RegulationJul 19 2022

What the new consumer duty will mean for your company

  • Explain objective of The Consumer Duty
  • Understand what fair value means
  • Identify what advisers can do to prepare for regulation
  • Explain objective of The Consumer Duty
  • Understand what fair value means
  • Identify what advisers can do to prepare for regulation
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Approx.30min
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What the new consumer duty will mean for your company
(Cytonn Photography/Pexels)(Cytonn Photography/Pexels)

The FCA’s guidance directs that when communicating with individual customers, as will be the case when providing regulated advice, firms should use opportunities presented during routine interactions to check that consumers understand the information presented to them.

In practice, this will mean advisers will be expected to tailor their communications on an individual basis; test an individual’s understanding while simultaneously seeking to give advice that meets suitability criteria under the FCA’s framework of complex conduct-of-business requirements.

Price and value and adviser charging

A lack of fair value under the duty amounts to consumer harm and serves as an indicator of a lack of good faith under the FCA’s consumer duty proposals.

Fair value in simplistic terms requires a clear and positive correlation between the price a consumer pays for a service and its overall benefits.

As part of assessing fair value, advisers will be expected to obtain information from product providers on the value assessment conducted for a product they may later advise on and offer to a customer.

This fair value information must be borne in mind in any remuneration decisions an adviser subsequently makes. 

Although every firm in a distribution chain is responsible for ensuring consumers do not receive poor value for any pricing within their remit, the FCA‘s proposals are clear: the firm at the end of the distribution chain has responsibility for ensuring consumers do not receive poor value.

From an advice perspective, this assessment should be conducted not just in relation to advice charges but should also take into account the overall cost to the customer, including all product and distribution charges throughout the chain. 

One question the consumer duty does not address is whether, by being at the end of the distribution chain, an adviser firm is expected to always bear the adverse impact of a resultant higher overall fee, which may not represent fair value for customers.

In such circumstances the FCA expects that an adviser will not promote or use such products or services in its advisory process.

From a consumer perspective, this achieves the short-term objective under the duty. From an adviser’s perspective, it is difficult to see how this will be a sustainable model for the adviser market in the long term.

What should advisers do to prepare?

Clearly the consumer duty will impose a number of new and potentially challenging requirements.

On the basis of the two consultations and draft rules, adviser firms should have begun carrying out a number of preparatory tasks in anticipation of the final rules, which are expected to be published towards the end of this month. 

Some of those preparatory actions will include: 

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