The FCA plan to take Consumer Duty seriously….and you should too

By: Adele Gray

09/11/2022

In a recent speech made at the PFS’s Festival of Financial Planning, Therese Chambers, Director of Consumer Investments at the FCA, made it very clear that the FCA will be taking the enforcement of the New Consumer Duty rules very seriously and that firms must prepare very carefully for the implementation in January 2023.

Whilst there has been a degree of scrutiny under the comparable “Treat Customers Fairly” charter, Chambers has warned “I cannot emphasise enough that this is a different lens to what you have been used to and even though the rules are not yet in force it requires your active participation to understand the degree and extent of the cultural shift that it entails. A tick-box approach to detailed regulatory requirements will simply not be good enough as that will never be sufficient to answer the questions of whether a firm has secured good outcomes for its customers”.

What are the new rules?

There are three measures that make up the new Consumer Duty rules:

1. The overarching principle requires that “firms act to deliver good outcomes for retail clients”.
2. This principle is underpinned by three cross-cutting rules, whereby firms must act in good faith towards retail customers, avoid foreseeable harm to retail customers and enable and support retail customers to pursue their financial objective.
3. There are also four outcomes, a suite of rules and guidance setting more detailed expectations for a firm’s conduct according to the four specific outcomes that represent the key elements of the firm and its consumer relationships:

• Products and services
• Price and value
• Consumer understanding
• Consumer support

The fundamental challenge

Arguably the crux of the challenge in meeting the new rules lies with client communications. Firms must get rid of wordy and obscure legacy documents and ensure that their communications support consumer understanding of their products. Consumers need to be equipped with the correct information to make informed investment decisions and so pursue their financial objective. Services, costs and charges and suitability reports must all be available in a clear and straightforward manner.

As Chambers said, “Poor disclosure has been a consistent theme in the results from our previous supervisions reviews……too often firms respond to the communications challenge in disclosures that re over lengthy, over complex and fundamentally unclear. We are expecting better standards under the Duty than the current rules”.

How can Research in Finance help?

In 2013 Research in Finance launched a study designed to provide asset managers with a deeper understanding of end consumer motivation when investing. This was in direct response to the FCA’s implementation of its Retail Distribution Review. Ten years on this study has continually evolved to meet the needs of asset managers and is perfectly positioned to support the new FCA Consumer Duty requirements.

During the latest quarterly wave of our Retail Consumer Interest Study we asked 304 respondents to rate a list of potential improvements that might help build their trust with asset managers. The response was:

How to build trust with asset managers

Source: RiF Retail Consumer Interest Study Wave Q3 2022

It seems that a clear fee structure and transparent explanations for underperformance remain the top factors for building investor trust with asset managers. Simplifying information, providing financial education to young people as well as providing clear fees also saw the greatest increase in perception since the previous wave (all up 6%).

Here at RiF we can help with consumer understanding in several ways:

• We conduct an in-depth annual survey of private investors, designed to gain a deeper understanding of retail consumer investment motivation.
• We offer a community component for asset managers to test their marcomms material amongst private investors, ensuring suitability for all consumers.
• We can look at the understanding of key documents, websites, factsheets, and communications and can provide consumer feedback, along with recommendations for enhancements.

The rules now need to be met within a short timeframe (firms with open products and services must action their plans by the end of July 2023, those with closed books have until July 2024) and we are here to support you as you plan and implement your response to the new Consumer Duty.

To find out more about how we can help with your Consumer Duty requirements, please get in touch with Mick Hrabe or Richard Ley. You can also call us on +44 (20) 7104 2235.