RegulationAug 10 2022

Consumer duty means every firm must hold up a mirror to their proposition and pricing

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Consumer duty means every firm must hold up a mirror to their proposition and pricing
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The consumer duty is here, and now the work begins to implement it in practice. The Financial Conduct Authority notes that many firms are already doing their best for their retail customers. But it also points out that too many are not. 

In this new world, where the relationship between price and value is to be much more rigorously assessed against a principle that says "retail customers experience harm where they don’t get value for their money" must give pause for thought to the industry’s dominant model of ongoing servicing for an ongoing fee.

While the ‘cheapest is best’ argument of the past is clearly being replaced with a far more balanced assessment of what represents value, value clearly has to be related to outcome. According to principle 12, firms will need to "pro-actively act to deliver good outcomes for customers". 

All wealth advice firms, in which an annual performance review is provided along with a ‘let us know if anything has changed' letter, will need to assess whether this reactive service meets this new standard. 

Layered charging, one-size-fits-all charging and charging linked to the size of assets, all of which underpin the industry’s business model, come in for scrutiny. 

Demonstrating value

Can firms demonstrate that clients understand the layers of charging from fund management, discretionary management, platform and adviser charge? Does this stack represent value for money for all clients all of the time?

Critically, where the same percentage charge is broadly made regardless of the size of assets advised on, does that represent value for money for larger clients, as well as for smaller ones?

Why should the first client pay you £5,000 a year and the second only £2,500, if the ongoing work involved is similar?

Over lunch recently the head of a large network drew a pertinent analogy when talking about the consumer duty. 

He told me: “I’ve worked with my accountants for years. They do my tax return and other bits and pieces. I pay them £1,500 a year, but I don’t give them a portion of my assets.”

And that is the obvious conclusion. If you are building a financial plan for a client with half a million pounds and another for a client with a quarter of a million, why should the first pay you £5,000 a year and the second only £2,500, if the ongoing work involved is similar?

The industry’s argument is that the adviser is adding more value for the first client because the sum is bigger. Under the lens of consumer duty though, the challenge would be to prove this and to do so in a way that clearly shows the client paying more is getting more.

This is a tougher question to answer if both are in the same central investment proposition, which is not being managed against clear objectives and preferences, and does not differ whether the client is in accumulation or decumulation. In decumulation, the value equation becomes tougher in a lower risk, lower return portfolio that is shrinking rather than growing. 

In a world in which everything from medicine to trainers is personalised, the regulator is laying down a fundamental challenge to prove that services are in the best interest of the clients and represent value for money. If not, they could be deemed to be causing consumer harm.

Conversely, giving a client a cheap fund that they do not understand or which does not meet their preferences, or recommending the cheapest platform that the client cannot use later, does not help meet the duty either. So, what will good value look like in the age of consumer duty? 

Lean on technology to help the client keep track of how they are doing.

We can start by asking ourselves what the client really wants to know. First and foremost: am I going to be alright? Am I going to be able to fund the things that are important to me – whether that is accumulating enough to retire, managing risk in retirement, passing on money to my kids, or simply making sure I do not run out of cash?

The role of the adviser is to answer those questions. To enable clients to take control of their lives by helping them understand their options, the risks they face and those at their disposal.

To help them think through their preferences for their money – on sustainability, for example, which we know matters to the great majority of people. To help them navigate periods of volatility and to keep their eyes on their goals and help them stay the course. 

Course of action

A direction, then, for the post-consumer duty world: make a plan, build solutions around that plan, make sure it aligns with the client’s real needs and proactively engage with clients to help them stay on plan.

Lean on technology to help the client keep track of how they are doing, giving them the reassurance they need that they are doing okay – or, if they are not okay, equipping you for the conversations that help them get back on track. 

Make sure the client understands the value you are delivering through the choice of solution, the choice of manager and the ongoing proactive support you are providing. How to do this economically and profitably is of course rightly central to firms’ considerations. 

The finalised guidance provides in target markets a powerful framework to deliver solutions that are profitable.

One thing that can comes clearly through the consumer duty is the use of target markets. The regulator is keen for advice firms to lean on Prod to enable them to take client segmentation – which most firms already use to some extent – to the next level. 

It is looking for firms to be able to talk about their target markets and about their pricing approach, proposition, planning and desired outcomes in each. This framework offers the chance to industrialise the processes that can be automated, leaving advisers free to personalise their interactions to the extent that the proposition and price allows in each segment. 

Embedding target markets into your proposition and technology enables firms to tailor communications, deliver services and monitor and review outcomes for clients in a way that was not possible even a few years ago.

While the consumer duty will mean every firm will have to hold up a mirror to their proposition and pricing, the finalised guidance also provides in target markets a powerful framework to deliver solutions that are profitable for the end client, and for the firm. 

Ben Goss is chief executive of Dynamic Planner