OpinionMay 27 2021

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

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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.

The FCA is not alone among regulators in continuing to seek to raise consumer protection standards

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:

  1. Layered charging. The paper raises concerns that it is harder for consumers to assess price if there is layering of charges along the distribution chain. It points in particular to the asset allocation/fund selection layer where separate fees can be charged by a discretionary manager, “which might together result in a higher overall cost that does not represent fair value”.
  2. One-size-fits-all charging models, where the size of the portfolio on a percentage fee means that the consumer may pay substantially larger fees, “even though the costs of providing the service and the benefits consumers receive may be very similar”.
  3. Ensuring that the price charged is reasonably relative to the performance benefits received and the challenge of ensuring that prospective clients are able to reasonably “assess these potential benefits before purchase”.

In simple terms: more will be expected from businesses in terms of consumer protection, while key elements of many companies’ commercial models are likely to come under even greater scrutiny in terms of the value they deliver. Additional pressure will be placed on the stack of fees charged to clients and each component will need to be further justified, along with the net return clients receive for the risk they take. Clients in drawdown where the majority of wealth is managed, taking relatively lower levels of risk and who are being charged a standard adviser fee for annual reviews, platform and discretionary charges will be under the microscope.

To meet these potential new, tougher standards with services that demonstrably deliver value for which consumers are happy to pay, businesses will need to ensure they are delivering personalised services but with significantly increased efficiency in order to handle margin pressure. This is clearly the FCA’s view too.

In its FAMR review from last December, the FCA wrote: “We feel there is significant scope for technology to further assist firms when providing advice to consumers and help reduce the costs involved, making it more affordable.” It sees financial planning technology as a key part of the answer to reducing costs and creating more space for value, stating: “One firm told us that, used properly, technology could reduce the preparation time for an ongoing review from six hours to 45 minutes.”

Another provided evidence to the FCA that advisers fully adopting technology “took in twice as much revenue”. The use of asset allocation tools to help advisers recommend suitable portfolios tailored to clients’ needs, and report-writing software to address the cost of suitability reports, are also seen as solutions to the productivity challenge.

While the FCA, in line with regulators around the world, are continuing to seek higher consumer protection standards and value for money, they are also setting out their support for financial planning technology to support profitable, sustainable business models.

From a company's perspective, whatever form the new consumer duty takes, this should be seen as more of an opportunity than a threat.

Ben Goss is chief executive of Dynamic Planner