'Consumer duty is not just a cosmetic fix'

This year, we will experience the beginnings of another seismic shift as the consumer duty comes into effect and is embedded into firms’ day-to-day operations. 

As with RDR, it will be several years before we truly understand what difference the consumer duty has made, but if the regulator’s aims and ambitions are fully realised, its impact will be even more wide reaching.

The regulator has been clear that this is not a race to the bottom on costs.

Whereas RDR was very prescribed and focused on what advisers could and couldn’t do, the consumer duty is more cerebral and, as the name suggests, focuses on the consumer.

I am sure that the regulator will be taking more notice of the consumer duty’s outcomes than it did with RDR and that means there won’t be any hiding places for ‘sharp’ practices once it is fully embedded.

Core outcomes

Looking at each of the four outcomes in turn, some are likely to have more impact than others.

The first outcome is that products and services are fit for purpose, designed to meet consumers’ needs and targeted at those consumers. This outcome should lead to a simplification of product suites, as manufacturers focus on what is really important to consumers.

In turn, it may lead to a reduction in services within product suites, so that manufacturers aren’t asked to unbundle their services.

This may lead to menu-based pricing where added-value services must be paid for, rather than supplied as ‘free’ services within the product or service suite.

I see a real desire to fulfil the 'consumer understanding' aim, but also an acceptance that we’re not going to get this right immediately.

The second outcome is that products and services are sold at a price that reflects their value.

I would like to think that this won’t focus solely on price, but on the fair value of services – by which I mean fair value to the consumer, fair value to the distributor, and fair value to the manufacturer.

The regulator has been clear that this is not a race to the bottom on costs, and that businesses must prove themselves sustainable, not by simply shifting the total cost of ownership to favour one party in the distribution chain.

The concept of value has already raised some questions across the market, and the challenge will be to provide clear material that explains what that ‘fair value’ means to each company, so that we provide solutions to clients that meet their stated ambitions.

The third outcome – consumer understanding – is probably the most difficult one to achieve in the time available. It requires a re-think of pretty much everything the industry does, with a clear view of seeing this through the eyes of the consumer.

From my conversations with advisers, I see a real desire to fulfil this aim, but also an acceptance that we’re not going to get this right immediately.

Meeting consumer needs is the outcome that the majority of my adviser contacts tell me they have cracked.

This is an area where I believe that the industry will be seeking continuous improvement, both in the run-up to the implementation dates and beyond.

The fourth outcome is providing a level of support that meets consumers’ needs, with an enhanced focus on the needs of vulnerable clients, which is an area that the FCA has specifically highlighted we all focus on improving. 

Meeting consumer needs is the outcome that the majority of my adviser contacts tell me they have cracked.

However, this is a significant step up from treating customers fairly and the Prod rules in making sure investment solutions meet the needs of one or more identifiable target markets.

It is an area where we all have to do better – not just to onboard clients, but to continue to service their financial needs effectively and efficiently, and articulate progress towards meeting those needs in a language they understand, avoiding jargon where possible. 

Clear communication at retirement

Having said all of that, I was reading a report recently (a consumer and financial communications survey by Simplify Consulting) that told me 46 per cent of financial communications received by people are read very little, if at all, as they are hard to understand, contain too much jargon and do not indicate an immediately clear action.

Interestingly, many of these communications are aimed at those who are at or nearing retirement.

This indicates that perhaps the industry needs to improve further in how it engages with and informs this key demographic at a crucial stage in their lives. 

In summary, in order for the consumer duty to make a real difference, the industry needs to work better together.

Initially, it is very encouraging that many firms have been coming together to share their hopes, fears and aspirations, and consider ways of more effectively realising the regulator’s ambitions and meeting consumers’ needs.

However, we need to ensure that this isn’t just a cosmetic fix and that we continue to improve and challenge ourselves to be better and to do better.

One adviser I know has started to re-engineer their advice models.

Therefore, it’s vitally important that we don’t view the consumer duty as a tick-box exercise and, again, there are excellent examples of this across the market.

One adviser I know has started to re-engineer their advice models by thinking about the services needed by different cohorts of clients and then unbundling certain services to meet those specific requirements.

They are being genuinely creative about how they meet the intention behind the regulation. 

If we get it right, the consumer duty could go some way to narrowing the advice gap, although it won’t do this on its own.

We need the regulator, distributors and manufacturers to work together to drive efficiencies of scale, so that the industry can offer services at a reasonable cost to those who want advice but can’t currently access it at what they consider ‘fair value’. 

Antony Champion is head of intermediaries at RBC Brewin Dolphin