03 May 2022
The FCA believes that financial services don’t always work effectively for clients. Consumer duty was first proposed in May 2021 with the intention of setting higher expectations for the standard of care that firms provide consumers. A new consumer duty is set to be introduced by April 2023, with the underlying ethos being a shift in the culture and mindset of advice firms.
The FCA have identified practices that can cause harm: the sale of products or services that are not fit for purpose, exploitation of consumers’ behavioural biases and lack of customer support. Proposals for new regulation have been influenced by feedback from industry and consumer groups, helping to address the causes of harmful practices.
The consumer duty will expand on two existing FCA principles and will require regulated businesses to: act in good faith toward retail customers, avoid foreseeable harm to retail customers, enable and support retail customers to pursue their financial objectives. The new duty relates to four areas: products and services, price and value, consumer understanding and consumer support.
Firms must be proactive and take all reasonable steps to avoid foreseeable harm to customers by providing discernible information, offering products that are specific and relatable and offering constructive customer service, all at a price that is competitive and fair. Advice businesses will have to effectively ‘put themselves in customers’ shoes’ when communicating and designing products. These standards are undoubtedly already part of the mantra of many advice businesses but with the new outcomes-based approach, advisers will be expected to give every client 100% when it comes to the consumer journey, ensuring that they work diligently for each customer.
The FCA will supervise the implementation of these regulatory changes and if practices are found not to deliver for customers, senior managers will be held accountable and the FCA will intervene. The Executive Director of Consumers and Competition at the FCA, Sheldon Mills commented: 'Making good financial decisions is vital to financial well-being and trust, but too often consumers are not given the information they need to make good decisions and are sold products or services that do not offer the benefits they might expect. We want to change that. We’ve been working to set a higher standard for firms, to put more of the onus on them to act in their customers’ interests and get their products and services right’.
What does this mean for advice businesses? Potentially more investment in resources, compliance, technology, and management information. The new duty must be fully implemented by 30th April 2023 - two years from proposal to implementation for new regulatory requirements isn’t a long timeframe in the financial world and advice businesses will need to start addressing this sooner rather than later. There’ll be a requirement for advisers to show that their clients have fully understood the marketplace, including any pitfalls, proving that they’ve fulfilled their role without taking shortcuts.
How will advice businesses go about achieving this? How much time will it take and what implications does this have in terms of cost? Will advice businesses have to recruit additional team members? Outsourcing investments is an option and a growing trend - partnering with professionals can mitigate regulatory risk and allow advice firms to concentrate fully on the adviser journey and managing their business, ensuring that clients are looked after, and the business has an opportunity to flourish.
How will this affect the financial world going forward? The new duty will help to create an environment for healthy competition between firms, encouraging advice businesses to be innovative in the development of relevant and appropriate products and services. Adviser-client relationships will be strengthened as the customer will receive adequate information and communication, building trust and ultimately resulting in more people in the UK seeking financial advice. Implementation of the new consumer duty rules may require investment, as well as a shift in mindset, management, and overarching framework, but the long-term benefits for consumers and advice businesses are undeniable.
Scott McNiven, MPS Accounts Manager
Katie Poulson, Client Engagement & Marketing Manager
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