Consumer Duty is one of the biggest pieces of regulation the industry has seen since the RDR in 2012. This summer it will be two years on from the first implementation date, which applied to open products and services. But regulation experts have warned it is difficult to assess third-party firms’ compliance with Consumer Duty as part of due diligence requirements.
For a firm which does not have direct contact with end clients, it can be hard to know whether and how Consumer Duty is filtering down the distribution chain. The FCA addressed this topic in a recent paper where it talked about the responsibilities of distributors in regards to compliance with Consumer Duty, but emphasised the importance of due diligence rather than giving specific guidance.
“We will engage with firms to consider how we could provide more certainty on our expectations under Consumer Duty for firms in retail distribution chains, particularly those that do not interact directly with retail customers,” the FCA’s March feedback statement read.
Sparrows Capital is a provider of model portfolios composed of ETFs and index funds. Because its clients are IFA firms, it does not have contact with end clients, so it is difficult to know how these end customers are experiencing the outcomes of Consumer Duty rules in practice.
“We explain to them what we do and what we’re expecting to achieve, and what the risks and benefits are,” said Sparrows Capital compliance officer David Ogden. “It’s really getting some sort of comfort that they are passing that on in its entirety to end clients. That’s a very difficult thing to establish,” he said.
He talked about the complexity of some distribution chains, with fund providers, model portfolio providers, fund managers, platforms, advisers and clients.
“All those people want to do due diligence on all those people,” he said. It’s especially tricky to conduct this due diligence on platforms, he suggested. “I can ask them questions, but I can’t prove the answers are sensible or reflect reality. We should only really be partnering with IFAs we trust to distribute our products properly.”
Avoiding extra paperwork and cost
Part of the problem is finding a way to assess Consumer Duty adherence without creating more paperwork for firms, and more costs for end consumers. “I’ve talked to quite a few peers in the industry about this, to some much bigger firms than ours, and everyone is in the same boat,” Ogden continued. “We don’t really know what it is we should be doing, and we all want to do the right thing. What we don’t want to do is generate lots of paper exercises that mean absolutely nothing.”
Jo Fulford (pictured), wealth consultant at Simplify Consulting, agreed firms need more practical guidance on how to make sure Consumer Duty is being implemented correctly.
“It’s probably fair to say there is a spectrum of success when it comes to ‘living’ Consumer Duty,” she said. “The FCA recently commented that they’re seeing improvements where firms are proactively testing mass changes to communications, but I think firms definitely need more use cases of what good looks like in order to make effective changes and feel confident that the regulator is trying to support them rather than catch them out.”
She added the FCA’s ongoing focus on other areas, such as operational resilience, vulnerable customers, the advice boundary review and targeted/simplified advice could give firms more of a structure to follow. “In turn, this should enable firms to better evidence adherence and demonstrate benefit to consumers through reporting and MI. The challenge for firms is whether they have the right data available, at the right level, to evidence delivery of consumer duty requirements and whether the FCA have enough sight of a breadth of suitable data to support firms to define what good looks like.”
Operation resilience rules bed in
The transition period for operational resilience rules ended on 31 March, but this is just the start for firms. We can see this from the FCA’s consultation papers on operational incident reporting for third party and outsourcers, argued Fulford. She explained the regulator wants to understand the dependencies, and subsequent risks, caused by supplier failure.
While the FCA wants better visibility on the risks and how customer outcomes would be prioritised in the face of disruption, it does not want to add to the regulatory burden on firms. “Resilience absolutely should be built into business models, but there is a recognition from the FCA that legacy infrastructure vulnerabilities may require deep pockets to close the gap, and this isn’t always achievable in one go. The FCA’s expectation is that firms have a plan in place to maintain service and continue to close gaps as their resilience matures,” said Fulford.
What are the FCA’s priorities for the next five years?
On 25 March the FCA unveiled its five-year strategy, outlining its priorities over the medium term. Two areas of focus are technological innovation, and crime prevention.
“We want financial services to seize future potential,” the report said. “Doing so benefits the country through growth and innovation. By harnessing technological advances, for example, firms can improve their competitiveness, attract new customers, serve existing ones more effectively and ensure our markets – particularly the wholesale markets in which we excel – function better.”
The regulator acknowledged the “significant time, money and effort firms invest in their anti-crime systems” as it pledged to support them in using new technology to improve these controls and cut costs.
Fulford said the FCA’s plan is “full of promise to tackle some of the industry’s long-term problems.” It will encourage firms to share insights, expand the principles of Open Finance beyond banking, and promote trust and fair value through the Advice Guidance Boundary Review, she said.
Ogden is watching to see what clarity the FCA is able to give on the boundary between advice and guidance. “If firms are really going to provide this ‘targeted support’, I can’t see how that could ever be commercial, because half of the problem of the advice gap is that people don’t want to pay,” he said.
AI regulation on the way?
Financial services firms are experimenting with ways to use artificial intelligence to improve business efficiency. Looking forward, there may be some guidance to come on the use of AI, and how to avoid getting it wrong to the detriment of consumers. “The lack of defined regulation and controls must be address soon if meaningful progress is to be made harnessing the potential AI offers,” Fulford suggested. This could be another big shift firms must be ready for as they grapple with the existing changes to the regulatory landscape.