Long Read  

How the consumer duty will affect product design

How the consumer duty will affect product design
(FT Money)

The Financial Conduct Authority has published its policy statements and finalised guidance on consumer duty. The new rules will come into place for existing products and services from July 31 2023.

What does it mean for advisers?

A new consumer principle will require regulated firms to deliver good outcomes for consumers by acting in good faith, avoiding cause of foreseeable harm, and enabling and supporting retail customers to pursue their financial objectives.

The new rules build on the FCA's treating customers fairly and product governance requirements, raising the bar in terms of their research, understanding and due diligence on financial products they recommend to their clients.

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While the changes to rules are extensive, we focus in on what the upcoming rule change might mean for the investment landscape.

What does it mean for investment products and solutions?

We do not see the new consumer duty rules as fundamentally changing the landscape for the majority of investment solutions recommended by reputable advisers, such as model portfolios and funds, so long as firms are already delivering on their existing product governance obligations. 

We do, however, see it as creating a higher hurdle to be able to target, document and evidence good outcomes.

Where we do see pressure coming is on more complex and more speculative products where investment payoffs are complex, and/or for services where charging structures are opaque.  

Below, we look at how investment solutions could be impacted with respect to: the design and manufacture of financial products; fee structures; and product switching.

Examples that would not meet the new consumer duty requirements, in our view, would include design and manufacture of financial products.

The new consumer duty rules will require firms to consider client interests in the design and manufacture of financial products.

Unreasonably priced products that offer poor value for money will come under scrutiny. Discerning between price and value can be a challenge, but we see the new consumer duty rules as forcing those involved in the design, manufacture or distribution of amber risk products to move up a notch to red risk.

Examples could include:

1) High-cost, plain vanilla index funds 

Some providers, including Virgin Money, rightly attracted criticism for offering bog-standard FTSE 100 tracker funds with an OCF of 1.00 per cent, despite holding substantial assets within the fund. 

The cost has been gradually reduced and the OCF is now 0.60 per cent. However, this still seems high when compared to an analogous fund tracking the same index from iShares, which costs only 0.07 per cent. 

The burden will now be on the providers charging high fees for vanilla index funds to evidence how the product is designed to act in customer’s interests. 

Their defence will be that their fund costs need to cover the cost of client service as well as the underlying product, but even adjusting for this, the fund provides questionable value for money relative to its peers.