Aegon - Thinking Ahead: Duty calls for advisersSteven Cameron, Pensions Director
For financial advisers only
In this article, our Pensions Director, Steven Cameron, gives a detailed view of the FCA’s new Customer Duty draft regulations and what this could mean for you as financial advisers.
The FCA expects its new Consumer Duty – the ‘new Duty’ – will cause a paradigm shift for all firms serving the retail financial services market. While there will be the same consumer principle and three cross-cutting rules for all firms, the implications of these could vary dramatically depending on whether you’re a bank, credit card company, fund manager, pension provider, platform service provider or adviser firm. Here, I’ll consider the possible implications for you as an adviser firm, including your role within the wider distribution chain.
Key Points I will cover in this article
- The new Duty will have very different impacts on manufacturers and advisers
- FCA focus is on firms ‘acting reasonably’ to deliver and evidence good consumer outcomes and fair value
- ‘Paradigm shift’ goes well beyond existing rules, such as Treating Customers Fairly (TCF)
- Consider the price and value of your service as well as that offered across the whole distribution chain
- Consider your approach to charging, how to demonstrate it’s reasonable between groups and how to evidence fairness
- Greater liaison between advisers and manufacturers on value assessments and target markets
- Adviser firms that influence product design must meet requirements as ‘manufacturers’ too
- An increased focus on financial wellbeing may support evidence
- The final rules are due in July, leaving relatively little time ahead of deadline on the April 2023
The new principle and cross-cutting rules
The new Consumer Principle requires your business to ‘act to deliver good outcomes for retail customers.’ The FCA is quick to stress this sets a higher standard than current rules including those concerning TCF and ‘clear, fair and not misleading’ communications.
The principle is supported by three cross-cutting rules requiring firms to:
- Act in good faith towards retail customers
- Avoid foreseeable harm to retail customers
- Enable and support retail customers to pursue their financial objectives
As adviser firms, it will already be second nature for you to put customers at the heart of your business and help them meet financial objectives. You also play an essential role in helping customer understanding, to allow them to make effective, timely and properly informed decisions. An increased focus on a customer’s broader financial wellbeing including creating a clearer picture of their future selves and how to finance future goals may help evidence this. Still, however aligned the Duty at high level appears to an adviser’s business, there will be many detailed areas of impact.
The Duty’s application also depends on the nature of the advice provided with different expectations where holistic and ongoing advice is offered compared to transactional advice or non-advised services.
Draft guidance for firms across the distribution chain
Within its draft guidance, the FCA has some sections aimed specifically at ‘manufacturers’ and others for ‘distributors’. The latter includes adviser firms and others such as platform service providers. Here, I’ve analysed what I believe will be expected of advisers, based on guidance for distributors although some FCA guidance may be targeted more at others within the definition of distributor. Hopefully, we’ll receive more clarity on this in July’s final rules and guidance, but each individual firm will need to assess the requirements based on their precise business model.
As the new Duty will apply right across the retail market, there are many areas where you’ll need to take account of the roles and responsibilities of other firms in the distribution chain. Under TCF, this was supported by The Responsibilities of Providers and Distributors for the Fair Treatment of Customers (RPPD) guidance. With the new Duty effectively superseding TCF, there’s a ‘rulebook’ reason why the FCA has revoked the RPPD. But if anything, I see the new Duty creating an even greater need for FCA guidance on how roles and responsibilities fit together. Aegon has called for replacement guidance to aid consistency across and between manufacturers and distributors including in important areas such as value assessments and target market definitions.
An adviser firm’s primary activities will fall within the definition of ‘distributor’. However, if your firm has an influence over the design of a fund or product you offer, you’ll also fall under the ‘manufacturer’ definition. This brings a whole set of other requirements which I’ve not covered here.
The four outcomes
I’ll now look in more detail at guidance offered to ‘distributors’ including adviser firms.
Products and services
Adviser firms must already understand the products they advise on. This requires information from manufacturers including product characteristics, identified target market and appropriate distribution strategies. The granularity of manufacturers’ target markets will reflect the characteristics, complexity and risk of consumer harm of the product. I expect manufacturers will be refreshing target market definitions as part of their new Duty preparations.
Adviser firms may wish to revisit how they describe their service proposition with the new Duty in mind. Distinct services should be designed to meet the needs of the average consumer within the target market. An increased emphasis on financial wellbeing as part of the service may be worth considering.
One specific example the FCA gives is if charging a fixed or minimum monetary adviser charge, the target market may need to exclude customers with small amounts to invest. For these customers, the fixed charge would not represent value.
Avoiding foreseeable harm is an obvious benefit of seeking advice. Advisers should consider how long a time horizon they take into account. If there’s an ongoing relationship, firms should regularly review if any new risks of harm become reasonably foreseeable – be that from external developments or changes in individual circumstances.
Whether or not ongoing advice is being offered has a big influence here. The new Duty isn’t pushing firms to always offer this. The benefits should be considered when designing services for target markets. Price and value aspects may justify ongoing advice in some, but not all, circumstances.
The new Duty will require adviser firms to regularly review they’re recommending products in line with intended target markets – and provide such information to manufacturers to support manufacturers’ reviews. If issues emerge, firms must act – including preventing further harm. Where appropriate, they should inform others in the distribution chain of their actions. This will further add to adviser provider information exchanges.
Price and Value
The FCA is rightly clear that value is not just about price. It’s the relationship between the overall price the customer will pay over their lifetime with the product or service, and the benefits they’re likely to receive. The FCA suggests any firm assessing the value of a service might consider what it costs them to provide it and market rates for comparable services.
In one example, the FCA refers to charges expressed as a fixed percentage of fund. Here, customers with larger funds pay substantially more than those with smaller funds, even though the costs of providing the service and the benefit the customer receives may be similar. Adviser firms should consider their approach to charging, if it’s reasonable and also how they will evidence fairness between groups.
Manufacturers will be required to undertake product value assessments and provide advisers with the outcomes of these. We’re calling for the FCA to facilitate some standardisation here so advisers aren’t faced with widely varying formats from different manufacturers.
One of the most significant aspects of the new Duty is that advisers will need to look not only at the value of a recommended product itself but also if after adding their charges – the customer is still getting fair value. As adviser firms are at the ‘end of the distribution chain’, the FCA expects them to look at the price and value of all components together as well as of their own service in isolation. This is potentially contentious as an advice service has a value in its own right, a key principle of the Retail Distribution Review.
In another new development, the FCA will expect firms to consider non-financial costs to customers including their time and effort and the ‘cost’ to them of allowing firms to use their data. Financial wellbeing can also provide benefits which go beyond the ‘hard numbers’
This outcome relates to all forms of communication, verbal and written. The many regulatory requirements around communications must continue to be met in full. But there might be scope to improve suitability reports – perhaps making them easier to navigate or reviewing the use of any generic paragraphs.
A key new requirement is to step back and consider if communications truly promote understanding, helping customers to avoid foreseeable harm and pursue financial objectives. Again, we see this wider consideration as an important aspect of financial wellbeing.
Where interacting one-to-one, communications must be tailored to the individual, and their understanding checked, using ‘opportunities presented during routine interactions’. This is something firms should also consider recording evidence of. Other than where regulations specify – such as advice on defined benefit transfers – firms don’t need to verify every individual customer has understood.
If issuing bulk communications, these should be designed and tailored to be likely to be understood by the ‘average’ customer in the target group – while also considering any characteristics of vulnerability. Significant communications should be tested both in advance and afterwards to assess effectiveness against expected outcomes.
Interestingly, the FCA also recommends communications should include the consequences of not taking action.
This outcome may be more relevant to those responsible for products once they’ve been purchased. But, adviser firms should consider aspects such as managing and monitoring complaints and carrying our root cause analysis.
What’s considered as ‘acting reasonably’ in terms of ongoing support is likely to depend on whether ongoing advice is being paid for. Again, a key consideration will be building an evidence base.
Whether under customer support or other outcomes, the new Duty places considerable emphasis on taking account of characteristics of vulnerability. Previous guidance has now become rules. Assessing which customers exhibit vulnerabilities is not a straightforward question and when offering ongoing advice, it’s important to reassess regularly. Firms should also consider how they adapt their service when a vulnerability is identified – and how they evidence additional support.
Evidence and Monitoring
The FCA is placing a major emphasis not only on delivering good outcomes but evidencing this through MI. Adviser firms should review all existing MI for completeness against the Duty, including making sure it truly is measuring outcomes, not just customer satisfaction, inputs or transactional data. Demonstrating improved financial wellbeing could be part of this. The draft guidance does say a firm’s MI should be appropriate to the nature, scale and complexity of its business, so expectations of adviser firms will differ from those of manufacturers.
A firm’s governing body must review and approve the firm’s assessment against the Duty at least once a year. Firms of all sizes will need to consider how best to demonstrate this.
What the Duty doesn't require
The FCA recognises no firm can protect customer from all risks or harm. They’ll not expect you to protect against risks they ‘reasonably believed the customer understood and accepted’. This could cover investment risks which were clearly explained.
The proposed deadline for the new Duty is April 2023 – even though final rules won’t be published until July 2022. Reflecting the scale and scope, the FCA suggests firms start engaging now with draft rules and guidance. While Aegon and others have lobbied for a longer timeline, there’s no guarantee of an extension. So, while some firms and sectors will be less affected than others, I’d recommend firms start planning earlier rather than later. An initial familiarisation exercise and high-level gap analysis across the four outcomes – and the cross-cutting rules – could be well worth the effort to support a more orderly implementation. Here at Aegon, we stand ready to support advisers on the journey.
To see more articles in our Thinking Ahead series, as well as other relevant insights – visit our Fresh Perspectives hub.