The Financial Conduct Authority (FCA)’s Consumer Duty has the potential to be one of the most defining events of the era, impacting all UK-regulated firms effective 31 July 2023. The FCA is making a seismic and profound change to become an explicitly customer outcome-focused regulator, rather than one who creates and issues prescriptive rules to industry participants, writes Russell Andrews, global head of advice solutions, SEI, Asset Management Distribution.
After four years of cross-industry consultation, an overarching principle was defined for “firms to act to deliver good outcomes for retail clients”. Sounds simple, but can you evidence it? Underpinning the principle itself, the FCA wants to see actual evidence of how firms are focusing on consumer outcomes, and it will also impact how the regulator will supervise firms in the future.
At the highest level, the FCA is now looking for firms to conduct all aspects of business with three principles at the core: Act in good faith towards customers, avoid causing foreseeable harm, and enable and support customers in achieving their financial objectives.
These principles have been translated into four key outcomes that represent primary and critical interactions between customers and industry stakeholders: Products and services, consumer understanding, value for money, and consumer support.
But with the deadline fast approaching, firms are facing a number of challenges when it comes to adherence.
The challenges
Interpretation: Out of the gate, one of the biggest challenges faced by the entire industry is how to interpret the desired outcomes in a practical, measurable and tangible way that can be easily evidenced.
Implementation: Being able to determine what equates to good value is not so straightforward. A platform or investment product may be justifiably more expensive because they offer better choice, service, tools, active management, risk controls etc. This could arguably be considered better value as it presents a greater likelihood of meeting customer needs, but demonstrating that on a forward-looking basis is not easy. Additionally, tailoring communications for the end customer requires instituting a method of communication that can be understood by each. Simply applying the most basic approach for all won’t work. Knowing it can be understood by all doesn’t mean it’s meeting the needs of a more sophisticated customer.
Testing, monitoring, and adjusting: Once you’ve successfully moved through the implementation phase, the journey doesn’t end there. The FCA is keen for the industry to no longer rest on their laurels and assume that compliance means job done. Going forward the FCA is striving for an ever-improving environment—both culturally and in respect to customer outcomes and experiences. All firms also need to create a process for ongoing testing and monitoring of customer communications and support. In addition to periodic reviews, firms need to identify triggers for timely interventions and alter communications where they are deemed as being misunderstood. This could become especially challenging for vulnerable customer segments.
The solution
Simplify and control: Often, when faced with a challenge such as new regulation, we look to identify what is required to support the existing business, proposition, and operating model. In many cases, a good starting point may be to assess whether a business can be simplified in a way that doesn’t negatively impact customers but more easily accommodates regulatory changes.
Adopt a goals-based approach: This investing approach isn’t a new phenomenon, but Consumer Duty could be the catalyst for its eventual dominance for financial planning, advice, and investing. There is arguably no better way of having personalised and understandable engagements with customers than discussing their goals in the critical context of their individual circumstances and preferences.
Outsource: In the past many advice firms have adopted an internal approach for many facets of the planning, advice, and investing process. The sheer complexity of adapting to comply with Consumer Duty might well act as a trigger to re-think that mental model and identify an experienced strategic partner that can help ensure compliance while delivering for the customer.
Utilise technology: In reality, it’s hard to think of a scenario where technology doesn’t play a crucial role in a modern proposition. However, to successfully accommodate a number of aspects related to Consumer Duty at scale without harming business economics, adopting specific technologies will become critical.
The takeaway
Consumer Duty’s ultimate goal is to put customers in a position where they can make informed decisions; where they are presented with suitable products and services for their individual needs; and where they receive fair value for those purchases.
The duty will require all firms, whether designing, selling, or advising on products and services, to put their customers’ needs first and take full accountability for delivering against those needs.
Looking ahead to the rest of 2023, the deadline is fast approaching. If you haven’t made meaningful inroads in respect to planning and implementation, then you’re already behind the curve. The firms that adapt best and most effectively present these benefits to clients will likely achieve success.
This article was written for International Adviser by Russell Andrews, global head of advice solutions, SEI, Asset Management Distribution.
