What Will The New Consumer Duty Mean For Advisers?

There is a significant shift underway in the UK regulatory landscape, and with it, FCA expectations. In line with the regulator’s transformation programme, a regulatory framework for more assertive supervision and enforcement is set to be announced.

This move is not simply ‘TCF with teeth’. We’re talking about a change to the foundations on which FCA regulation is built, and a shift away from what financial services firms do to a focus on actual results. In short, achieving good outcomes for clients is to become a proactive requirement.

For advice businesses that care for their clients, this shift is nothing to fear, and such regulatory evolution should be welcomed as an opportunity to work in a better way, based on outcomes and principles. However, it’s important that advisers start getting to grips with new expectations as soon as possible.

Why the change?

There are several reasons why the regulator is ushering in this new approach. At its heart is the desire to ensure products and services are fit for purpose, offer fair value, and are understandable – particularly as the availability and accessibility of financial products continues to grow. The new rules are designed to help ensure consumers are consistently placed front and centre across the whole financial services industry.

Another reason for the change is the continuing risk of information asymmetry and behavioral bias for which current regulations can’t solve. The new consumer duty standards are also expected to help promote effective competition in the market.

What are the rules likely to be?

The final rules have now been announced, with the implementation period lasting 12 months.

The new rules are likely to state that a firm must act to deliver good outcomes for retail customers and help them avoid foreseeable harm.  Advisers should expect the new rules to span products and services, affect both price and value and have consumer understanding and support as key pillars. This will also mean ensuring outcomes for vulnerable customers are as good as those for non-vulnerable ones.

The standards are likely to cover all interactions with retail customers, including prospects, and across both regulated and ancillary unregulated activities. Likewise, they will be applied on a forward-looking basis for new as well as existing products and services.

Digging into the detail

The new Consumer Duty rules will have far reaching consequences. For products and services, it concerns the needs of the target market and distribution strategy, entailing obligations for advisers as the ‘manufacturer’ of advice services, as well as for distributors.

In terms of value, the relationship between price and benefit is also under the microscope. Advisers will need to evidence how fair value is provided and kept under review. This means value assessments for advice services and achieving fair value in the distribution chain.

The changes also aim to raise consumer understanding. This means making sure consumers have all the information needed to make effective decisions, which advisers will need to check and demonstrate. 

Finally, advisers will need to begin identifying the support needs of clients and show how they are being met. Part of this will likely include avoiding unreasonable barriers and costs, as well as demonstrating that service commitments are being delivered.

How can advisers prepare?  

All of this may seem daunting, and that is why advisers are recommended to begin preparing now. The Consumer Duty implementation deadline is April 2023, which isn’t a lot of time to plan, implement and embed. You need to fully understand what needs to change and then work out where there are gaps in your current practices, processes and controls. Ultimately, the FCA will want to know how advisers are aligned with this new approach, and what they’ve done in response to the new rules.

A good way to start is with ‘gap analysis’. Ask yourself, ‘what are my business’s current processes and how do these differ to the regulator’s rising expectations?’.

Next, advisers should do some housekeeping, including reviewing propositions, undertaking benchmarking, and beginning foreseeable harm assessments. Advisers should also start thinking about their product governance framework, as well as considering their communications strategy, client support needs, and put in place an MI framework and outcomes monitoring.

Part of this also means thinking about how technology can assist with the new Consumer Duty. The right tech can help to streamline processes as well as automate elements of reporting and help advisers spot potential problems much earlier. For example, digital platforms can help identify otherwise ‘hidden’ vulnerability traits in clients, enabling advisers to better cater to their individual needs.

The FCA suggested that the cost for compliance with the Consumer Duty for a small IFA firm could be anything up to around £25,000. Although that’s a hard pill to swallow, see whatever you spend as an investment in a robust future, rather than a cost. IFAs are usually incredibly stretched and don’t have the internal resources to make the kind of change that is required. Consider seeking external support to carry out the required activities or to provide assurance that what you’ve done will meet regulatory expectations.  For example, Tenet can help in numerous ways, from gap analysis, policy reviews, and outcome monitoring, to providing templates, frameworks, training, and process audits.

A changing landscape

The regulatory environment is tightening across the financial services sector, and the new Consumer Duty standards represent a significant change for everyone involved. These new requirements may seem complex and intimidating to many advisers. However, with the right preparation, technology and support, most advisers should be able to make the switch fairly easily and quickly see how these changes will benefit both them and their clients.

For more information on how Tenet can support your business with the new Consumer Duty regulations, please contact joinus@tenet.co.uk