Senior executives at fund managers and financial advice firms could face fines and have their bonuses docked if they fail to put the needs of customers first, in one of the biggest overhauls of UK financial regulation in a decade. A new "consumer duty", which will start to come into force from the summer of next year, will replace current rules that say firms must treat customers fairly. DAVID OGDEN, Head of Compliance at the evidence-based portfolio manager Sparrows Capital, says the new rules provide the investing industry with an excellent opportunity to improve consumer outcomes.
Although the full implementation of the FCA’s new Consumer Duty has been delayed until October 2023 it seems clear that the regulator’s latest attempt to put customers’ best interests and customer outcomes at the heart of firms’ processes keeps the subject is right at the top of its priorities.
Is there a reason to be confident that this initiative will succeed where Principles, Treating Customers Fairly, The Responsibilities of Providers and Distributors, PROD, the Senior Managers Regime and numerous enforcement actions have demonstrably failed to achieve this cultural change? It is hard to conclude positively. After all, the new Rules aren’t radical, particularly after the proposed Public Right of Action was dropped after the first consultation. If it has proved impossible to enforce all the earlier initiatives, then why will this be any different?
In terms of cultural change, the regulator is not, in our view, targeting the worst excesses but the less overt poor practices which result from a failure to properly think through scenarios which may impact on eventual outcomes. There isn’t a significant number of firms out there cynically designing products with a view to achieving good outcomes for the business at the expense of clients; but there are too many occasions on which the intended outcome is not delivered.
The preferred outcome will not always be achieved, of course. That is not under anyone’s control. But that makes it even more important that financial consumers appreciate the risks they take when investing and, of course, the risk of not doing so.
Many will cry “caveat emptor” and ask why this long-established saw doesn’t seem to apply in financial services. With most consumer goods it is soon evident whether the buyer is getting what they paid for; if a fridge doesn’t keep food cold or a vacuum cleaner doesn’t pick up dust that will be easily spotted; but it can be many years before it becomes apparent that a client was badly advised or that a product has failed to deliver its intended benefits. The downside of that may of course be rather worse than having a dusty carpet! Risks inherent in any product or service are not always fully appreciated upfront and it is very much incumbent on distributors to ensure that their customers are in a position to make appropriate decisions.
The Rules are subject to considerable interpretation, which is wholly reasonable as it simply isn’t possible, or desirable, for rules to cater for all circumstances throughout the industry. So, what should advisers be concentrating on to make sure that their processes are aligned with regulatory expectations?
First - nothing terribly new here - is suitability; but there are two components to addressing that topic. The obvious one is to have a comprehensive process to assess a client’s circumstances, objectives and risk appetite at the outset and throughout the relationship.
And here it is worth emphasising the need for thorough ongoing reviews, an obligation that hasn’t always been discharged as diligently as may have been desirable. The other requirement of suitability is to look very closely at the products and services selected to ensure that they meet the clients’ needs. That covers everything from funds and model portfolios to tax wrappers and platform services.
We would not have to look far to find products which initially looked like great fits but failed to deliver over the intended term so, keeping them under review is essential. That’s not to say that any performance or service blips, or cost changes, should always promote a switch; clearly that’s unrealistic. But an extended issue of any sort must be identified, and action must be taken where appropriate.
It is instructive to look at some other recent FCA initiatives to see what they consider to be prime considerations when choosing products and services.
The recurring theme has been value, perhaps best demonstrated by the requirement for fund providers to formally assess the value offered by their products. That is a very difficult thing to measure in advance as, of the three key components of value, performance is unknown, and service is subjective.
Even with the benefit of hindsight, conclusions regarding performance may be confused by, for example, comparisons against peer groups which often paint a misleading picture.
While it is important not to fall into the trap that price is the same thing as value; as Warren Buffett said: ‘Price is what we pay, value is what we get’, there is no escaping the importance of price as a key determinant of value.
What that means in practice is that if there are two products or services that aim to deliver very similar outcomes and experiences then there had better be a good reason identified if the one selected carries a higher cost than the alternative, otherwise it will become a very difficult choice to justify, especially ex post.
Our takeaways from the FCA’s new initiative?
The implications will differ depending on the nature of each firm and its business, so it is incumbent on management to assess their procedures and processes to identify any required enhancements.
A constant ongoing focus throughout a client’s financial journey is essential so that changes can be made, for whatever reason, if required.
A thorough analysis of products and services is essential, and that diligence must be maintained throughout a period when it is used for a client.
Identifying good value is a particularly important factor in determining whether a client outcome is as intended. It is therefore of significant importance to give a high priority to the only element of value which can be determined upfront: price.
Consistency of approach is generally a good thing for both a business and its clients, and it is certainly seen as a good thing by regulators. The publication of the Consumer Duty Rules offers businesses an opportunity to reassess their processes and confirm that they are designed with a clear view to fostering good client outcomes.
Picture: Ed Robertson via Unsplash
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