Getting through the gates after consumer duty

We have a copy of our first-ever front page, framed and on the walls of our office in Bracken House. 

The paper spoke to a rising cohort of entrepreneurial, independent financial advisers, moving out of the world of insurance company sales and into direct advice to clients. 

Regulation, too, reared its head. At one time there were so many different regulatory bodies it felt as if we were drowning in acronym soup. 

That same entrepreneurial spirit prevailed nevertheless.

But post-depolarisation, A-Day, the retail distribution review, pension freedoms and the like, here we are once again, with the consumer duty obligations knocking at our door. 

How entrepreneurial do people feel now?

It does mean that we're going to have a different lens that we look at when we look at application forms.FCA 

I have not spoken with an adviser who disagrees with consumer duty's overall aim of making sure that everything is being done with the customer's best possible financial outcome as the goal. 

But I have spoken with advisers who fear this will crush the entrepreneurial spirit in a way that even the RDR, with its abolition of commission-based payments on investment products, did not. 

This fear is based partly on the working environment for newcomers and those leaving behind an employed role to become directly authorised. 

They are starting to go it alone at a time when professional indemnity insurance is operating in an almost cabalistic fashion, setting premiums at eye-watering prices.

Likewise, regulatory costs and charges have been rising, as reported by FTAdviser, with the Financial Services Compensation Scheme taking an ever-larger piece of the adviser's profit pie.

Add to this the cost-of-living crisis, rising business rents and insurances, salaries and staff costs, and it is unsurprising many advisers have spoken to me of their concern this all makes for a hard market for newcomers. 

The other big fear factor, of course, is consumer duty, and the knowledge that just to get through the FCA's gatekeepers, firms seeking authorisation will have to map out exactly what they plan to do to be profitable enough to comply with capital adequacy expectations, while presenting ongoing fair value assessment proposals. 

Oh, and of course the FCA will be expecting firms not to be making profits off the backs of clients in terms of charges. 

Fair warning

Earlier this year, in a podcast from the regulator, Alex MacDermott, a technical specialist in the FCA’s authorisations division said while the duty was a "big change" in regulation, "it doesn't change the standards that we assess firms against at the gateway.

"So, the threshold conditions, the requirements for registration, they don't change.

"Firms still need to show us that they've got appropriate financial and non-financial resources, they still need to show that they can run the business in a sound and prudent manner and that they're suitable."

But he went onto say that while the conditions of entry do not change, "obviously the lens that we look through when we're assessing firms against those threshold conditions is 'Can they meet and comply with all the requirements of the handbook as they apply to them?'

"So, with the consumer duty, that's going to mean that throughout the firm's application, so throughout all of their systems and controls, their regulatory business plan, they really demonstrate that they've put the customer at the heart of what they do.

Can they meet and comply with all the requirements of the handbook as they apply to them.FCA spokesperson

"It also means... they are able to develop, design, distribute products and services that meet their needs, which are of fair value and that customers can understand."

The FCA admitted that newcomers are "going to need to provide quite a lot of information in their application form and probably also in some supporting documents, like their regulatory business plan".

This is everything from around the wording of communications and forms, having specific policies to ensure annual meeting outcome plans are in accordance with consumer duty, and outlining how future products and services that may be provided would meet obligations under the duty.

It will be interesting to see whether there is a tail-off of new firms receiving authorisation post-July 2023.

MacDermott continued: "So, I suppose what I'm saying is there's a lot in the consumer duty and it does mean that we're going to have a different lens that we look at when we look at application forms."

Advisers wanting to go it alone are going to have to take someone with them - like Frodo took Sam.

Only in this case, Sam is an extremely experienced compliance consultant and business creation specialist, who can talk the newcomer through every single potential scenario before those plans go through the 'different lens' of which the regulator has given fair warning.

It will be interesting to see whether there is a tail-off of new firms receiving authorisation post-July 2023 and in the months following. 

My gut tells me it will be a while before there are a significant number of bold new entrants into an advice market that so desperately needs that injection of entrepreneurial spirits.