Is the Treasury about to kill the Consumer Duty?

I probably need to stop reading Linkedin at the weekends. But that's where I found myself on Saturday morning - responding to a comment on a post I had written about the Financial Ombudsman reforms last week.

When I first read the Treasury's latest proposals last Monday - the two things that worried me most were the imposition of a 10 year time bar, and the Government's proposal to take control of appointing both the Chief Ombudsman and Chair of the Ombudsman. But on the broader headline reforms - which are about driving closer alignment between the Ombudsman and the FCA - I felt fairly relaxed. After all, the Consumer Duty is now doing almost all the heavy lifting for the FCA - and this sets a very high bar in terms of how firms are expected to treat their customers.

But over the weekend, I received a comment on my post suggesting that the Treasury was planning to ban the Ombudsman from relying on the FCA's principles of business (of which the Consumer Duty is one).

So I went back to have another read of the Treasury paper - and found myself dwelling on the following line:

"Recognising that the FCA rulebook is extensive and will change over time, the government also intends to take a power that would allow it to specify that particular rules are not to be included in the adapted Fair and Reasonable test or should be dealt with in a different way. This is particularly relevant when considering the application of the high-level obligations contained in the FCA’s Principles for Business, including the Consumer Duty."

As far as I can see, there's not yet any other detail about what this might mean in practice. But taking the statement at face value, it would seem that the Treasury intends to ban or limit the Ombudsman from using the Consumer Duty and other Principles of Business as the basis of whether a firm passes the fair and reasonableness test. If that was to happen, in the worst case scenario it would throw the FCA's current approach to regulation into turmoil - and would also be a serious backwards step in terms of consumer protections.

The good news is, the Government will need primary legislation to make these changes - so there should be a long road of consultation and debate before any such ban came into force. And while the FCA and FOS last week launched their own consultation on some changes which don't require legislation - these do not include any restriction relating to the Principles of Business.

Killing Consumer Duty through the backdoor

But this is clearly a long-term mission for the Chancellor. Over the last 18 months, in several of her speeches, she has repeated the age-old industry lobbying line that the Financial Ombudsman Service has gone too far because it is allowed to create new regulation through the backdoor.

Personally, I have never believed that to be the case. I've seen lots of very odd Ombudsman decisions - both in favour of the firm and in favour of the customer. And I do think FOS has got work to do to improve the consistency of its decisions. But I don't think this is a structural problem with the fair and reasonable test. For me, it's more about training and resource.

But if the Treasury does go ahead and ban the Ombudsman from looking at the FCA's principles, it will effectively be killing Consumer Duty through the backdoor.

How will the FCA be able to credibly base its supervisory activity around Consumer Duty if, at the same time, firms are having their actions vindicated by decisions at the Financial Ombudsman Service?

The importance of the Treasury Select Committee

The Financial Ombudsman Service's interim Chief Ombudsman and Interim chair both found themselves in front of the Treasury Select Committee last week - to answer questions about the proposed reforms.

Neither seemed worried - and insisted there would be no erosion of consumer protection. But given that both of these are only "interim" postholders - and the Treasury has made it clear that it wants to be in charge of hiring and firing for these posts - it's not surprising they didn't come to the committee armed with an assault on how the Government is going about its reforms.

The Committee chair is certainly on the case, however. She has already written to the Economic Secretary asking her to justify why she needs to hire and fire the chair of the FOS. And at some point, Ministers will be back in front of the committee to face those questions directly.

While I'm very worried about the direction of travel - I'm cautiously optimistic that the Government won't get away with executing its plans. Most Labour MPs are not tuned into this issue at the moment. But once the Government has to slate it for primary legislation, they are likely to have a fight on their hands.

I am still so baffled that this is the preoccupation of a Labour government. Although its rhetoric has been disappointing over the past 18 months - its crimes in the world of consumer protection are more about what they haven't done, rather than what they have.

But these proposals would be crossing a major line if they became reality. Only two years ago, the Chancellor put her name to a manifesto for financial services which put the Consumer Duty at the heart of consumer policy. Now she is trying to dismantle it.

Thank heavens for Meg Hillier and the Treasury Select Committee - who appear to be the only people ready and able to call out bad policymaking.