The Financial Conduct Authority has re-iterated that it considers the Consumer Duty a “gamechanger” for the advice industry, requiring a significant cultural shift among advisory firms.
In a speech at the PFS’s Festival of Financial Planning, Therese Chambers, director of consumer investments at the FCA (pictured), said it expects all financial firms to take the Consumer Duty seriously and to prepare carefully for its introduction in 2023.
Chambers said: “The fact is many firms are still falling below the standards we expect. That’s demonstrated by high Financial Services Compensation Scheme costs, which are rightly a source of frustration for those firms doing the right thing.
“The key change is the introduction of the Consumer Principle. Firms must act to deliver good outcomes for retail customers, this imposes a higher and more exacting standard of care than the principle of ‘Treating Customers Fairly’.”
At its core in delivering on this Principle, the Consumer Duty has three cross-cutting obligations; a firm must act in good faith towards retail customers, must avoid causing foreseeable harm to retail customers and must enable and support retail customers to pursue their financial objectives.
To achieve these aims, firms will need to change the culture and way in which they interact with clients.
Chambers said: “For many firms, the new Duty will require a cultural change. Cultural change cannot be achieved simply by adjustments in governance, MI and processes. Yes, these can support cultural change, but firms’ senior management need to clearly demonstrate to the rest of their colleagues throughout their firm what putting good consumer outcomes at the heart of their business means. Firms which view the new Consumer Duty as simply a change to governance and processes are doomed to fail from the start.”
Communication
Firms must ensure that their communications support consumer understanding of their products and services, equipping consumers with the right information at the right time to make informed investment decisions. For advisers, the focus will be upon explaining the nature and extent of their advisory services, costs and charges and suitability reports.
“Poor disclosure has been a consistent theme in the results from our previous supervision reviews of the advice sector. Too often, firms respond to the communications challenge in disclosures that are over lengthy, over-complex and fundamentally unclear. We are expecting better standards under the Duty than the current rules,” said Chambers.
Products and services
Firms will need to ensure that products and services meet consumer needs. Firms must have a clear target market or markets in mind for their advisory services and they will need to ensure the design of those services meets the consumers’ needs, characteristics and objectives.
The FCA’s Assessing Suitability Review found that over 90% of the regulated advice given in the UK is suitable but there is a small number of firms where only 60% of advice was suitable.
Chambers said: “This is unacceptable and the consequences can be devastating for people. The Consumer Duty gives us all an opportunity to focus on driving up standards further. The focus on target markets should be understood as the need to understand the varying needs of the different cohorts of customer that you will all have. We need to move on from one-size-fit-all models to models which are genuinely designed to meet the needs of customers and which recognise that not all customers have the same needs.”
Firms will need to pay close attention to the risks attached to each product and service and question whether investing in a particular product is likely to cause foreseeable harm to a client. The FCA warned that if a product is high complexity, has a difficult-to-understand pay out profile or involves incentive payments, the answer could be yes.
“It is not enough simply to say that your customer has a high tolerance to risk. You will not be discharging your duty if harm is reasonably foreseeable,” added Chambers.
Fair value
Advisers will be expected to adopt charges that are reasonable compared to the overall benefits clients receive. Research has shown that clients do not always have a clear understanding of what financial advice costs.
Chambers said: “In a well-functioning market, we would normally expect there to be a broad distribution of charges, reflecting factors like different service levels, underlying costs to advice firms, and incentives for firms to compete on price. However, our analysis found significant clustering of adviser charges.”
With the FCA allowing firms flexibility in how they set their charges, it has urged advisers to carefully consider whether their charging model is fair value for different groups of consumers.
Consumer support
Finally, firms will be expected to provide support that meets consumers’ needs and expectations and ensure that ongoing support is “delivered well.”
The same will apply when things go wrong, with firms expected to offer good levels of support in resolving complaints with consumer outcomes front of mind.
Chambers said the FCA will “challenge” firms to consider their current practices through the lens of the Consumer Duty and said expectations will be placed upon firms, regardless of size.
Chambers said: “I cannot emphasise enough that this is a different lens to what you have been used to and even though the rules are not yet in force it requires your active participation to understand the degree and extent of the cultural shift that it entails. A tick-box approach to detailed regulatory requirements will simply not be good enough as that will never be sufficient to answer the question of whether a firm has secured good outcomes for its customers.”
The new rules will come into force on 31 July 2023, with closed products and services given until 31 July 2024 to comply.
