For UK financial advisers only, not approved for use by retail customers. Click here for the customer website.

A new customer duty – but what will it mean for advisers?


Vince Smith-Hughes
Director of Specialist Business Support

In May last year the FCA published the first of two expected consultation papers on the new consumer duty (CP21/13).

The paper was extremely wide ranging and was directed pretty much at everyone in financial services.  In December the FCA published the second consultation paper (CP21/36) summarising the feedback that it received in response to the first consultation paper, and setting out updated proposals on the wording of the new consumer principle together with proposed new rules and guidance.

The ‘cross cutting’ rules set out how firms should act to deliver good outcomes and therefore provide greater clarity on the expectations required. The cross-cutting rules require firms to:

  • Act in good faith

  • Avoid foreseeable harm

  • Enable and support retail customers to pursue their financial objectives
     

The outcomes relates to the governance of driving good outcomes for the following four key areas

  • products and services

  • price and value

  • consumer understanding

  • consumer support
     

The consultation period closed on 15 February 2022 and the FCA expect to publish final rules by 31 July 2022. An implementation period will run until 30 April 2023, by which time, the FCA expect firms to have fully implemented the Consumer Duty.

How far reaching is it expected to be? Well, if you take the FCA estimate of cost to the industry as some kind of guide, it is expected the total one-off direct costs for firms to comply to be in the range of £688.6m to £2.4bn, and the ongoing annual direct costs to be in the range of £74.0m to £176.2m. Obviously this is a cost that will be shared between the c. 51,000 firms which the FCA regulate. Put another way that’s an average of between approx. £13,500 to £47,000 per firm as a one-off and around £1,450 to £3,450 annually. While appreciating of course some firms will pay much more than others, it does at least give an idea of the scale of work that is needed for some.

Though virtually everyone in financial services is likely to be affected to some degree - not least product providers and platforms, for the purposes of this article I’ll concentrate predominantly on a few of the areas where advisers should perhaps spend time in the run up to the new rules and guidance.

Though I would strongly recommend familiarising yourself with all aspects of the paper, I found one of the most insightful parts of this document were the tables defining what is likely to be consistent and inconsistent when the new rules/guidance comes into play for each of the four key areas. As an example, here is the table produced for product and services

It’s well worth having a look at these tables in relation to your own proposition. These can be found on pages 204, 214, 227 and 236.

Some of the items in these tables may look familiar to you, as they build on existing rules and guidance. For example, the table reproduced above has some obvious links to PROD. Advice firms should have already embedded these rules into their processes as they were introduced in 2018, though there may still be areas to consider. This is highlighted in section 2.13 which states “Where firms already meet existing rules in relation to, for example product governance, these will usually meet the new requirements we are consulting on under these outcomes……..they should also consider other aspects of the Duty, such as whether their consumer support standards meet the new requirements”.

Another topic that is mentioned extensively throughout the paper is that of vulnerable clients, with the FCA once again quite rightly keen to stress the importance of firms considering the diverse and often unique requirements that need to be considered. Page 58 sets out the analysis of the responses to the earlier consultation, as well as covering FCA proposals. Particular attention is paid to diversity and inclusion. Once again existing guidance is referenced, in particular the finalised guidance paper FG21/1 which was released in February of last year.

One other aspect that is worth highlighting is some aspects of the desired price and value outcome. As a profession there are often commentators who will distil the commentary down to a very simple ‘cheap is good’ type of message. This is most certainly not what the FCA are saying, and nor are they seeking to be a price regulator as has sometimes been mooted. Rather their message is that the price customers pay for  products and services should be proportionate to the value. This is hard to argue against. From an adviser fee perspective a few obvious points arise:

  • A firm should be able to document how fair value is provided to clients for the fees they pay, both on an initial and ongoing basis

  • This is should be reviewed regularly with action taken as appropriate

  • Clients should pay fees based upon the service they receive, which may mean advisers will need to construct different charging structures for different types of clients/services provided
     

Finally, firms need to be aware that under the proposed rules there will be a requirement for a report to be produced and presented to a firm’s board or equivalent governing body on an annual basis. The report would be an assessment of whether the firm is delivering good outcomes for its customers which are consistent with the Consumer Duty. The FCA will use this report to assess a firms compliance with the consumer duty, and they will expect it to be provided upon request.
 

Summary

It has never ceased to amaze me how resilient the advice profession is, despite the numerous challenges it has faced. TCF, RDR & MIFID all had some commentators sounding the death knell of advisers, but it seems to me that the profession is as strong, if not stronger, than it ever was. Every survey you read highlights how much clients value good advice, and what a better financial position clients are in having received advice.

With that in mind I have no doubt that once again advisers will rise to the challenge of the new rules and guidance, with hopefully even more positive outcomes achieved for their clients as a result. One thing is certain though – all of us, advisers, investment houses, product and platform providers, etc must all start to consider the new standards and what is required – this is bringing a radical change and let’s get ahead of the curve.