I think that for many people, Consumer Duty seems to have been with us forever. It is only two years ago that we were putting together our implementation plans.
The Financial Conduct Authority’s (FCA) Consumer Duty was first announced in 2021 and came into effect for open products and services on July 31, 2023, and for closed products and services on July 31, 2024 according to the Financial Conduct Authority. The Duty sets higher standards of consumer protection within the financial services industry.
It is interesting to consider how this has changed the practices of many firms and seems to have made little difference to some firms. One of the firms that I spoke with recently said that it simply brought other firms up to the standards that it has been practicing for years.
Another of my clients used to be given a hard time by a network for the way she conducted her business. Her fact finds were non-existent and her suitability letters were emails outlining the client objectives, her solutions and the costs. Fairly short. It was pleasant to be able to confirm that in fact she was entirely compliant with the Consumer Duty. Client centric, clear explanations, clear costs and then the promise to communicate regularly and review the solutions.
It is a shame that the financial services industry is so distrusted as an industry that we need to give such fulsome explanations
My experience has led me to the belief that the ability to explain things simply and clearly is a skill that confirms expertise. Indeed, it is such a skill that few possess. It requires confidence and self-belief to know that you are doing the right thing.
It is a shame that the financial services industry is so distrusted as an industry that we need to give such fulsome explanations. To explain the mechanics of products rather than the benefits of their use to clients. If you buy a car, the salesman has no need to confirm that you understand how a combustion engine works. You are interested that it is comfortable, easy to drive, will perform an accordance with your driving style and is reasonable economical to run. Some people may also be interested what colour it is.
Some firms have had fun segmenting their clients and giving the different service offerings fancy names. But this segmentation also made them consider what they are charging their clients. It was an interesting and useful exercise to consider what services they offer to clients and how much time those services took. When they did their calculations about their services, they found that they would actually need to increase their rates to be paid for their time. Interestingly, their charges per hour were a magnitude higher than I charge them! Food for thought.
The FCA acknowledges that there will always be an element of cross-charging, but this can be greatly reduced by using tiered charging rates. There will always be those clients who are time-thieves and others who make very little contact. It was encouraging to see how these firms wanted to be as fair as possible to as many of their clients as possible.
Vulnerable clients have been a focus of the FCA within Consumer Duty. This is all about ensuring that we are as agile as possible to provide services to clients. The recognition of vulnerability has become much more defined. The recognition of vulnerability is the first step, but the most important step is what we did about it. The recording of vulnerability is important to ensure that the client will receive the level of attention that they require to bring them to a position where they can make an informed decision that they understand.
It is interesting that our geopolitical system does not seem to follow this ethical principle. It seems that “deals” are offered to people when they are in desperately vulnerable situations. Extortion would have been the old-fashioned description of this method of dealing.
The Consumer Duty is focussed on maximising the ability of consumers to pursue their objectives. It is this pursuit that is addressed by the need to review client arrangements regularly. Normally, reviews should be carried out annually, but this will depend on client circumstances and their life stage. The main thing is that reviews are carried out on the schedule that has been promised to the client.
I have been working with my firms to make the point that there are two stages of review. The most important one is the review of client circumstances. Has anything in their life altered since the last meeting? Family? Finance? Job? Other capital expenditure plans? What are their current objectives – short and long term?
Step two is to look at what solutions they have in place. Are the plans in place going to enable them to pursue their current objectives? If not, what changes need to be made? Do they have the money to implement all the solutions or will they need to prioritise.
So, Consumer Duty has been an opportunity for firms to review how their business is running and how able it is to service their clients to enable them to pursue their objectives.
Coupled with that, it has been an opportunity for them to consider their own profitability. The FCA wants to see profitable firms as healthy firms are more likely to behave better towards consumers. The FCA is not interested in price, but it is interested in value for clients. A difficult equation to work out.
As I may have said previously, I count the Consumer Duty as the gift that keeps giving. For many firms it has not made much change to how they deal with clients. If anything, it has simply confirmed that they have been doing the right things all along.
