One year ago, the FCA put Consumer Duty regulation into action, calling on firms to review customer interactions with a focus on identifying vulnerability, clear communication and fair value.
The regulation resulted in a year of adjustments in the industry, with a reassessment of client fees for many companies and new systems to document the advice process taking place.
Although the goal of Consumer Duty was to improve transparency and standards for investors, regulation has also put a strain on some firms as they attempt to keep pace with the changes.
Research from the lang cat flagged that the strain of Consumer Duty has led to a widening of the advice gap, with over half of respondents reporting that they have stopped advising clients as a result of Consumer Duty. Among those that have made cuts, 12.7% of clients were no longer serviced, the lang cat found. They estimated that including those that could be affected by this in the near future, it could lead to 1.5 million clients being cut out, in total.
See also: UK investment giants: British ISA proposals could fall foul of Consumer Duty
Alison Gay, senior public affairs consultant at the lang cat, said the most common change as a result of the regulation has been how firms communicate with clients. This has led to better value for a particular sector of clients, but comes as a double-edged sword for those outside of that sector, who now face a challenge in receiving advice.
“The increased cost of serving clients and the widening of the advice gap as a result of the duty suggests the FCA should be reviewing whether the reporting and evidencing requirements are set at the right levels, especially for smaller firms. It can’t be a good customer outcome if the adviser is spending excessive amounts of time on documentation rather than serving the client, and at the moment it feels like the balance isn’t yet right,” Gay said.
“And the FCA appears to agree because it’s just published a consultation to address potential areas of complexity, duplication, confusion, or over-prescription which create regulatory costs with limited or no consumer benefit.”
On 29 July, the FCA announced a review of where financial regulation was overly complex or overlapped with Consumer Duty regulation, calling on the financial services industry to point out specific areas.
The FCA hopes the changes will lower costs for firms, which could create a more accessible investment environment.
Tom Selby, director of public policy at AJ Bell, welcomed the review period and said its an opportunity to ensure regulation is “fit for purpose”.
“The development of reforms to the advice guidance boundary, including the potential for more personalised guidance through ‘Targeted Support’, will require firms to be given flexibility to design guidance interventions based on their understanding of customer behaviour,” Selby said.
“The demands of the Consumer Duty on firms to aim for ‘good outcomes’ for customers should reduce the need for overly prescriptive rules. Instead, businesses will benefit from additional flexibility to deliver propositions that work for their customers, in line with the overarching objective of delivering good outcomes under Consumer Duty.”
However, advisers have already started their shift away from small clients in an effort to contend with the reporting requirements and additional time spent on paperwork, which research from Octopus Money shows has more than doubled for a single advice case. As a result, its report found that 75% of advisers have marked serving smaller clients as a “significant challenge”. And while a main aim of Consumer Duty is fair value, over a third have increased fees for clients with a smaller portfolio.
Ruth Handcock, CEO of Octopus Money, said: “In the pursuit of improved client outcomes, we’re inevitably seeing a short-term tightening of advice availability rather than long-term innovations that will propel the industry forward. If workloads are doubling, and minimum fees are increasing, it feels inescapable that the advice gap will widen as more and more clients are unable to access good quality financial advice.
“Despite these initial, unintended consequences, I feel buoyed by the chance for a second wave of opportunity after this initial response. Innovation to serve clients and measure outcomes in new ways takes time, investment and collective action. As an industry, we have to foster an environment that enables everyone to adapt their service models to serve all clients effectively, regardless of their asset size.”
Approaches to client relationships have differed from firm to firm, but Helen Lovett, chief operating officer at Foster Denovo, said the firm looked at value for clients on a “granular level”.
“What the Consumer Duty meant for us was an opportunity to carry out a root-and-branch review of our service; essentially, an individual appraisal of each of our 4,000-plus private wealth clients, establishing what element of the service was most valuable to them, and creating a bespoke fee agreement,” Lovett said.
While the regulation has put an additional workload on the industry, Alan Wateridge, client director of Wealth at Redington, said the changes have “undoubtedly raised the bar on consumer outcomes”.
“We have spoken with firms who over the past year have reviewed systems and processes to improve how they communicate with their customers. We have also seen a continued trend in the reduction in fees and charges as firms continue to review how their products and services meet client needs and offer fair value,” Wateridge said.
Wateridge also pointed out that Consumer Duty has started to create change for the reputation of the industry, with issues like mis-selling seeming “less likely” in a post-consumer duty environment.
“Consumer Duty has helped act as a catalyst for firms to review and improve their internal processes – firms seem more open to challenge their internal procedures to ensure they are working in the best interests of their customers. It was clear most advisers have good intentions, but the regulation has helped to drive improvements, notably in client communication, retirement income advice and fee structures.”
In addition to a year of change with consumer duty, the industry has faced a time of mergers and acquisitions throughout advice practice and investors have been hit with high inflation levels, driving a competition for price. Benjamin Reed-Hurwitz, EMEA research leader at ISS Market Intelligence, said these factors in combination with consumer duty have turned heads towards model portfolios.
“Consumer Duty is only a year old meaning its full impact is still to set in. Current observable data, however, points towards Consumer Duty magnifying the impact of many of the trends that preceded it,” Reed-Hurwitz said.
“Pricing pressure, consolidation of advice practices and the growth of centralised investment propositions are three such trends. All intersecting and reshaping the UK advice paradigm.”
As consequences of Consumer Duty begin to take shape, whether it be through where advisers place attention or what products are pushed to the forefront, Wateridge said clear guidelines for companies and an increased use of technology to help ease some of the record-keeping burden can aid in the transition.
“It will be interesting to see how firms continue to implement changes and how the FCA is to enforce the regulations. I think its important firms continue to conduct regular external assessments to ensure new policies put in place are carried out in practice, and these evolve based on experience – monitoring their own data and ensuring MI remains relevant will be important,” Wateridge said.
Richard Parkin, head of retirement for BNY Investments, said while the regulation may not feel as if it’s “business as usual” yet, even those who felt the regulation was an unnecessary distraction must now “recognise that they need to take it very seriously”.
“One year on from Consumer Duty it’s clear that this isn’t just another bunch of FCA rules but a fundamental shift in how the sector is regulated. After what was quite a painful implementation for many, firms are starting to recognise the benefits of having a clearer understanding of where and how they add value,” Parkin said.
Gay also said that firms should recognise “everything the FCA does in future will continue to be viewed through a Consumer Duty lens”. She expects the FCA will begin to increase the action taken against firms who do not comply with the regulation.
“Generally, firms are supportive of the objectives of consumer duty and understand why it was brought in. But for smaller firms in particular the amount of extra admin created by the duty is non-negligible and is seen by some as taking advisers away from the core activity of actually providing advice,” Gay said.
“I don’t yet think we’re at a stage where firms have the duty embedded in their practices in such a way that it’s entirely second nature, but we should be heading in that direction.”
