13th February 2023

Consumer Duty or just new TCF clothes for the Emperor

The FCA has published the final rules for Consumer Duty - PS22/9: A new Consumer Duty, alongside finalised guidance FG22/5. 

IFA’s have until 31 July 2023 to fully implement the Consumer Duty requirements for new and existing products and services, and until 31 July 2024 for closed products or services.

Worryingly a few months ago, research showed that almost 1 in 5 advisers (19%) said they hadn’t heard of the new Consumer Duty??

There are three elements to how the new Consumer Duty should be structured, they are:

Consumer principle

• Firms must act to deliver good outcomes for customers

Cross-cutting rules

• Act in good faith towards customers
• Avoid foreseeable harm to customers
• Enable and support customers to pursue their financial objectives
• Products and services
• Price and value
• Consumer understanding
• Consumer support
• it moves the overarching regulatory framework from a ‘principles’-based approach to a ‘rules’-based approach.

Four outcomes

Whist the concept of Consumer Duty is highly laudable, the world of financial services has been plagued by the failure to use plain English, which I think is at the core of some considerable consumer detriment.

In keeping with post millennium modern thinking, the 2015 initiative, (‘Treating Customers Fairly (TCF), that cost a fortune to design and implement) has now, seemingly, been re-badged and it is to be known, going forward as Consumer Duty(CD). 

This TCF link last updated in March 2021 is well worth a retrospective look, I think you will see what I mean.

Is this yet another attempt to get the delivery of financial advice and the associated products much simpler. Put bluntly, reducing the opportunity for consumers to claim, say some 20 years later, that they were miss-advised? If so, the idea should be applauded. But will it?

As the 31^st July approaches, how did it get to this stage? 

All the regulators listed below really should know but will prefer not to admit that it was really all their fault.

During my, some 40 years in the industry, overseen by NASDIM, FIMBRA, PIA, FSA and FCA I have seen regulators go out of their way to make life more complicated for consumers and regulated firms, most often to justify an existence. And when they failed, another regulator was born, often with the same staff to try getting it right all over again and failing, a form of perpetual motion? 

Over the years we have seen rules replaced by principles then discarded. Principles opened the door for retrospective regulation opportunities undreamt of. 

I did wonder, cynically, if that was a deliberate attempt for the regulators of the day to embark on a fishing expedition with fines and punishment being the ‘Principles’ catch hauled in?

Unlike principles, everyone is that little bit safer with rules based regulation. It is devised, written and imposed by a regulator to be obeyed at all times to avoid incurring a penalty, normally a whopping great fine that the government rather than the regulator of the day can in ‘Boris’ speak, ‘spaff’up the wall, or at worst for very bad behaviour, some time in prison. 

These days most of the seriously bad behaviour we read about often involves unregulated products or activity. Often, when it hits the press, relating to events that happened years ago that for some reason has taken ages to see the light of day followed by a fine or a court date and a striking off!

The challenge for IFAs in achieving ‘Consumer Duty’ nirvana is that they will have to consider prices for both their services and those of provider firms whose products form part of the advice process to calculate fair value and they must have it sorted by end of July. Providers had completion deadlines set for April and July.

This was a golden opportunity to think not only about consumers but to provider responsibility and what could be done.

For many years, regulatory responsibility has ended at the door of the adviser, after all it was and still is about the advice and never the product. 

If the product does not perform its intended purpose the adviser ‘cops’ the blame. The rationale reminds me of that old Billy Bennett music hall song with these lines: “It's the rich what gets the pleasure, It's the poor what gets the blame”. In this case the least well-resourced part of the advice, sales and distribution process is nearly always the only one in the firing line.

Given that any negative advice outcome is in almost all cases part of the product distribution chain, surely, subject to certain suitability confirmations from the adviser and the clients confirming their understanding of what they have bought into, responsibility if any should fall at the Provider or manufacturers door. 

Or, how about regulated financial products being certified as ‘fit to fly’ by the regulator then redress could fall at their door?

Enacting the above should see fewer miss selling opportunities, fewer FOS answerable complaints and virtually no redress, and, a 100% delivery of all three elements to how the new Consumer Duty should be structured,

Now that would represent a regulatory landmark!

Advisers have only got another four and a half months to consider fair value, make an assessment, and then make changes.

We have produced some thoughts to help.

This sounds for many small firms like more work they just do not need, more costs in working it all out or paying somebody else to work it out for them. Looking at this with a cynical eye perhaps many could be asking, “I thought as an IFA I already did this? After all wasn’t that what the TCF initiative was all about way back in 2015”?

Going off-piste a bit, word had reached the ‘Emperor’ about these two master tailors and their fine cloth. He thought, “I am the smartest and the most excellent Emperor! I will be the first to get ‘suited and booted’ in this most excellent ‘clobber’?!

Remember, only people who were smart and of the most excellent character could see the suit made of this magic cloth (he, she, they to avoid any miss gendering) was pretending to wear. People who were not smart and not so excellent (he, she, they) would see the Emperor was wearing nothing at all, completely naked, but were too afraid to tell the Emporer. 

Is this latest regulation mission a case of the ‘Emperor’s new clothes? 

The FCA has said the consumer understanding and outcome of the most ‘excellent’ consumer duty should benefit firms by reducing complaints and driving healthy competition.  

Its aim is to reduce poor outcomes by improving the information individuals are given about a product or service.

The FCA’s Richard Wilson said “In a nutshell, we want consumers to be given the information they need at the right time and presented in a way they can understand so that when they're applying for, say, a loan or taking out insurance or making an investment, they can understand enough about the product, say how it works, its benefits, risks and costs to be able to make good decisions,” 

He added: “That's really important because we want consumers to be in a position to make informed decisions and choose products and services that best meet their needs.”

In addition to the benefit for consumers, Wilson outlined how the FCA expects the consumer understanding outcome to also benefit firms “because they won't be competing against other firms who are perhaps misleading or manipulating consumers with their communications”.

Not sure how that helps, how will the firm or the consumer know? Now I may be getting on a bit, but this surely is TCF wearing a fine new set of regulatory clothes to justify why regulatory fees keep going up?

Alan Lakey observed:

“There is various behaviour that good advisers currently perform that will become mandatory for all advisers such as:

1. Reviewing all products and having some mechanism to prove this with commentary on why or why not to changes 

2. Assessment of communications - plain English, nothing missing, etc.  This of course interfaces with the fact that FCA/FOS don’t like Suitability Letters beyond 4 pages

3. The reviews will extend to platform reviews, product reviews, charges reviewed, etc

FCA wants records retained so it is onerous and will put up adviser charges to balance.

The usual sledgehammer to miss the nut!

It won’t stop the lCF and other scandals, of course”.

Another acronym that regulators should think about is KISS. Keep it simple, stupid (KISS) is a design principle which states that designs and/or systems should be as simple as possible. Wherever possible, complexity should be avoided in a system—as simplicity guarantees the greatest levels of user understandings, acceptance, interaction, and outcomes.

It is a principle that in fact should be a rule for creating regulation that works. 

I would like to know if you think Consumer Duty (CD) is a huge regulatory advance, a complete waste of time or even as I think a case of rebadging something that existed already by making your business life more difficult?

Do share your thoughts via this short, anonymous survey

Results will be sent to the FCA.

Panacea Comment, Regulation