As this summer’s FCA Consumer Duty rules look to achieve clearer, and higher standards for adviser firms’ culture and behaviours, Compliance Consultant, Tony Catt, explains the details so that IFA Magazine readers can make sure they are prepared for the changes coming down the line.
Over the years, the Financial Conduct Authority (FCA) has been fighting a (losing) battle to try to stop consumers receiving poor value and poor advice relating to financial services.
The FCA has tried many different initiatives over the years. These include Treating Customers Fairly (TCF), Retail Distribution Review (RDR), MiFID and MiFID II, Senior Managers & Certification Regime (SM&CR) and now is looking at Consumer Duty – for which no acronym is known at this time.
Putting Clients Needs First
Clearly, most advisers want to do “the right thing” when it comes to their clients. They act ethically towards their clients and always have. The alphabet soup simply gives them an opportunity to review what they are already doing.
Probably, the most far-reaching initiative of all those listed was the RDR. It brought in a higher qualification entry point for advisers and also tried to get rid of commission based sales. In my experience, more professionally qualified advisers tend to be better practitioners because they are more aware of the need to take care with the positive and negative points involved in any advice given and the actions that can be taken.
Customer Agreed Remuneration
Getting rid of commission was rather more difficult. Ideally, the FCA would like advisers’ remuneration to move towards a proper fee-based structure for services rather than payment for sales. The payment for sales approach was seen as a root cause of poor standards of advice and poor consumer outcomes which prevailed for many years.
That reminds me. I can remember meeting an adviser in 2001, just after I had started my own practice. I wanted to try to work towards a fee structure and was excited when the adviser told me that he only works on fees. Brilliant, what were his rates? Hourly rates? Different for various services? He said that his fees for investments are 3% initial and 0.5% per year ongoing. He spoke with no irony and I am not sure whether he noticed my frustration and disappointment.
So, when RDR raised this issue, it was little surprise that commission and trail commission was re-badged as adviser fees. This still remains important to adviser firms as the more established firms have an income stream and therefore a future re-sale value.
MiFID ii tried to change this a little by making it necessary for advisers to clearly state their charges for reviews and what service the clients can expect to receive in their review. A step in the right direction.
A revised approach to consumer duty
Consumer duty is being brought in as, in the FCA’s experience, financial services markets do not always work well to provide adequate levels of consumer protection, and competition does not always work effectively in consumers’ interests. Where this happens, consumers may suffer harm. They may:
- find it harder to make an informed or timely decision.
- receive unsatisfactory support from their provider
- buy products and services that are inappropriate for their needs, of inadequate quality, are too risky or otherwise harmful
The FCA therefore wants to bring about a fairer, more consumer-focused and level playing field in which:
- firms are consistently placing their customers’ interests at the centre of their businesses
- competition is effective in driving market-wide benefits, with firms competing to attract and retain customers based on high standards and customer satisfaction, and innovate in pursuit of good consumer outcomes.
- FCA regulation keeps up with technological change and market developments so that:
▶ consumers are protected from new and emerging harms, and
▶ firms can innovate to find new ways of serving their customers with certainty of our regulatory expectations
- firms extend their focus beyond ensuring narrow compliance with specific rules, to also focus on delivering good outcomes for customers
- firms consider the needs of their customers – including those in vulnerable circumstances – and how they behave, at every stage of the product/service lifecycle
- firms continuously learn from their growing focus on and awareness of what their customers experience
- in line with the FCA’s work on diversity and inclusion, firms act to meet the diverse needs of their customers
- consumers get the products and services they need, which are fit for purpose, provide fair value and do not cause them harm
- consumers understand how to use their products and services and receive the support they need to do so, and
- consumers get prompt and appropriate redress when it is due to them, with reduced misconduct ultimately reducing redress costs
The FCA believes that the Consumer Duty rules will do this, building on their previous interventions in markets and recognising the changing environment for consumers, by:
- explicitly setting a higher standard of care across all retail markets, informed by the FCA work on behavioural biases and vulnerability
- extending rules focused on product governance and fair value, which already exist in certain sectors, across all sectors
- focusing on matters of market practice (eg sludge practice) that interfere in consumer decision making and, by doing so, cause harm
- ensuring firms consider the needs of their customers – including those with characteristics of vulnerability – and how they behave, at every stage of the product or service lifecycle, and
- requiring all firms to focus on good customer outcomes and whether those outcomes are met
The FCA 2021/22 Business Plan set out that improving consumer outcomes through the new Consumer Duty was 1 of 5 consumer priorities. The Consumer Duty also directly informs and supports the other 4 which are:
- Enabling consumer to make effective investment decisions.
- Ensuring consumer credit markets work well.
- Delivering fair value in a digital age.
- Making payment safe and accessible.