Economic growth, the consumer duty and deregulation: can they all be compatible?
By Peter Tutton, Head of Policy, Research and Public Affairs
Lately, the tone of political discourse about the economy has shifted ground towards the imperative of economic growth. This has inevitably given rise to a lobbying subtext about deregulation. So, as the Chancellor prepares to deliver her Spring Forecast, should we be worried about an erosion of consumer protection?
Perhaps. In the financial services space, at least one Government minister has alluded to the arguments that businesses have been making about the perception of a disproportionate regulatory burden arising from the Consumer Duty, with a strong hint that it may fall within the scope of the deregulation agenda. So it’s timely to consider whether these potentially competing agendas are compatible, whether change is necessary, and what outcomes are desirable.
We’re an FCA regulated firm and we support the Consumer Duty
At StepChange, we’re both a charity and an FCA authorised firm. Debt counselling and debt adjustment (both elements of the debt advice and debt solutions we support people with) are regulated activities within the FSMA regime. So we too have to comply with the consumer duty. Of course this has some cost; but the benefits outweigh this. As a debt advice charity we support the consumer duty because it helps us to help financially and otherwise vulnerable people with problem debt.
The consumer duty gives us a powerful framework to think about our clients’ needs and the things we can do to improve the help we can offer them. It creates the basis for a common language, setting expectations and commitments about good practice and good customer outcomes across the financial services sector. This helps our clients to get support they need from financial services firms and encourages partnership working between financial services firms and charities like StepChange. There is an opportunity here for a virtuous cycle that results in a fairer, more trusted and stronger financial services market.
Why this matters for the economy and public services
We see at first hand the harm that problem debt causes every day. Debt harms peoples’ mental and physical health. It damages their family relationships and causes homelessness. It makes it difficult for people to find work, stay in work and perform at work.
This impacts on public services and creates social and economic cost that falls on all of us. In 2014 we estimated the social costs flowing from 3 million people with serious debt problems to be £8.3 billion. That cost is likely higher now, not least because we estimated 4.3 million (8% UK adults) were facing serious debt problems in September 2024[i].
There is a body of research, summarised in a recent House of Commons research briefing, highlighting that while higher levels of household debt can boost economic growth in the short term, in the longer term this increases the risk of financial crisis and can deepen and lengthen recessions. As the Governor of the Bank of England Andrew Bailey commented recently ‘there is no sustainable growth without financial stability’. The consequences of the Global Financial Crisis are still tangible in the household financial crises we see today.
Consumer protection and inclusive growth
We would go a bit further. For many years we have seen how growth and innovation in financial services have caused or worsened debt problems for UK households. From sub-prime mortgage lending in the lead up to the financial crisis, to the rapid expansion of harmful payday lending, to distressed BNPL borrowing more recently. In all these examples, the consequences of unsustainable growth or poor innovation oversight fall hardest on financially vulnerable households with low financial resilience.
Against this history, the consumer duty, with its focus on good consumer outcomes by design, provides the foundation for a better and more inclusive narrative for financial services growth going forward. Yes, there is a need to keep the effectiveness and efficiency of financial services regulation under review — the consumer duty comes from that; but this is very different to lumpen calls for deregulation in the name of growth.
What is needed here is clarity from policy makers on what really matters now: markets that work better for consumers who benefit from growth as a result. Here the government has already made the link between consumer protection and inclusive growth already, in the Chancellor’s November letter recommending the FCA to ensure that ‘Customers can access appropriate advice and products that will allow them to benefit from economic growth’.
That becomes horribly muddled when government elsewhere calls the consumer duty into question. Because there is good evidence that a long history of poor consumer protection acts as an anchor on consumers’ willingness to engage in the ‘sensible risk taking’ that the government wants to support investment in growth
The FCA’s Financial Lives 2022 survey found that under half (46%) of adults had confidence in the UK financial services industry, and only 36% ‘agreed that most financial firms are honest and transparent in the way they treat them’. The same survey highlighted this mistrust as a reason why only 8% of people had taken regulated financial advice, even though a further 28% could have benefited from it.
Tellingly, among those who did take regulated advice, FCA regulation was cited as an important factor underpinning trust and confidence in the advice they received. The FCA’s efforts to tackle barriers to financial advice through initiatives like targeted support only make sense in the context of an effecting consumer protection framework with the consumer duty at its heart.
Good growth, not growth at the expense of the vulnerable
We fully understand the important role financial services can play in stimulating and supporting broad economic growth. We also understand the need for financial services to innovate and grow to better meet consumers’ needs, and for financial services regulation to support that aim. As an FSA authorised charity trying to meet the needs of financially vulnerable consumers we understand and feel that tension as much as big city firms, perhaps more.
There is always a need for proportionate, effective regulation. Not necessarily more, not necessarily less. The consumer duty was designed to halt the procession of financial service market failures resulting in widespread consumer detriment. It does this by putting more emphasis on firms to better understand their customers’ needs and circumstances and look harder at where products and services might create foreseeable harm. Prevention being better than cure.
Here it is notable that the consumer duty approach is being considered by other market regulators. For example, the energy market regulator Ofgem recently published its intention to raise standards in the domestic energy sector through its consumer duty-type initiative the Consumer Confidence programme. The government has also understood the need for markets to deliver better outcomes for consumers through its interventions to strengthen employment rights and reform the Private Rental Sector.
A better deal for millions of financially vulnerable households won’t be achieved through financial services alone, other key markets also need to work better. That is about joined up policy making. If the government’s growth strategy is to reach down safely and effectively to households who have been ‘left behind’, then the call for broad deregulation in financial services and other markets is not a good way forward.
[i] Figures from YouGov Plc. Total sample size was 2,211 adults. Fieldwork was undertaken between 9th — 10th September 2024. The survey was carried out online. The figures have been weighted and are representative of all UK adults (aged 18+). ONS mid-year population estimate for 2022 estimates there are 53,646,829 adults aged 18+ in the UK.
