The Consumer Duty: A platform’s perspective
The final rules and guidance for the Financial Conduct Authority’s (FCA) Consumer Duty were published in July and are still making headlines.
Late in September, for instance, the FCA continued to urge IFAs to take this ‘significant regulatory initiative’ seriously – perhaps due to research published by Royal London in May, suggesting almost one in five advisers have not even heard of it.
Going live in July 2023, the Duty is comprised of three cross cutting rules with four outcomes seeking to raise and clarify the standards of consumer protection.
By acting in good faith and avoiding foreseeable harm to retail customers, and enabling them to pursue their financial objectives, the FCA hopes to achieve good outcomes in products and services, price and value, consumer understanding and consumer support.
“Consumer Duty is nothing more than what a good adviser already does – it just formulates and cements that in a policy statement”, Andrew Tiley, Fundment’s Chief Product Officer, is keen to clarify from the off.
This new Duty, its language and ambitions, does, however, highlight a few key areas that the industry and the FCA must work together to provide the solutions to – and Ola Abdul, Fundment’s CEO, and Tiley hope these areas will become a catalyst for change that will start to equalise what the expectations of advisers and consumers should be from the industry at provider level.
Evidence and quantification ‘could be tricky’
From the regulator’s perspective, the most important principle in the new Consumer Duty is consumer understanding.
As the FCA’s guidance rightfully notes, with the turbulence of the current macro-economic climate, it is ever more important that the industry is equipping retail customers with the insight they require to make the smartest financial decisions for their circumstances.
However, this doesn’t come without its challenges, for both adviser and platform provider.
“The US... has a metric for in-specie transfers of three days. If similar benchmarks were set here, we could argue anyone not meeting that is not meeting the benchmark for platforms to provide value.”
“We have always known there are advisers between us and the retail investor,” says Tiley, “but the Consumer Duty now requires everybody in the chain to evidence they provide communications and disclosures in a way the consumer can understand, and that could be very tricky.”
Importantly for Abdul and Tiley, evidence and quantification is a challenge elsewhere in the Duty too: “The most important element is the value for money component”, Abdul notes, “if by virtue of being most controversial.”
Price and value, he points out and as the regulator says in its policy statement, are different things. The terms work together, but where price is an absolute, value is subjectively applied, and critics can justifiably argue that this choice of terminology opens up the industry and regulation to grey areas. As Abdul notes, “Some don’t quite understand what they are supposed to do.”
The challenge of equivalency
As an intermediary, Fundment is ostensibly a gatekeeper for Consumer Duty obligations.
In the case of value this means that, as Abdul explains, “In some cases, we could switch off advisers’ access to products if we don’t believe they offer value for money to the end customer.”
Whilst the Duty makes it clear there is no formal fiduciary duty between a platform provider and consumer, Abdul and Tiley say Fundment do indirectly police it. And where the evidence from machine intelligence and data shows the course of action is unavoidable, the relevant advisers or products would then be managed out.
To add to matters, advisers will also expect platforms to help them communicate value for money to their retail customers, but as of yet the documentation for this is unknown.
“There is no equivalency in the Consumer Duty.”
“There is a real risk of massive inconsistencies, because platforms are more than likely to approach this differently”, says Abdul. It seems a template would be much welcome, like that of the requirements on illustrations, mandated to be provided in a consistent way. And yet, as Tiley emphasises, “There is no equivalency in the Consumer Duty.”
Equivalency is a far-reaching challenge, because advisers will need to assess if platforms are providing them with value too. “How do you assess that when there is no benchmark right now?”, Abdul asks.
Benchmarks
Without equivalency, advisers are left without the adequate terms to identify the platform and products which would offer their customer the best value service. “The US, for example, has a metric for in-specie transfers of three days. If similar benchmarks were set here, we could argue that anyone not meeting that is not meeting the benchmark for platforms to provide value.”
These practical implications of the new Duty must be addressed before the FCA will truly see the step up in good outcomes the new Duty has the potential to activate.
Abdul and Tiley hope identifying this will push platforms to start adopting industry wide standards, believing there must and will become a standardised Service Level Agreement (SLA) benchmark soon.
Such industry-wide standards will benefit advisers fulfilling their duty to consumers and comply with the FCA, and in turn the retail customers themselves.
“It’s not as simple to say these are the rules for the advisers, these are the rules for the providers”, Tiley emphasises; in the intricate ecosystem of platforms, advisers and retail customers, good change in one area begets good change in another.
On the platform side of things, the industry must come together to make the most of the opportunities the Duty has set before them – because the opportunity is there.