STANDARDS OF CARE TO BE SCRUTINISED BY FCA

Proportion
Reading Time: 3 minutes

8 April 2022 

Consumer Duty: Sounds a bit like a new tax on advisers, doesn’t it?

You’ll likely have seen the term in FCA communication by now, but do you really know how the proposed legislation will impact your firm?

It’s probably better to think of it as ‘your duty to consumers.’ The FCA is making the standards of customer care it expects clearer, to increase the level of consumer protection in retail financial markets.

The second consultation, Consumer Duty CP21/13, closed in February, so we expect final guidance to be issued any time now. The FCA has promised the rules will be written into its handbook by July 31.

For many regulated firms who fall outside the financial advice sector, compliance will require a significant culture change. However, thanks to the FSA’s focus on Treating Customers Fairly (TCF) in 2007/08, financial advisory and wealth management businesses are already well placed for a smooth transition into this new legislation.

What is the new Consumer Duty?

Consumer Duty isn’t an update, it is additional regulation to ensure the products and services you provide are fit for purpose and enable clients to make well-informed decisions.

Basically, the rules require you to put yourself in the consumer’s shoes. It is a package of measures to give firms more certainty about the FCA’s expectations and help you avoid harm by delivering high standards of care from the outset.

The regulations comprise:

  1. The Consumer Principle: An overarching standard of conduct expected of you.
  2. Cross-cutting Rules: A set of instructions outlining the cultures and behaviours expected of you.
  3. Four key outcomes:
    1. Communications that equip consumers to make effective, timely and properly informed decisions about financial products and services.
    2. Products and services that are designed specifically to meet the needs of consumers and are sold appropriately.
    3. Customer service that meets the needs of consumers, enabling them to realise the benefits of your products and services. You must act in their interests without undue hindrance.
    4. The price of products and services represents fair value.

How will compliance procedures change?

Thankfully, the majority of advisory firms already do their best by clients, but you will need to consider your current processes against the four key outcomes.

You should start by thinking about the following:

  1. Communication with clients, reports, appendices and marketing material. Are they customer friendly, written in plain English and jargon free? For example, does Mr Smith really understand passive investing or tactical overlay?
  2. Consider your investment proposition and target clients to ensure they are clearly defined and differentiated. The correct solution for one client may not be appropriate for another. For example, a client investing in an ISA is unlikely to want the same product as someone with multiple planning needs.
  3. What level of service are you providing and more importantly, what are your clients paying for? Do you monitor the performance of your processes, look at where they are falling short and address these promptly? Do you review your processes to ensure they remain fit for purpose?  Are any group of clients being disadvantaged, for example, the vulnerable, particularly as technology progresses?
  4. Does your pricing represent fair value for clients? If you provide different levels of service depending how much the client is paying, can they choose the one they want, or is it based solely on how much they have invested? Are there potential conflicts of interest within your pricing structure? This is an ideal time to consider your fees and make sure they are clear and fair.

Act now

The ramifications of Consumer Duty will be wide reaching, affecting your dealings with everyone, except ‘professional clients,’ such as corporate entities and government bodies.

Expect the FCA to monitor and test, to ensure firms are acting on the legislation and assessing the impact of their actions. In the first instance, this means compliance consultants, like us, need to apply the guidance to the support we provide, so you understand and fulfil your obligations and where necessary, adapt policies, procedures and processes.

We can hear the collective groan from here at the prospect of more work, but this is about achieving the best results for clients. As long as you already have their interests at heart, it should simply be a case of benchmarking your service against the regulations.

More information about Consumer Duty can be found on the FCA’s website: https://www.fca.org.uk/publications/consultation-papers/cp21-13-new-consumer-duty. For advice about preparing for the new regulations, contact us on (0161) 521 8641 or email: [email protected]

Related Post