In this, in her latest blog for IFA Magazine, Katie Brinsden (pictured), Managing Director at the national, directly- authorised IFA, Truly Independent, delves into another yet one of those topics she feels so passionate about. This month, it’s regulation and compliance that has focused her attention. But before you grimace, read on to see what Katie has to say about this fact of life for the advice profession, and why we may well grumble but when we consider the alternatives, perhaps it’s not quite so bad after all?
American economist and political commentator Thomas Sowell argues that there are no solutions to the world’s most pressing problems. There are instead only trade-offs, he says, and our goal should be to identify the best available.
This might sound like a rather downbeat standpoint, but experience seems to back it up. Look at the sweep of human history and you very quickly appreciate the vast majority of “solutions” have been suboptimal and short-lived.
It may be worth keeping this sobering reality in mind as we marked a year of Consumer Duty at the end of July. The quest for “good outcomes” in financial services has probably attracted more criticism than praise since its launch last August, but is our industry’s view unduly negative and even naive?
We can explore this possibility through the prism of three simple questions. Sowell suggests these should be posed when evaluating any policy, so how does Consumer Duty – or, for that matter, the overall regulation of the adviser community – stack up against them?
1. At what cost?
Back in 2021, when the idea was still a relative twinkle in its eye, the Financial Conduct Authority (FCA) commissioned a report that explored Consumer Duty through the lens of its likely economic impact. The authors concluded: “It is almost inevitable that short-run costs for regulated firms will increase.”[1]
In many cases, of course, those increases are likely to have been passed on to clients. A survey published in July 2023 found around a third of advisers expected their fees to go up, with only a tiny minority believing Consumer Duty would enhance profitability[2], while subsequent research revealed 37% of firms had changed their charging structure[3].
The fact is that many regulatory innovations are widely perceived as little more than bureaucratically imposed burdens. Additional demands usually require extra resources, which in turn often translate into higher costs for providers.
Consumer Duty has proved no exception in this regard. Ensuring consumers receive “fair value” is an entirely worthy cornerstone of the initiative, but fair value can have a price.
2. What hard evidence do you have?
Regulators in every industry have accumulated a wealth of data in recent years, and they will continue to amass a great deal more in the years to come. FCA Chief Executive Nikhil Rathi has even described this superabundance as “the lifeblood of a modern regulator”[4].
We can take it as read, then, that the FCA feels it collected sufficient evidence to justify Consumer Duty’s introduction. We also know much more information is now being gathered to showcase the new regime’s effectiveness.
Earlier this year, for example, the FCA reported that more providers are demonstrating good practice in areas such as service-level metrics, governance and outcome-related incentivisation. It also highlighted scope for further improvement[5].
Ultimately, data is now at the heart of decisions in every professional arena. We might draw a measure of comfort from the knowledge that it was – and remains – pivotal in this instance and that Consumer Duty was not set in motion simply on a whim.
3. Compared to what?
This question, above all, perhaps gives us a sensible perspective on both Consumer Duty and regulation in general. However meddlesome some of it might appear, we need to ask ourselves what the sphere of financial advice would be like without regulatory intervention.
At least deep down, most of us realise it would be a mess. It could very easily revert to the adviser equivalent of the Wild West, as witnessed when thousands of self-appointed “independent insurance brokers” held sway 30 or 40 years ago.
Like the Retail Distribution Review before it, Consumer Duty may eventually imbue the market with a distinctly Darwinian edge. In other words, it could encourage the survival of the fittest.
Logically, this would allow the best advisers to prosper and the worst to depart the scene. Aside from those found wanting, few of us would dispute this would be a welcome development for our industry and the people it aims to serve.
Conclusion
Truly Independent’s CEO, Andrew Goodwin, describes regulation as a “tolerable barrier”. What he means is that we have to accept there is not much we can do about it, even though we might occasionally find it exasperating.
By extension, we might as well attempt to unearth some positives. Maybe the biggest of all is that regulation helps spare us a return to an era when too many advisers routinely failed to cover themselves in glory.
In the final reckoning, in my opinion, the healthiest way we can respond to any regulatory development is to try to recognise how it might one day work to our advantage. In tandem, we just have to grin and bear it.
In the tradition of Thomas Sowell, this is undoubtedly the stuff of trade-offs rather than solutions. But better a trade-off than an unregulated free-for-all from which no-one can genuinely expect to benefit.
Katie Brinsden is Managing Director of Truly Independent.
[1] See Frontier Economics: “Economic Impact of the FCA’s Consumer Duty”, July 2021 (https://www.fca.org.uk/panels/practitioner-panel/publication/cp_21-13_new_consumer_duty_-_frontier_report_for_the_fca_practitioner_panel.pdf).
[2] See, for example, FTAdviser: “Third of advisers expect fees to increase with Consumer Duty”, July 24 2023 (https://www.ftadviser.com/fca/2023/07/24/third-of-advisers-expect-fees-to-increase-with-consumer-duty/#:~:text=The%20research%2C%20which%20surveyed%20339,network%20(22%20per%20cent)).
[3] See, for example, Royal London: “Consumer Duty fair value prompts 37% of adviser firms to change their fee structure”, November 9 2023 (https://www.royallondon.com/about-us/media/media-centre/press-releases/press-releases-2023/november/consumer-duty-fair-value-prompts-37-per-cent-of-adviser-firms-to-change-their-fee-structure/).
[4] See, for example, Financial Conduct Authority: “Shaping the rules for a data-driven future”, June 16 2022 (https://www.fca.org.uk/news/speeches/shaping-rules-data-driven-future).
[5] See, for example, Financial Conduct Authority: “Consumer Duty implementation: good practice and areas for improvement”, February 20 2024 (https://www.fca.org.uk/publications/good-and-poor-practice/consumer-duty-implementation-good-practice-and-areas-improvement#:~:text=Next%20steps,-Firms%20should%20consider&text=Firms%20that%20identify%20gaps%20should,are%20delivering%20poor%20customer%20outcomes).
