:  

  • used simpler and more accessible language  
  • been more upfront about product exclusions  
  • reviewed fair value, with some fees being removed or restructured  
  • ended sludge practices which inhibited customer switching 
  • committed to notify savers at least annually about better interest rates  
  • made significant technology investment in customer insights and service

Closed book products come in scope from July.

We’re not setting out to trip firms up by going after technical breaches. We look favourably on firms taking reasonable steps to identify and proactively address concerns, even if mistakes are made.  

We want to be pragmatic, so have focused on the greatest harms – cash savings markets, both in the largest banks and on platforms, insurance products such as premium finance and GAP insurance. We have telegraphed these publicly over the last 2 years, so there should be no surprises.

Fair value and fair play 

A consistent theme has been that the onus is on firms to satisfy themselves about fair value. That is not a Trojan horse for price regulation.  

We do not want to regulate prices, just as we don’t want to restrain profits for well-run businesses. 

Indeed, firms which deliver the outcomes in the Consumer Duty well should have a competitive edge. 

We are mindful of the risk of unintended consequences.   

Historically, we have only acted on price where, as with payday lending, there were manifestly unacceptable outcomes even with competition.  

Nor would we want to undermine firms’ capacity to attract capital to invest. Those firms that invest judiciously serve customers better, for one thing.  

And we don’t hesitate to counter those who claim there are excess profits, when in fact there is no evidence of these, for example on cash savings or motor insurance pricing.  

We base our statements on evidence, and we set this out to be scrutinised. 

But we will also act if we have concerns.  

Take savings. For years too much is held in cash by a customer base that exhibits a high level of inertia.  

That reduces savers’ returns and limits capital for productive investment in our economy. Our 2021 consumer investment strategy explicitly sought a shift away from large cash holdings towards market investments. This approach has evolved as interest rates have risen.  

Rather than reach for drastic regulatory levers, such as a target for banks’ net interest margins (NIMs) or a minimum rate of interest, we sought to understand more.  

We asked firms how they were sure they were delivering value to savers and communicating effectively with them. Some, frankly, have been more effective than others. The market moved. Savers responded to greater competition, particularly in term products, and no prices were set.  

Where NIMs settle in the medium-term will in large part be driven by the vibrancy of this competition. And we will want to be satisfied with explanations from firms, particularly outliers.  

We have heard concerns that our actions, alongside other funding pressures, put pressure on banking business models and margins. We have always been clear that if business models need to change in response to competition and a changing market, we would not stand in the way. For example, the free if in credit banking model in the UK is a market and commercial decision, not a regulatory requirement, other than for basic bank accounts. Other countries have different, fee-based approaches.     

As with cash savings, we will give firms time to act before we intervene. Lack of responsiveness will lead to firmer intervention. We are taking a similar approach for investment platforms and double dipping, where a fee is charged and a proportion of interest on cash savings kept.   

In insurance, we’ve repeatedly called for premium finance products, used by around a third of motor or home insurance customers, to be more reflective of the costs and credit risk involved, not least as many of these customers are amongst the most vulnerable. Following a limited response to our concerns over Guaranteed Asset Protection (GAP) insurance when we highlighted these in September, we are now taking action as we saw low value. On average only 6% of premiums were paid out in claims and up to 70% of premiums were paid in commission throughout the distribution chain. We have identified concerns about low replacement values being paid in motor insurance claims.  

Many of the risks of poor value stem from a lack of consumer understanding about the products, or opaque fees or sludge practices.

Redress for consumers

Now, having spoken about our forward-looking approach to the Consumer Duty, let me talk about our approach to redress for past actions. After all, the fines we have levied (and recently often diverted to redress) are low in comparison to the potential cost of compensating for poor historic conduct. We are not retrospective and focus on conduct that may have breached the law in force at the time.  

We aim to act proactively and thoroughly understand the problem.  

That is how we are approaching historical motor finance commission arrangements.  

We recognise this work has generated some uncertainty in terms of how we will assess outcomes. It has also attracted speculation about whether or not consumers are owed redress and if so, what the cost would be.    

We are working hard to get to the bottom of the facts and will set out next steps by the end of September. 

It is worth repeating some of the history here. In 2021, after the pandemic, we banned discretionary commissions.  

Perhaps inevitably, complaints, at first in trickle and then in something more torrential, came in. The courts have and are considering legal cases, with mixed results. And the Ombudsman is assessing complaints.  

With its first decisions, we acted. 

We intervened to pause, until September, the requirement for firms to give a final response to complaints within 8 weeks about agreements with discretionary commission arrangements. 

We are mindful not just of ensuring that consumers are treated fairly but also our objective to ensure markets function well. And in a country where 78% of households own a car, it is obvious that we need to maintain a functioning, accessible and competitive motor finance market. 

It is a sure case of the balancing act I mentioned earlier. 

Understandably, there are different estimates from analysts and campaigners of the cost and scale of this issue.  

Some, not us, have sought to draw comparisons with payment protection insurance (PPI).  

In PPI, the regulator’s work took place over many years and this and action on redress dragged on for some time.   

With motor finance, because of the impact on firms, as well as consumers, we want to clarify matters in a more condensed time frame and on a basis that is robust and fair. Critically, this will depend on firms cooperating fully and providing data comprehensively and promptly as well as potentially the speed of any court processes. 

There are elements of these cases that expose firms’ legal obligations and whether these were met in particular situations. The court system is available to firms as well as consumers to settle these points. We do not consider it complicates the work we are doing now if firms have a legal case they wish to pursue directly either by appealing County Court judgements or seeking judicial review of FOS decisions. Whether to do so is a matter for firms to decide and, if necessary, explain their choices to their investors. 

While certainty is not something I can provide today, and I cannot prejudge what we might find, I can say in my view it is improbable we will find nothing to report as we look at historic motor finance sales. Some firms will be better placed than others. Equally, I do not anticipate this issue playing out as PPI did, not least because we have intervened early in the interests of market orderliness. 

We recognise too the interest in our work on the issue of charges for ongoing advice for wealth management.  Was the service paid for actually provided?   

Again, we have raised this publicly for some time. We have already seen some moves by some firms to address this. We are gathering information to better understand how widespread this issue is so we can make sound decisions.  

More broadly, we are developing guidance for firms on our expectations on what they should be doing to deal with identified redress issues more quickly and effectively. We intend to consult on this and better complaints reporting this year.  

Where we have concerns, where there is the possibility of the need for redress, we will seek to make that public or encourage firms to do so, as soon and in as much detail as we can. As we have done, recently. We want to give firms, consumers, the wider market information, and certainty when we can. All in line with our strategy. 

This brings me back to the Consumer Duty. Rectifying issues is costly. It takes time. It damages reputations. It deprives firms of cash that could fund investment. That is why we see firms fully embracing the Consumer Duty as the best means of prevention, bringing redress and compensation costs down and so supporting medium-term competitiveness.  

Saying that, as we can see just from the instances of redress I have described here, the UK landscape stands out in Europe due to its combination of complexity and the scale of claims management activity, in part reflecting some particular challenges we have faced.  

In the US, the class action system can have similar impacts. While recent legislation has strengthened how we cooperate, the Financial Ombudsman Service rightly takes independent decisions based on what the Ombudsman thinks is fair and reasonable in all the circumstances of a case. This threshold was set by Parliament. The FCA has no powers to overrule them in individual cases. Courts also have established precedents, including on the nature of Ombudsman powers. And time bars can be very complex to determine given the interaction between regulation, statute, and judicial precedent.

How the level of redress is calculated can be inherently complex. And what falls under FSCS coverage can raise hard legal questions at the boundary. Administration costs can also be high due to volumes of complaints (and some have called for fees to be charged to claims management companies and law firms) and subject access requests.  

So, looking at all this together, I can understand why some would call for a wider review of the system by policymakers to see how further clarity could be provided, whilst ensuring fairness for consumers so that when compensation is due it goes to them not intermediaries and does so promptly as well as fairness for firms too so we have a system overall that supports the risk appetite the economy needs as well as regulatory certainty.

Regulatory cooperation and our role as a prudential regulator 

When the intervention or redress events that I have spoken about today occur, they can have a significant financial impact on firms. Where firms are dual regulated, we work closely with the Prudential Regulation Authority to establish a common understanding of the potential impacts in different scenarios. For example, with respect to cash savings work, we exchange data on firms’ liquidity, impacts of TFSME repayments and implications for the wider funding markets.  

The PRA is responsible for the prudential regulation and supervision of systemic institutions, including banks and insurers in the UK as well as credit unions. 

At the FCA, we take responsibility for prudential regulation and supervision for the remaining authorised population in the UK, over 40,000 firms, making us we believe the largest prudential regulator by number of firms in Europe. This includes a large number of investment and trading firms active in wholesale markets. 

We are using financial resilience data on a more systematic basis. We want to strengthen the principle of 'polluter pays'.  So, we are consulting on new rules for financial advisers requiring them to calculate potential redress liabilities, deduct that from regulatory capital, and if that breaches minimum requirements then an automatic asset retention applies until the issue is resolved. 

We also recognise the appropriateness of calibrating prudential rules in a proportionate way to support appropriate risk taking, international business and wholesale trading activity and we will have this in mind as we look at reviews of our frameworks in the coming year.      

And that will build on a far-reaching reform agenda we are already leading on wholesale markets, consistent with international standards.

Supporting investment and innovation 

I gave a speech recently at a JP Morgan event about our work with the Government and The Pensions Regulator on pensions reforms, supporting investment in productive finance in the UK. 

We are doing more, whether that is reforming listings rules, creating the regime for long-term asset funds, support innovation with tokenisation or setting sustainability disclosure standards.  

A fundamentally different and more ambitious approach to data and digital infrastructure here in the UK is also vital to our competitiveness agenda.  

And, not just that, it is part of our consumer agenda, too.  

Firms that have most been able to meet the Consumer Duty objectives had tackled legacy data and tech infrastructure and invested in cutting edge technology to understand their consumers.  

We know cost:income ratios are under pressure. We do not want to stand in the way of such investments, be that automation or new approaches to tackle financial crime.

On AI in financial services, it is not our instinct to jump in immediately and seek to regulate in detail, given we can rely on the Consumer Duty, our market integrity framework and the Senior Managers and Certification Regime (SMCR) accountability regime. Over the last week, we set out how we can support use of synthetic data to tackle fraud or financial exclusion. 

There will also be industry-wide projects that need funding, be that a move to the faster T+1 settlement, development of a fixed income consolidated tape, an investment research hub or campaigns to support UK capital markets. 

For firms and investors, this also means a healthy conversation about the scale of investment that is needed both at firm level and by the market as a whole to build the infrastructure we need.  

That conversation needs to weigh up the choice between short term shareholder distributions and long-term investment to ensure medium-term competitiveness.  

And innovation does not need just to technological.  

Our Advice Guidance Boundary Review with the Treasury is testing some ambitious proposals to reform our regulatory approach. We want to solve a vexing problem – how to ensure consumers get the advice they need when they need it at a price they can afford to pay.


I hope I have been able to give you some insight into where we are coming from on the big issues investors have on their minds.  

An outcome-based approach to regulation requires a mindset shift.  

As we make this shift, we aim: 

To act proportionately, based on evidence.  

To collect more if we need it.  

To balance our objectives.  

To mitigate the risk of unintended consequences.  

To flag issues early, allowing those we regulate to act before we feel we must.  

To do what we say we will do.  

To act fast where we see significant harm and to avoid a problem becoming larger than it need be.  

To allow the space for firms to invest and innovate.  

And play our part in supporting a thriving, attractive and competitive financial sector here in the UK. Thank you.