Regulation  

Critical next steps in preparing for consumer duty

  • Describe some of the imminent challenges facing advisers and the consumer duty
  • Identify some key dates in the lead up to implementation
  • Explain the challenges over charges
CPD
Approx.30min
Critical next steps in preparing for consumer duty
(Yibei Geng/Unsplash)

We wrote earlier this month about a couple of the key structural and process changes that retail investment advice firms will need to make that will be mission critical to ensuring compliance with the Financial Conduct Authority’s consumer duty by this time next year.

These included the monitoring and testing of customer outcomes and developing processes to meet the consumer understanding outcome.

But these are not the only key elements that advisers need to worry about over the coming 12 months as they grapple with the sweeping set of changes – the FCA itself has estimated implementation could cost the entire industry as much as £2.4bn in one-off costs.

We have therefore outlined some of the further considerations for advisers in the coming months, including: price and value; board, governance and culture; timing; and critical next steps.

Price and value

An important area that many firms will need to grapple with is the FCA’s price and value outcome, which is a key plank of the consumer duty.

Although the FCA has introduced this concept to some parts of the market to date, such as in the asset management sector, it is likely to be a new concept to many and therefore firms will need to consider the institutional architecture that they will need in order to meet these new requirements.

It will be important for firms to have clear assessments of the intended customer benefits of a product or service as the bedrock of the fair value assessment. Taking this on, firms will need to take a holistic view of costs when assessing value.

It is clear from the extensive non-handbook guidance that the FCA has published alongside the final rules that the regulator also expects firms to consider potential non-financial costs when assessing value.

If customers are unable to effectively access information about product features, or about contingent fees and charges, then these could amount to barriers that prevent them from pursuing their financial objectives.

One area that will need to be assessed by firms providing financial advice is their charges and whether they provide fair value to customers. An example given by the FCA focused on customers incurring high minimum fees due to the adviser’s charging model.

To correct this, the firm’s target market would need to be refined to exclude customers with very small investment amounts. In this example, the firm could not provide fair value to those customers.

The FCA has been clear that distributors such as retail investment advice firms have a critical role to play in getting products to market and that they have an obligation to ensure that their, or other charges across the chain, do not cumulatively result in the product ceasing to provide fair value.

This is of particular importance in longer or more complex chains, where multiple charges may be added. For retail investment advice firms, providing fair value is therefore a holistic rather than isolated assessment and these firms will be dependent on information provided to them by manufacturers.