No one is using FCA rule review tool, experts weigh in on why not

In January 2024 the Financial Conduct Authority (FCA) created a tool with which stakeholders could ask the regulator to carry out a review of any of its regulatory rules. In the 10 months since the rule review tool went live the FCA has not received a single application for a review, according to its response to a Freedom of Information Act (2000) request.

Mick McAteer, founder and co-director of The Financial Inclusion Centre, said the rule review tool was an important accountability mechanism for the FCA. “I think it’s perfectly legitimate for it to be there. It’s up to the industry to use it and it’s on them if they don’t,” he said.

Which rules?

Gavin Stewart, an independent regulatory commentator and former UK regulator, said that while there is widespread agreement the regulatory system could be simplified, it was more difficult to identify individual rules to be removed.

“Which rules can you cut? Can you be sure that if you switch this one off you won’t inadvertently be creating a bigger problem?” Stewart said.

According to Philip Deeks, head of KPMG’s Regulatory Insight Centre, the desire to strip out rules was not universal among firms.

“Some firms would say ‘I don’t need the rules. The rules get in the way of what I want to do’. So they’re very much the advocates of ‘absolutely, strip it out if you don’t need it’. While other firms, with different business models, or different levels of maturity, might go, ‘no, no, they help. I need them’,” Deeks said.

Stewart said a better approach might be to review existing rules as new ones are added. “So when [the FCA is] looking at a particular policy area, rather than just add to the old rules, they have a good think about whether they are still useful. And consult with the industry, because if their systems are all set up on the basis of the existing regime, the cost of change might be prohibitive, and it might not make sense to change it,” he said.

“I suspect much of this happens anyway, informally, but it could become more embedded and transparent.”

Deeks, who is a former technical specialist at the FCA, agrees that removing rules may not be straightforward for firms.  

“If you are removing rules, there is quite a consequential obligation on firms. Sometimes even if a rule is removed, what you find is some firms might just carry on using it, either because they think it’s the right thing to do, or because it’s so burdensome to take it out of their IT systems,” he said.

Handbook reviews

In FoI11710, the FCA said it was also asking firms for suggestions on simplifying its consumer handbook.

“While the FCA’s feedback tool has been created for firms to use to report when a rule is not working as intended on an ongoing basis, we have additionally published a call for input under which we are seeking responses on how we can simplify the rules and guidance in our handbook, following the implementation of the FCA’s Consumer Duty.  We are asking for comments by October 31, 2024,” it said.

McAteer, who is a former non-executive director of the FCA, said firms could have been waiting for a call for input rather than using the rule review tool. “I think people have been holding back to save their powder for this big review,” he said.

However, he was concerned that the “real prize” for firms was not to streamline or remove specific rules but to redraw the line of responsibility between the industry and its customers.

“I think all of the intention here — whether it’s the Consumer Credit Act review or the Advice/Guidance Boundary Review or this call for input — is to try to shift the boundary of responsibility for liability towards the consumer,” McAteer said. “Culling the number of rules or pieces of guidance in the handbook won’t actually affect regulatory costs that much because firms will still have to comply with the high-level rules, so they will still have to employ compliance staff, risk managers and lawyers.

“What will make a difference is if the boundary is redrawn so that consumers have less opportunities to go to the Financial Ombudsman Service,” he added.

The FCA has also announced a review of the Markets in Financial Instruments Directive (MiFID II) handbook.

Waivers

Deeks said firms might also have decided to request a waiver on a particular rule, rather than submit a formal request for a rule review. Firms can apply for such waivers when they believe a rule is inhibiting their ability to service clients.

“A firm can apply for a waiver and say, ‘we don’t think this rule should apply to us for this reason’. It’s possible that individual firms are going down the route of fixing it for themselves rather than fixing it for their competitors by submitting a request for a rule review,” he said.

The FCA could consider looking at which rules have the most waiver requests against them, he suggested. “They should have quite a rich source of tangible examples when an existing rule isn’t doing what it needs to. If you’ve got 50 firms applying for a waiver for the same rule, you can probably draw a conclusion from that.”

In an update on the Consumer Duty published December 9, the FCA said it would provide feedback on its call for input on simplifying consumer-related rules for firms in H1, 2025.