By Fiona Tait, Technical Director, Intelligent Pensions
Focussing on the impact on advisers is however missing the point, the key issue is the impact it will have on the end client. Will they, when it comes to it, even notice the difference?
What’s different about The Duty?
Key among the existing regulation are Product Intervention and Product Governance (PROD), which deals with the products sold to each consumer segment; and Treating Customers Fairly (TCF), which … well you get the idea.
Unfortunately, despite all this, the FCA retains concerns that clients are not always receiving fair value. They have therefore taken a different approach with The Duty. Where PROD and TCF are ‘rules-based’, The Duty is ‘principles-based’, meaning that advisers are expected to focus on the outcome of their advice rather than just the steps taken to deliver it. If this makes it harder to assess compliance, it also makes it harder to ‘get round’ the responsibilities that come with it.
PROD also left out one very crucial aspect – service. Advisers must provide evidence that their own services provide value to their clients, and that the cost of their services is not unreasonable in relation to the value they deliver. Under the principles-based regulation is no definition of ‘unreasonable’; as businesses they are expected to make a profit, but not at the cost of fair value to the client.
The principles to be considered are:
• What does it cost the firm to provide the advice services they offer - who does what in the firm and how long does it take them to do it.
• If there is more than one service level on offer, are the costs of each fair in relation to each other - clients who are receiving ‘lighter-touch’ services should not be paying the same as those who have more regular, and often more personal, contact.
• How do the costs of the relevant services compare with those offered by similar firms in their area.
The Duty also applies to the whole of the advice chain, meaning that advisers must assess their own services, plus any other ancillary services which are included. If any of these services aren’t delivering value to the individual client, they shouldn’t be paying for them. Under PROD, product providers and platforms were required to justify their products and charges to the regulator; under the Duty the responsibility is extended to advisers who distribute them, and this includes services provided by Investment houses, Discretionary Fund Managers and Technology providers.
Impact on the end client
Most clients will be largely unaware of Consumer Duty, even if their adviser has (dutifully) written to tell them about it. There are however some changes that may have an impact on the adviser-client relationship, either as a direct result of The Duty or the more subtle impact of FCA pressure on certain areas of advice.
Some clients will notice that their advisers are asking for more and more information about their needs and objectives. The FCA expect in-depth fact-finding and will not settle for vague estimates of expenditure or insufficient detail around the client’s lifestyle and expectations. Some clients, especially those with long-standing relationships, find this time-consuming and potentially intrusive, and advisers need to be very clear about why it is necessary. It is not a case of ‘the regulator makes me do this’, the reason is that more tailored advice improves the chances of achieving the outcome the client is expecting, and avoiding those which they don’t.
What these clients may find even worse is that advisers will also be challenging them about their objectives. The days in which everything was driven by what the client wants are now gone, and advisers are obliged to consider what they need. While the money does, of course, belong to the client, professional advice cannot endorse decisions which they believe will lead to foreseeable harm.
On the other side of the coin, the days of ‘you’re my adviser and I’ll do what you say’ are also numbered. Advisers must also ensure that clients understand their recommendations and the potential outcomes. This is not an easy, however the requirement is not that the client can follow in-depth tax calculations; they must simply understand what they have bought. If a client has a pension, they must know they have it; if they’re paying ongoing fees, they must know their fund will be impacted.
At the end of the day then, increased consumer protection is likely to come at the cost of increased consumer engagement. And that is not a bad thing.
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