Consumer Duty one year on – what might happen next?

Bob Hunt

Bob Hunt

3 July 2024
As we approach the first anniversary of the Consumer Duty rules at the end of the month, it seems an appropriate time to reflect on the changes mortgage advisers have implemented over the past year and how they might prepare for what will undoubtedly be a next phase. This as we know is not a ‘one and done’ exercise.

Consumer Duty represents a shift towards prioritising consumer interests, ensuring positive client outcomes with a strong emphasis for each firm internally on the ways and means by which they achieve this and how they can prove it.

As we move forward, it might well be that the Financial Conduct Authority (FCA) now starts focusing more sharply on slightly more nuanced aspects of the advice journey, such as fee-charging and commission structures. Mortgage advisers must already be proactive in aligning their practices to ensure compliance and maintaining consumer trust and I wonder whether fees and commissions will be spotlighted next.

Since the implementation of the Consumer Duty rules, mortgage advisers have had to navigate a series of critical changes aimed at enhancing consumer outcomes.

Key achievements include:
  1. Enhanced consumer communication: Advisers have needed to improve the clarity and transparency of communications with clients. This includes simplifying jargon, clearly outlining the mortgage process, and ensuring clients understand the terms, conditions, and implications of their choices.
  2. Better product governance: Firms have to be diligent in aligning their product offerings with the specific needs and circumstances of their clients. This has involved conducting rigorous assessments to ensure the suitability and sustainability of products recommended.
  3. Improved record-keeping: One of the FCA’s focal points has been the maintenance of high-quality records. Mortgage advisers have had to document interactions meticulously, capturing the rationale behind product recommendations and the advice provided. This record-keeping is not just for compliance but serves as a defence mechanism in audits, proving that client interests were prioritised.
  4. Robust complaints handling: Processes for handling complaints have needed to be strengthened. Advisers are now required to investigate complaints more thoroughly and resolve them in a timely manner, ensuing any systemic issues identified are addressed promptly to prevent recurrence.
Now, of course, there may have been a temptation here to say, we did all of this before Consumer Duty; however, as we know, the FCA would certainly not have seen it that way and, from a Paradigm perspective, we have been impressed by the level of engagement from our member firms and how they’ve wanted to complete and show their improvements in these areas.

Talking specifically about the FCA’s emphasis on record-keeping, this of course, is not merely for compliance; it is also a cornerstone of the regulatory audits they will continue to carry out. Mortgage advisers can anticipate the FCA will continue to scrutinise Consumer Duty activity to assess whether firms have genuinely prioritised consumer interests.

Key areas of focus will include:
  1. Documentation of advice given: Auditors will examine records to ensure the advice provided was suitable for the client’s circumstances at the time. This includes the adviser’s rationale for product recommendations and evidence of informed client consent.
  2. Compliance with suitability assessments: Firms demonstrating they have conducted thorough suitability assessments and these have been regularly updated in line with changing client circumstances and market conditions.
  3. Transparency in fee-charging: The FCA is likely to audit how fees are structured and communicated. Mortgage advisers should ensure their fee structures are transparent, fair, and commensurate with the ongoing service provided to clients.
However, perhaps now the big question is what happens next? What will be the next Consumer Duty focus, alongside a continued appraisal of what has been achieved so far? I think, as the FCA gears up for its next phase, mortgage advisers may wish to take cues from developments in the IFA space, particularly regarding fee-charging practices.

So, for example, the FCA continues to scrutinise IFA fee structures to ensure they are proportionate to the services provided. Mortgage advisers may wish to review their own fee models to ensure they align with the ongoing value offered. This includes providing a transparent breakdowns of fees and linking them directly to the services clients receive.

Indications from the FCA show it is already scrutinising the practice of ‘loaded commission’ where premiums to the consumer are increased in order to generate an enhanced commission to the adviser. And this is relevant to IFAs too, many of whom are also active in this space – we know this as they use our protection proposition.

Although it is unlikely this will be outlawed yet, adviser firms will need to justify the enhanced commission by clearly outlining the additional work they have done, or will do, over the life of the policy for the client in order to justify the enhanced premium.

The spend on doing so will need to be clearly defined to ‘prove’ the customer is getting a service ‘above and beyond’ what is expected from a ‘standard’ adviser-client relationship, as clearly the consumer is paying a higher price for the product which could be substantial over the length of a typical policy

Advisers might also want to get prepared for an enhanced disclosure process regarding their fee and commission structures. This includes clear explanations of how fees are calculated, what services are covered, and how commissions impact product recommendations.

As the Consumer Duty rules reach their first anniversary, mortgage advisers should reflect on their progress and be proud of what they have achieved and how, once again, they’ve coped with a major evolution of the regulatory landscape.

However, this is just the start. Embracing transparency, aligning fees with service value, and maintaining meticulous records will be crucial. By anticipating the FCA’s areas of focus and proactively adapting their practices, advisers can ensure compliance, enhance consumer trust, and foster long-term business sustainability.

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Paradigm Consulting is a Member of the Association of Professional Compliance Consultants and also the Consumer Duty Alliance.

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Office address: Paradigm Partners Ltd, Paradigm House, Brooke Court, Wilmslow, Cheshire, SK9 3ND
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Paradigm Mortgage Services LLP
Office address: 1310 Solihull Parkway, Birmingham Business Park, Birmingham B37 7YB
Registered in England and Wales. Company No: OC323403. Registered Office: Paradigm House, Brooke Court, Lower Meadow Road, Wilmslow, SK9 3ND
Paradigm Mortgage Services LLP is a Limited Liability Partnership.

Paradigm Protect is a trading name of Paradigm Mortgage Services LLP
Office address: 1310 Solihull Parkway, Birmingham Business Park, Birmingham B37 7YB
Paradigm Mortgage Services LLP is registered in England and Wales. Company No: OC323403. Registered Office: Paradigm House, Brooke Court, Lower Meadow Road, Wilmslow, SK9 3ND
Paradigm Mortgage Services LLP is a Limited Liability Partnership.