Consumer Duty: We can see clearly now

The Consumer Duty has landed, and amidst all the talk of rules, outcomes, and deadlines, we have spotted three themes we think every adviser firm should know about…

Enough time has passed since the FCA published the final rules for the Consumer Duty for the dust to have settled and for us to see what it is that adviser firms are really dealing with.

Headlines you may have seen have focused on when the Duty begins (you have until the end of July 2023 to implement the rules for new and existing services, but you may need to show your working as soon as October 2022), and what the FCA ultimately aims to achieve (its outcomes are grouped under four headings – more on those at the end).

However, having studied the FCA’s final rules and its guidance for firms, and after some lengthy conversations and debates, we have spotted three themes we believe all firms should note. Here they are, in order of significance to adviser firms.

Theme 1: Data and MI

The FCA has vowed to up its own game on collecting and analysing data and clearly expects the same of the firms it regulates.

Using data and MI, you will need to assess, test, understand and evidence the outcomes your customers are receiving. This makes sense – if a client experiences a poor outcome, it is important to understand why – but it will present a challenge to many firms who typically are not, and have not needed to be, data led.

How you go about this is… up to you. The FCA said firms should “use their judgement” to find relevant sources of data to give them the insights they need to assess whether they are delivering good outcomes.

Helpfully, in its guidance, the FCA has listed 15 types of data or information you could use to support your insight gathering, including file or process reviews, and customer feedback. It also encourages an open dialogue policy within firms on products, services, and process, and says members of your team should be permitted to feed back honestly.

There may be an increase in requests from manufacturers for information to support their own Consumer Duty processes. Distributors must, if asked, provide relevant information to support manufacturers’ reviews. This may include sales data or information on cancellations.

As with everything else in the Duty, a principle of proportionality (see our third theme) applies. The regulator understands there will be “significant differences” in firms’ ability to get hold of what they need, and said all data and MI collected should be appropriate to the nature, scale and complexity of your business, considering your size, the products and services you offer, and the customer base you serve.

Theme 2: Culture

Culture is a broad term, but we all have a sense of what a good or bad culture looks and feels like. So, is the FCA interested in your firm’s culture and governance? Very much so.

The FCA wants the Duty to create a shift in both culture and behaviour. Your firm’s board or, if you don’t have a board, whoever or whatever is the equivalent governing body, should review and approve an assessment of whether your firm is delivering good outcomes for your customers which are consistent with the Duty. This needs to be done at least annually.

And you need to have a champion (ideally an Independent Non-Executive Director) at board (or equivalent) level who, along with the Chair and the CEO, ensures that the Duty is being discussed regularly and raised in all relevant discussions.

According to the FCA, there are four drivers of culture – purpose, leadership, people, and governance – and firms will need to ensure that acting to deliver good outcomes is central to each. A question it said it may ask firms on culture is: How does [your] organisation’s culture support the delivery of good outcomes for customers?

Firms can expect at “every stage of the regulatory lifecycle” to be asked to demonstrate how their business model, the actions they have taken, and their culture are focused on delivering good customer outcomes.

Theme 3: Proportionality

The FCA was clear at the beginning: The Duty would apply to all firms in the distribution chain that influence “material aspects of the design, target market or performance of a retail financial services product or service” – even those with no direct customer relationships. It doesn’t get much broader than that.

So, it was little surprise that, during the Duty’s consultation phase, one question raised was how it planned to police what were likely to be its toughest-ever rules in a market of firms of wildly different sizes and responsibilities.

Its answer was ‘proportionality’.

While all firms are obligated to help deliver good consumer outcomes, the regulator said it understood there will be “significant differences in the capacity and capabilities of a sole trader firm on the one hand and a major bank on the other”. Which is both sensible and reasonable.

However, size is one thing, proximity to retail customers another. Advice firms are gatekeepers in financial services, for many a first port of call on the way in and a final touchpoint on the way out. That the regulator has said the extent of a firm’s responsibilities depends on its role and influence over retail customer outcomes is significant.

In summary, advisory businesses will share the weight of responsibility to ensure the Duty is a success, but that share is relative. Proportionate.

What happens next?

As we did when the Duty rules were first proposed, over the coming weeks we will be looking in turn at the each of the Duty’s four outcomes, and what adviser firms will need to do to meet each one.

This will include a breakdown of each outcome from an adviser’s perspective, guidance on good and poor practice, and tips on how to feel confident you are meeting the FCA’s expectations.

The four outcomes are consumer understanding; consumer support; products and services; and price and value, and we’ll start with the outcome we believe holds most significance for adviser firms – consumer understanding. See you next time.

Mike Barrett is Consulting Director at the lang cat