'Consumer duty's price and value outcome difficult to interpret'

The assessment requires firms to consider not just their own fees but information from other parties in the distribution chain, before showing why they believe their products and services offer value.

Wallace and Northrop, directors at Alpha Financial Markets Consulting, say this could lead to practical challenges for firms.

In a Q&A with FTAdviser In Focus they explain the impact of the consumer duty on advisers overall, and give some advice on how firms can tackle the potential challenges along the way.

The price and value outcome has proved to be a difficult outcome to interpret

FTA: It is only a couple of months until the consumer duty comes into effect. If you were an adviser, what would be on your checklist now?

CW & BN: The extent of the effort required to deliver various items will depend on the advice firm and the type of clients they service.

Firms operating in higher-risk areas may benefit from having more checkpoints in the client journey to ensure the customer has fully understood the risk they are undertaking. But these would be on my checklist:

• Implement staff training and education to ensure all staff members know about the duty and are aware of their responsibilities.
• Update MI reporting – enhance management information dashboards and processes to ensure information can be collected and effectively reported across the four outcomes across your organisation.
• Update client-facing communications (for example, suitability reports and terms of engagement) to ensure content is clear and understandable to the customers.
• Enhance client support by clearly signposting methods of contact, evidencing turn-around times for processes and mechanisms to prevent client fraud, and reviewing your vulnerable customers policy;
• Complete remaining fair-value assessments.
• Document agreed communication channels with product manufacturers and associated procedures.

FTA: What can advisers expect from the regulator in the first year of implementation (for new products), from July 31?

CW & BN: It is clear from the finalised rules and guidance, and from recent communications, that the Financial Conduct Authority expects firms to demonstrate how they are achieving good outcomes. 

We expect the FCA to enforce against the duty in a way that reflects the overall risk of harm to customers. If firms are struggling to meet all requirements of the duty in time for the deadline, they should prioritise addressing those areas that pose the highest risk of consumer harm.

They must also ensure they have an adequately resourced and clear plan to deliver any outstanding items in an appropriate timeframe post-July 2023.

The FCA has also been clear that it expects firms to take a data-led approach to monitoring outcomes and be able to support conclusions with appropriate evidence.

Ensuring an appropriate MI strategy is in place and supported by effective dashboards and escalation processes will be essential to demonstrate that good outcomes are being achieved.  

FTA: What are the most likely problem areas?

CW & BN: The price and value outcome has proved to be a difficult outcome to interpret. It requires firms to gather and consider information from other parties in the distribution chain and show how they have satisfied themselves that products and services offer value.

As part of their value assessment, firms must demonstrate how the inputs of their assessment roll up to a final conclusion. Advice firms will need to define what value looks like for a customer based on defined criteria and metrics.

The FCA will be looking to see whether a firm’s value assessment framework truly assesses whether customers are achieving good outcomes, as opposed to being a box-ticking exercise.

As with any regulatory engagement, firms should engage fully with the regulator to answer questions and should provide any information relevant to its request

Firms will also need to demonstrate that they have carried out an assessment of their own fees as well as the cumulative impact of fees incurred along the distribution chain on the overall value of a product (for example platform and underlying investment product fees).

Ensuring this outcome is adhered to is likely to involve a review of a firm’s service proposition and charging structure, and any changes to this are likely to result in practical challenges. 

FTA: If the regulator does approach an advice firm with an issue concerning consumer duty, how should firms respond?

CW & BN: As with any regulatory engagement, firms should engage fully with the regulator to answer questions and provide any information relevant to its request.

Firms will need to be able to evidence the steps they have taken to comply with the duty. If there are any remaining gaps, firms must have a clear plan demonstrating how these will be implemented, within an appropriate timeframe. 

Firms should also be able to demonstrate how they will continue to meet the requirements of the duty on an ongoing basis, including the systems, processes and controls that are in place to ensure compliance with the duty.

FTA: What is the quickest and best way to appease the regulator?

CW & BN: The duty is centred around achieving good outcomes for consumers. Firms must be able to demonstrate that the client’s perspective is at the forefront of both their implementation and embedding activities.  

The FCA expects firms to prioritise areas that run the risk of greatest harm to consumers, so ensuring implementation activities are complete in these areas is crucial.

Firms can help to evidence their work by ensuring the implementation approach is documented, with any previously identified gaps having a clear rationale for closure. 

FTA: What should advice firms do before July next year when it comes to closed products or services? Any areas of particular concern?

CW & BN: Advice firms will need to conduct a review of client portfolios to identify any closed products being held. The size of this task will vary across advice firms and they should be able to demonstrate this review taking place.

Once closed products have been identified, firms must be prepared to put in place the same level of oversight and infrastructure as open products.

Consumer duty is and will likely continue to be a critical element of the FCA’s supervisory strategy

Firms should critically assess how they approached the review of their open products and consider applying good practice to products and services in scope from July 2024.

This could include replicating the project governance structure or adapting timelines where activities took longer to complete than expected.

FTA: Do you foresee much enforcement action related to the consumer duty?

CW & BN: Consumer duty is and will likely continue to be a critical element of the FCA’s supervisory strategy.

Firms should expect continued engagement on the topic, with an expectation that they can prove they are achieving good outcomes.

They should expect the FCA to closely monitor implementation and to begin building a review of implementation into its supervisory work plan shortly after July, beginning with the largest firms. 

The current economic climate and cost of living pressures are likely to result in the regulator taking a strong stance on firms that do not comply with the new duty.

Sheldon Mills, executive director of consumers and competition at the FCA, has said the FCA will prioritise the most serious breaches and act swiftly and assertively where it finds evidence of harm or risk of harm to consumers. This could include interventions or investigations, along with possible disciplinary sanctions.

Find out more

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carmen.reichman@ft.com