The Financial Conduct Authority is set to issue its major policy statement and final guidance for the new Consumer Duty requirements early tomorrow morning (Weds 27 July) but what can Financial Planners expect to see?
All eyes will be on the FCA at 7am tomorrow as the regulator releases the much-anticipated final version of its Consumer Duty rules.
Hailed by some as a “watershed moment for financial services”, the new Consumer Duty is one of the biggest overhauls to UK financial regulation since the Retail Distribution Review.
All Financial Planning firms will be watching and working out what the new rules, due to come into force in April 2023, mean for them.
The FCA has said the Duty represents a higher regulatory standard than the current regime, where advisers are required to ‘treat customers fairly’ and communicate in a ‘clear, fair and not misleading’ way.
Under the new rules firms will be required to:
- Act in good faith towards retail customers
- Avoid foreseeable harm to retail customers
- Enable and support retail customers to pursue their financial objectives
The new Consumer Principle and Cross-cutting Rules are intended to deliver ‘good outcomes’ for products and services, price and value, consumer understanding, and consumer support.
The regulator says the new Duty will be underpinned by a concept of ‘reasonableness’, reflecting the ‘concept of how a reasonable prudent firm would act’ and is ‘one firms are already familiar with due to existing duties under common law’.
This means that it will be up to Financial Planning firms and the FCA to determine what is or is not reasonable, with details around the Duty and the impact on the market likely to evolve over time.
Almost three-quarters of advisers expressed concerns about the new rules to M&G Wealth in May.
Over two thirds (68%) of advisers surveyed by M&G said they would wait to review potential changes to their suitability advice process until after the final rules are published tomorrow, with a quarter (25%) saying they believed it was likely to result in little change at this stage.
According to provider Abrdn, 54% of advisers expected their firm to need to make procedural changes in order to comply with the new Duty, with just under half (46%) expecting to take on additional resources to comply.
Two-fifths (44%) of advisers expected to see overhead costs increase.
David Tiller, commercial and propositions director at Quilter, said the new Consumer Duty could prove a challenge for advisers who will have to get better at explaining the value they offer clients.
He said: “As in all aspects of life, cheap does not usually mean quality. The focus of the Consumer Duty is the customer outcome, so it is vital advice is backed by quality reliable ‘componentry.’ Cheap components often break under stress. Quality advice, technology, products and services command a premium because of the value they provide.
“I am confident that most advisers understand this, and it informs their choice of platform or investment solutions for their customers. However, another aspect of the Consumer Duty may present more of a challenge – the question of whether customers truly understand the value of what they are paying for. For example, some platform services such as pre-funding trades, or investment activities such as finding uncorrelated sources of return, have clear customer benefits. However, it is likely that few customers understand that is part of what there are paying for. Given this, are they really aware of their value? And should advisers still arrange these services if they are not?
“Of course, advisers must continue to help their clients benefit from these services, as they increase the likelihood of a good customer outcome. We need, however, to get better at explaining this. Under the Consumer Duty, the connection to the customer outcome is key – with clear causal linkages. Pre-funding means not missing out on market growth by being in cash if trading when the market moves and uncorrelated assets means a smoother journey to the same destination as returns are achieved with less volatility.
“Advisers will also have to be expert at explaining the customer value of things that help make their businesses more efficient, including tools and technologies that are not be covered under their advice fee. Whether through the advice fee, the platform fee or the investment fees, it is all part of the advice given and the simple truth is that the customer ends up paying for everything anyway.
“With the Consumer Duty advisers will be expected to be able to clearly articulate the customer value across the value chain. For advisers, being forced to use a cheaper, less efficient provider could mean an increased cost in delivering their advice, with customer savings more than offset by the additional costs incurred. This is a trade-off that people understand. While it may be cheaper to take a bus to the Mediterranean for your summer holiday, most people choose to fly understanding the additional cost offers speed and convenience.”
There is also the question around how the FCA will define value assessments and how it will measure good customer outcomes.
Tom Selby, head of retirement policy at AJ Bell, said that for the new Consumer Duty to work as the FCA envisages it will need to demonstrate a credible threat of enforcement against firms that flout them.
He said: “If the Duty works as envisaged, it has the potential to lead to better informed consumers buying products and solutions, and receiving communications that are more appropriate for their needs and circumstances.
“However, for this to be achieved the FCA will need to demonstrate a credible threat of enforcement against those firms who already flout its existing rules. It will also need to keep a close watch on claims management companies, some of whom will inevitably attempt to use the new requirement to chase spurious claims against firms.”
The FCA has estimated one-off costs to the entire financial services industry for the new Duty of between £688.6m and £2.4bn, and ongoing annual direct costs in the range of £74m to £176.2m.
As the FCA moves towards being a ‘data-driven’ regulator it seems likely that compliance will also be data-driven, with advisers expected to evidence value via hard metrics.
In March advisers told M&G Wealth that in terms of the collection of management information to assess client outcomes, over half (55%) collect very little or collect some but with no consistent process, while 36% said they regularly collected and reviewed client outcome data
Mr Tiller said advisers should be able to look towards their platform and investment providers for support to make providing these hard metrics to the regulator easier.
He said: “The FCA will expect firms to demonstrate value through good governance, hard metrics and dispassionate assessment. This is where advisers need to look to their platform and investment partners for the support required to make this easy.”
