RegulationJul 27 2022

Industry welcomes consumer duty extension despite 'tight timelines'

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Industry welcomes consumer duty extension despite 'tight timelines'

In a policy statement published today (July 27), the FCA announced that companies will have until July 31, 2023 to implement the consumer duty rules for all new and existing products and services that are currently on sale. 

The implementation deadline will be extended for a further 12 months (until July 31, 2024) for closed book products to give firms more time to bring these older products, that are no longer on sale, up to the new standards.

The FCA previously said there would be an implementation date of April 30, 2023 but many firms complained this would not be enough time.

Aegon pensions director Steven Cameron, said the provider fully supports the FCA’s new consumer duty and its ambition to ‘level up’ all parts of the retail financial services industry, delivering good outcomes and putting customer needs first. 

“This will involve a fundamental industry-wide review to make sure products and services meet customer needs and offer fair value, testing customers can understand all forms of communication and examining whether customer support is truly meeting needs,” he said.

This is a regulation that will sort the wheat from the chaff.David Tiller, Quilter

“Carrying out such an all-encompassing review thoroughly will take time. We’re pleased the FCA has listened to requests for an extended and prioritised timeline. Deferring the deadline for ‘open’ products and services, albeit by only three months till July 2023, is welcome but timelines remain tight.”

Cameron said the extra year to implement changes for legacy books closed to new business is helpful, particularly for firms with policies many decades old.

Likewise, Pimfa head of public affairs Simon Harrington, said the duty has the potential to be “a transformative piece of regulation” which will substantially improve how firms serve consumers and work towards ensuring they receive superior financial outcomes.

“But for that to be the case, as we have previously argued, firms need more time to implement the new regulations,” he said. 

“We welcome the fact that the FCA has now recognised that such a transformative piece of regulation does indeed require additional time for firms to implement new systems and processes to comply with it.”

Quilter commercial and propositions director David Tiller, said the delay to timescales was “sensible to ensure the new duty is implemented effectively.”

However, Lang Cat consulting director Mike Barrett said although it was a “sensible move”, there is still “a big sting in the tail for implementation”.

“Firms, and especially those who are directly supervised (ie, larger firms) need to be properly up and running in the next two months. There is also a fair bit to do for April.”

Resilient to change

Tiller explained that financial advice firms have proven time again to be resilient to change and most will be building on strong foundations but will have work to do to prove the value of their services. 

At a press briefing yesterday (July 26), FCA executive director of consumers and competition Sheldon Mills said the onus will be on advisers to measure value for money when it comes to the new consumer duty

However, Tiller said “it is far too simplistic” to link value to the cheapest price, given that the consumer duty also focuses on the avoidance of foreseeable harm.

“Customers will need to accurately understand the value of what they are paying for and the limitations that could reasonably cause foreseeable harm,” he said.

“The regulation is ambitious, far-reaching and the terms are broad, meaning it will be of consequence to all retail financial services. Firms will have to re-evaluate how they collect and collate data; implement a wave of new procedures and ensure culture is laser-focused on good customer outcomes.”

He explained that from the 12 principles of the new duty, the one which states ‘a firm must act to deliver good outcomes for customers’, is the most important.

“This really couldn’t be clearer - if you are serving customers, you must act to deliver good outcomes. No excuses, no passing of responsibilities. This is a regulation that will sort the wheat from the chaff.”

Meanwhile PA Consulting risk & regulation expert and former chief executive of the Financial Ombudsman Service Caroline Wayman, said today marks “a new era for financial services firms”, where better outcomes for customers and enhanced competition must now be at the top of the agenda. 

You can provide the most amazing and succinct information to a client and yet we all know most of them won’t read it, it is exactly why they are trusting you to do it for them.Tom Kean, Thameside Financial Planning

“After much consideration, the FCA has now passed the baton to financial services leaders, who must step forward and deliver for their customers,” she said. “Firms, and their boards, are now under time pressure to deliver robust plans and ensure their cultures and practices meet the new requirements. 

“With just three months for boards to sign off plans, and 12 months to implement this for most customers, firms will have their work cut out. With the cost of living crisis tightening its grip, we are likely to see the FCA use the duty to ensure firms are really delivering.” 

Quilter’s Tiller gave an example of what the regulator expects. He said it is foreseeable that a pension that is “insufficiently flexible” may not meet a customer’s future income needs. 

“The regulator’s view is clear – firms must ensure there is a reasonable relationship between the price a consumer pays for a product or service and the benefits they receive from it. Clear causal links must be made to the customer outcome, with measurable value assessments.”

“Firms will have to become more customer oriented before the point of sale as well as after. This will include clear segmentation of target markets to consider their characteristics and vulnerabilities – traits that advisers are well placed to identify.”

Additional work to be done

The City watchdog said clarity on its expectations, alongside firms focusing on what their customers need, should lead to more flexibility for firms to compete and innovate in the interests of consumers.

The duty will include requirements for firms to:

  • end rip-off charges and fees;
  • make it as easy to switch or cancel products as it was to take them out in the first place;
  • provide helpful and accessible customer support, not making people wait so long for an answer that they give up;
  • provide timely and clear information that people can understand about products and services so consumers can make good financial decisions, rather than burying key information in lengthy terms and conditions that few have the time to read;
  • provide products and services that are right for their customers; and
  • focus on the real and diverse needs of their customers, including those in vulnerable circumstances, at every stage and in each interaction.

SimplyBiz head of business consultancy Karl Dines, said the new duty is very much what was expected to come anyway. 

“It's a biggie; the rules will affect discretionary wealth managers, investment advisers, mortgage brokers, insurance brokers, and consumer credit firms, so will require both attention and action from all,” he said.

“Whilst fully digesting the 160 pages of the policy statement will take a few weeks, we can see that the main ethos of the regulation, which affects all advisers, – ‘to treat clients as you would like to be treated’ – remains at its core.”

He explained that the fair treatment of clients with vulnerable characteristics, safeguarding of consumer rights, and delivery of the most suitable solution for a client’s needs and circumstances are already observed by the vast majority of advisers – the additional work lies in the creation of processes to meet.

“Whilst the regulator has made it clear throughout the consultation and policy process that common-sense ‘reasonableness’ should be employed when firms design their consumer duty proposition, the final rules show that additional work will be needed from all advisers to ensure that they are all set to fulfil the new requirements,” he said.

“The regulator has extended the implementation period of the new rules to a year meaning that, for the majority of firms, fulfilling the requirements of the consumer duty will be achievable, but some hard graft will be required.” 

Personal Financial Society director of policy and public affairs Matthew Connell, supported the FCA's move to outcome-based regulation.

He said it is clear that detailed and prescriptive rules that were a regular feature of previous regulation, including European Union regulation, “create unnecessary bureaucracy” without necessarily providing better outcomes for the public. 

“However, we also understand the concerns of some firms that outcomes-based regulation may leave them with responsibilities for outcomes over which they do not have complete control,” he said

“The FCA needs to be specific about the kind of culture and mindset that it is looking for within firms so that it can treat firms that are looking for the right answer but have not yet found it differently from firms that are not interested in improving consumer outcomes.”

Connell explained that the FCA's model for customers in vulnerable circumstances, where it expects monitoring outcomes, analysing and learning from experience and testing and improving propositions as a result of the learning is a good basis for this and should be given more prominence in the guidance. 

“Finally, there is a danger that because price is easy to measure and value is more subjective, the FCA will take the path of least resistance and focus on price.”

He argued that this approach is likely to lead consumers and SMEs to buy less suitable products and be less informed about all the risks they take. 

“A focus on price at the expense of value will undermine the objectives of the consumer duty, and all stakeholders involved in financial services, including the regulators, have a duty to know the value of everything as well as the price of everything,” he said.

The new duty was largely welcomed by most individuals as something that will aid the industry, however Thameside Financial Planning director Tom Kean said there is a total disconnect with the real world. 

“You can provide the most amazing and succinct information to a client and yet we all know most of them won’t read it, it is exactly why they are trusting you to do it for them,” he said.

“How do you measure the value of trust? I might be wrong but they seem to be trying to measure subjective issues as if they were objective.”

Barrett said: “All in all, this is a good thing but a lot of detail for firms to consider. Lots of good guidance from the FCA this morning. Also worth noting their new strategy of releasing the details under embargo yesterday. 

“This can only help the industry work out exactly what needs doing.”

sonia.rach@ft.com

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