Regulatory shifts don't come much bigger than the Financial Conduct Authority's a new Consumer Duty. On broadly the same plane as pension simplifcation in 2006 and the retail distribution review six years later, the regime represents a seminal shift in the way advice firms need to operate.
With the final rules and guidance published on 27 July, here we pick out the important bits that you need to know.
In the regulator’s own words, the regime "will set higher and clearer standards of consumer protection across financial services and require firms to put their customers’ needs first."
Its scope is extremely broad, and applies to all firms in the retail distribution chain including product manufacturers, platforms, and of course financial advisers and mortgage brokers.
Though the introduction of any new regulatory measures can prove an additional headache for advice firms, the regime will undoubtedly lead to improved outcomes for consumers.
This is important. The Financial services sector has experienced its fair share of reputational problems over the years - most recently concerning the British Steel Pension Scheme transfer saga.
Consumer Duty aims to restore consumer confidence in the financial system. It seeks to ensure customers are treated fairly and have access to suitable products and services for their specific needs.
At the heart of the Duty are three cross-cutting rules. These determine that firms must:
act in good faith towards retail customers;
avoid foreseeable harm, and;
enable and support retail customers to pursue their financial objectives
At face value, you may find these a bit vague. So, let’s examine what the regulator is getting at in more detail.
The FCA defines acting in good faith as a "standard of conduct characterised by honesty, fair and open dealing and acting consistently with the reasonable expectations of retail customers."
With regards to the second rule, "avoid foreseeable harm", the regulator is fairly prescriptive here. While, as an adviser, you aren’t responsible for the activities of other firms involved in the customer journey, such as platforms, where you can reasonably foresee harm to one of your clients, you should act and raise any issues with other relevant parties.
For the final cross-cutting rule, the FCA expects you to create an environment in which consumers can act in their own interests – you must empower customers to make choices for themselves. Considering your clients’ behavioural biases and any vulnerability is a key part of this.
As a quick refresher, the FCA defines a vulnerable customer as one who, due to their personal circumstances, is especially susceptible to harm - particularly when a firm is not acting with appropriate levels of care. Those with characteristics of vulnerability are the most at risk. Examples of vulnerability include poor health, low resilience to cope with emotional shock, and poor literacy or numeracy skills.
Clearly, good adviser practices will already place be acting in adherence to the above rules, and will have embedded them into their advice propositions. As you may have gathered, the Duty doesn’t require you to reinvent the wheel. But it will, in most cases, require you to raise the bar in these areas even higher.
The FCA has four key outcomes it wants the Duty to achieve, which it feels are imperative in driving good outcomes for customers. Let’s look at each of them:
Products and services
Pivotal to achieving good outcomes for consumers is for products and services to be fit for purpose. The FCA says they must be “designed to meet the needs, characteristics and objectives of a target group of customers and distributed appropriately.”
As the regulator notes, there is some overlap with existing governance here, with this already covered under the Product Intervention and Product Governance sourcebook (PROD) within Mifid II. But rather than replacing PROD, the Duty will broaden its scope. PROD rules apply to investments, insurance, and funeral plans, but the Duty is rolling this out to all and raising the standards across sectors.
Price and value
Since 2019, asset managers have been required to produce value assessments, and the Duty appears to be requesting something similar from advisers.
The FCA expects you to assess your current products and services to ensure there is a reasonable relationship between the price paid and the overall benefit a consumer receives.
As you will be all too aware, a low price doesn’t always represent good value. This means that you are well within your right to recommend innovative products at higher prices as long as they offer increased benefits to consumers, and as such offer fair value.
It goes without saying that customers need to understand how a product works.
Under the Duty, your firm’s communications must support and enable consumers to make informed decisions about financial products and services. You need to provide your customers with the information they need, at the right time, and presented in a way they can understand.
Within your communications with customers, you must ensure they are likely to be understood and enable consumers to make effective, timely and properly informed decisions.
This outcome dictates that you must provide a level of support that meets consumers’ needs throughout their relationship with you. Your customer service should enable consumers to realise the benefits of the products and services they buy and ensure they are supported when they want to pursue their financial objectives.
Clearly, the channels where you can provide support to your customers is multifarious, including telephone, email, video technology and client portals. You must ensure that each of these meets the needs of your customers.
Originally, the proposed implementation date was 30 April 2023, giving you nine months to get up to speed. However, when the FCA quizzed industry respondents, they felt that not only would this short timeframe present challenges, it may also increase several risks.
After taking on board these concerns, the regulator has therefore proposed a phased approach. New and existing products and services that are open to sale or renewal must adhere to the rules by 31 July 2023, while those held in closed books have until 31 July 2024.
While you still have time to get your house in order, it would be wise to avoid leaving things to the last minute. The reason the FCA is giving you more time than it originally proposed is due to the resource needed to embed the new rules.
A good place to start is to undertake a review of your existing business practices. Examine how you communicate with your customers, assess whether your charging structure is transparent, and ensure that your products and services represent fair value.
The FCA is clearly keen to add extra layers of protection for vulnerable customers. Those that fall into this bracket may not be immediately obvious, so it’s worth checking your current processes to establish whether their needs are being catered for - the regulator’s Financial Lives survey 2020 found that 53% of adults display a characteristic of vulnerability.
In conclusion, though the Duty represents a major shift for the industry there should be little for good advice firms to worry about. You just need to make sure your customers' needs are placed front-and-centre across all aspects of your firm’s advice proposition.