The new Consumer Duty is being described as the biggest regulatory overhaul since the introduction of the Retail Distribution Review (RDR) in 2012. As the regulatory screw continues to be tightened around client outcomes, how can advice firms make sure their investment propositions and advice processes stand up to increased scrutiny?
The final rules and guidance detailed within the Consumer Duty are expected to land by the end of July, before coming into effect in April 2023. It will cover areas the Financial Conduct Authority (FCA) considers integral to the firm and consumer relationship. This will include the support given by your firm to your clients, as well as assessing whether your proposition provides fair value. This is all in the name of ensuring products and services are fit for purpose and allow clients to make better informed decisions.
Does price equal value?
Price and value is one outcome where the FCA is increasing its vigilance, but just how do you go about defining value? Well, put yourselves in your clients' shoes and think about it at its simplest level. Is the benefit they're receiving reflected in the price they are paying? That means assessing the overall cost your clients pay to determine whether it's reasonable in relation to the benefits they're receiving. But value is much more than just the price paid.
Royal London recently carried out some research with advisers to establish how ready the advice community is for the FCA's shift in regulatory approach. The findings provided some interesting insight into perceived value when looking at the key factors considered when making an investment recommendation.
An overwhelming majority (87%) of advisers stated that they consider charges when making an assessment on an investment recommendation. Other key considerations included a provider's financial strength (69%), the track record of their investment offering (67%) and the range of investment options available (66%).
In the absence of absolute clarity from the FCA, defining value will naturally differ on a firm-by-firm basis. Advice firms running their own model portfolios will be required to assess price and value in a completely different way to a firm adopting a packaged investment solution for example. Equally, higher charging investment solutions will come under greater scrutiny. Regardless of the investment approach being adopted, firms will need to be flexible, yet consistent, in their assessments when it comes to the different pricing and service models within their propositions.
A nod to PROD?
There's a strong sense of déjá-vu within the Consumer Duty when it comes to reviewing investment propositions and target clients. The need to define and differentiate these were introduced by the PROD rules back in 2018.
PROD was introduced to tighten the requirements around the design and sale of products to ensure they meet the needs of identifiable target markets, are distributed appropriately, and deliver good customer outcomes. The Consumer Duty places a fresh impetus on these requirements, particularly when also assessing value, customer communications and wider support.
Rather than viewing this as increased regulatory burden, you could argue that this renewed focus can be used as an advantage to examine client banks. This can help you identify clients mapped to a solution that's perhaps no longer meeting their needs.
Equally, it might be useful to think about grouping clients into segments in a more robust and commercial manner. For example, grouping clients together based on their responsible investment preference can be used as an input into this process. It can help you identify and map where the responsible investment opportunity lies across your clients whilst also helping assess the value provided across different offerings. The key is clearly defining and differentiating your different products and services.
The new and the old
So there are new requirements to think about as well as strengthening existing rules and guidance. With the FCA shifting their approach to regulation, the litmus test for advisers is proving that you treat your clients ‘well'.
As we build momentum to the final rules and guidance, it'd make sense implementing procedures to regularly review and document your different processes, if you haven't already - starting from the way you communicate with your clients, to your investment proposition and everything else in between.
April 2023 may seem like a long way off but if the last decade is anything to go by, the regulatory clock will continue to tick faster and faster.
Read the research to get closer to what advisers are saying about the new Consumer Duty.
This post is a paid post by Royal London
