With the integration of the FCA’s Consumer Duty Rules just a few short weeks away, Compliance Consultant, Tony Catt, reminds us why advice firms need to ensure that they are not only walking the walk and talking the talk but also paying sufficient attention to evidencing processes too.
The new Consumer Duty rules have certainly generated much extra work for advisers these past few months, as firms carry out their checks and controls of processes to ensure that they will not fall foul of the new FCA rules which take effect from 31st July. The regulator’s aim is for Consumer Duty to set higher and clearer standards of consumer protection across financial services and requires firms to put their customers’ needs first.
At a meeting recently, I met a man who has specialist knowledge, including a doctorate, on the subject of modern slavery. Naturally, I launched into how difficult my life is as a compliance consultant. But he gently guided the conversation towards people working in sweat shops producing clothing, or people working in mines to find rare metals and children working in both these environments. He also talked about the Uyghurs in China being persecuted by the Government.
This man works for a fund manager and, as part of their stewardship, they lobby companies towards better practices in line of sustainability and responsible governance. He said that the new labelling of the funds that the company runs would be “improvers”. This is the middle out of the three labels – focus, improvers and impact as detailed in Table 1.
Table 1
Proposed sustainable investment labels’ definitions and channels for achieving positive sustainability outcomes[SW1] :
| Sustainable focus | Sustainable improvers | Sustainable impact |
| Definition: products with an objective to maintain a high standard of sustainability; invested in assets regarded as environmentally and/or socially sustainable. | Definition: products with an objective to deliver measurable improvements in the sustainability profile of assets over time. | Definition: products with an explicit objective to contribute to positive sustainability outcomes in a measurable way. |
| Primary channel: influencing asset prices. | Primary channel: stewardship aimed at improving the environmental or social sustainability profile of assets. | Primary channel: directing new capital to projects and activities that offer solutions to environmental or social problems. |
| Secondary channel: continuous stewardship activities. | Secondary channel: identifying funds that are best placed to improve their sustainability profile over time. | Secondary channel: continuous stewardship activities. |
Source PRI
Integration of ESG within the advice process
In late May, the FCA reached out to the Association of Professional Compliance Consultants (APCC) as it is undertaking a project on the extent to which ESG is integrated into the investment advice journey in the UK.
The FCA is exploring how to introduce rules for financial advisers aimed at confirming that they should take sustainability matters into account in their investment advice and understand investors’ preferences on sustainability to ensure their advice is suitable.
As part of this, the FCA is looking to gather views from APCC members as to the current level of ESG integration in the advice process, the role of compliance consultants for financial advisers, and what potential regulatory intervention might look like.
This is an integral part of the ongoing Consumer Duty implementation as part of the advice process. Previously, a lot has been done to highlight dealing with vulnerable clients as covered by the new Consumer Duty rules. The breadth of the vulnerability issue and what may constitute a vulnerability as covered by the new Rules, is making advice increasingly more complex. [SW2]
However, I have been telling my client IFA firms that they also need to be addressing sustainable investment with the same vigour. Many advice firms have incorporated relevant ESG/Sustainable Investment-focused questions into the fact-finding process. I wonder whether that will be the sufficient evidence that the FCA will be looking for in future?
Identifying and meeting clients’ sustainable investment criteria is a source of concern to many advisers. I have met some that said that they raise it with their clients and the clients do not want it. For me, this is a concern. How was it raised? What was the discussion? Was the adviser positive about sustainable investment? Or was it dismissed because many sustainable investment/ESG-focused funds under-performed last year against their non-ESG counterparts that contained oil company exposure due to the price of oil booming?
Unfortunately, for advisers, sustainable investment is a complex subject. It involves positive and negative selection criteria. There are several levels of sustainability, now under three labels. On this front, advisers are entirely reliant on information from the fund managers. What happens if the client has specified a preference that has led to a choice being made; only to find out that the fund manager has gone against that choice in the next review? Also what about the possibility that a very eco-aware and focused client will know far more about the subject than they do? Such an instance would never be a ‘good look’ for advisers who want to be considered as the fonts of all knowledge.
Manufacturers and Distributors?
Advisers have been deluged by fund managers sending out lots of new documents that have been re-written for the fund managers to comply with the Consumer Duty rules by the end of April. I’m not sure how much of this will have actually been read. I can only hope that it has not been printed too often.
Recently, there has been an issue raised about ‘manufacturers’ and ‘distributors’ in financial services[SW3] . Personally, I am not sure about the ‘manufacturers’ label. I would have thought ‘providers’ or ‘producers’ may have been better but then nobody asked me!
It is logical that an insurance company or fund manager is a ‘manufacturer’ and an adviser ‘distributes’ that product. But an idea has recently been introduced that advisers are also ‘manufacturers’. Of their own advice process. Or co-manufacturers if they are constructing investment portfolios.
This is not a new concept as the FCA wanted to move in this direction with the RDR over ten years ago, as part of the move away from commission to sell advice. This would make the advice a product in its own right. Unfortunately, this idea was side-stepped by the re-labelling of commission as adviser fees. The world went forward without breaking step.
Advice as a product?
However, advice as a product would bring advisers into the same professional realms as solicitors and accountants who charge for their services. Advice should be used as a driver for a lot of business as most clients would be attracted to working with an adviser who they like and trust and provides the service that they want.
We have just a matter of weeks until 31st July to move all advisers towards being Consumer Duty compliant in order to meet the FCA deadline. Most are already compliant. They simply need to work towards having evidence that they are doing the right things.
Tony Catt
Compliance Consultant
07899 847338
