Opinion  

FCA's new consumer duty is an opportunity to better your business

Ben Goss

Ben Goss

The Financial Conduct Authority's consultation paper published this month, entitled "A New Consumer Duty", sets out options to strengthen the requirement for investment advice businesses to focus on customers’ best interests.

The regulator is seeking feedback on two sets of wording for framing this new obligation:

• Option 1: A firm must act to deliver good outcomes for retail clients.
• Option 2: A firm must act in the best interests of retail clients.

The great majority of companies that we deal with would rightly say that good client outcomes are already central to their businesses and culture, and have been at least since the introduction of the FCA's treating customers fairly principle and its six customer outcomes 15 years ago.

Indeed, in its paper the FCA notes that the obligation to act in the best interests of clients is already in the Conduct of Business sourcebook. What is clear though is that the proposed framework surrounding the new duty is intended to take investor protection to another level, and considerably beyond that required by Mifid II.

It would not be enough for services and products to be ‘suitable’, they would need to deliver at least ‘good outcomes’ and potentially be in a client’s best interest.

The FCA is not alone among regulators in continuing to seek to raise consumer protection standards. The US regulator, the Securities and Exchange Commission, incorporated ‘best interests’ into their regulations last summer for US broker dealers, closing the gap with the fiduciary standard already required of registered investment advisers. And the EU has just commenced a consultation into whether the application of Mifid II suitability is effective enough.

Worldwide the standards for investor protection are rising as regulators seek to create better conditions for consumers to move from savers to investors in a low interest rate environment and support the financing of public companies as economies seek to build back out of the pandemic.

The FCA 2020-21 business plan, published early last year, included “enabling effective consumer investment decisions” as one of its five key priorities, and the review of the Financial Advice Market Review and Retail Distribution Review published in December 2020 had a similar focus, stating as an overarching objective that: “We want consumers to have access to high-quality advice and guidance at the right time, and to know how to protect themselves from scams and fraud.”

The central challenge for investment advice businesses at the heart of the paper is not the concept of acting in the best interests of the consumer per se, which, as I say, is clearly central to the great majority of businesses already; the central challenge will be doing so while operating a business model that the FCA considers is delivering value for money.

It is worth drawing out three business model challenges to be considered, each of which have been raised with increasing frequency by the FCA in recent years and which go to the heart of many business's commercial propositions: