Counting down to the Consumer Duty

Fiona Hanrahan

Hello and welcome to our podcast.

My name is Fiona Hanrahan and I'm an intermediary development and technical manager here at Royal London. And today, I'm delighted to be joined by three very special guests. We have Jamie Jenkins, who is Royal London’s Director of Policy and External Affairs. We also have Clare Moffat, who is our Head of Development and Technical team, and Ryan Medlock, our Senior Investment and Development Manager.

Now we're talking about the new Consumer Duty today, and the FCA is currently putting the finishing touches to the new Consumer Duty. And we are expecting to see the final rules and guidance by the 31st of July. And as we count down to that date, we've launched some new research which explores how advisers are getting their businesses ready for what the FCA has described as a ‘fundamental shift’ in its approach to regulation.

So in this session we are going to dig into the themes which have emerged from this research and discuss how we can best support advisers within these new rules come in.

If you'd like to read our full research report, you can download a copy from our website at adviser.royallondon.com/Consumer Duty.

So then the new Consumer Duty is almost upon us, let's start by sharing your thoughts on how you see the industry changing when these new rules come into play.

So let's start off with Jamie then, please.

Jamie Jenkins

Thanks, Fiona. I think this is really quite a big shift, and I know not everybody sees it that way just yet. But I think it's an evolutionary shift from what was what is treating customers fairly, if you like, in the current regime to treating customers well and proving it. I think really sort of putting yourself in the customer's shoes and understanding whether or not they got a good service, a good product, and the right outcome.

So really pushing the boundary, I think, beyond where it is and raising the bar and what's expected and just, you know, to bring that to life a little bit, I think there is, you know, to some extent a culture under treating customers fairly that that means to be compliant. And I think you know, whilst that remains very important, I think we're pushing beyond that into, you know, beyond just the compliance of what we send to or provide to a customer.

And actually thinking, you know, what kind of outcome did they have on the back of that service or that product? So I think this is a cultural shift. And I hope that that's the way that it's embraced.

Fiona Hanrahan

Thanks, Jamie. And what about you Clare? Have you got anything to add to that?

Clare Moffat

So, same as Jamie, I think that this is a real shift. I think it's quite interesting because as much as it's a shift for the industry, I think a lot of advisers might feel that, you know, from the consumer's point of view, they might not see much difference to begin with but, you know, I think we'll talk about this a bit later on to actually what does happen will change but whether they'll be told about this Consumer Duty or what it means for them up front – well we don’t know and that might vary.

But it is going to mean that it is putting a greater focus or put yourself in their shoes and even things like kind of would you recommend that to your family and friends, you know. So I think that this just is increasing the standards and it always feels, you know, tough when there's new compliance regimes, new regulation but this is just, you know, as Jamie said, it's a move on from treating customers fairly.

Fiona Hanrahan

Thanks, Clare. And lastly, Ryan, have you got anything to add to that point?

Ryan Medlock

Yeah, thanks, Fiona. So I've heard some people talk about Consumer Duty to be, you know, the biggest overhaul in regulation since the retail distribution review came in, which was, what, ten years ago, which is, you know, is a pretty extreme statement to make. But I think it does reflect this transition or this continued shift that the regulator’s going through from moving to a system which is predominantly, you know, rules based regulation to one which is focused more on outcomes and you know, as both Jamie and Clare have touched on, I think that will naturally drive a change in culture.

Obviously, it's a move away from, you know, most tick-box type regulation. And I think for some firms, that is only going to require some small tweaks. But clearly for other firms, that is going to have a massive, massive impact. And I think for me, the litmus test going forward, you know, as Jamie alluded to earlier, is moving to treating customers well.

And having processes in place to assess this and review on an ongoing basis.

Fiona Hanrahan

Thanks, Ryan. Let's move on to think about some of the challenges then. The FCA's new Duty is driven by an ambition to deliver good outcomes for customers. And part of this will be making sure that products and services are fit for purpose and their price represents fair value for customers. So where do you think the main challenge challenges will lie for advisers in meeting this goal?

Let's go to Clare first this time.

Clare Moffat

Thanks, Fiona. So, you know, customer needs are always different, and what might be good value for one person might not be good value for another person. No one size fits all. So I think the starting point is being able to describe the risks of different situations, the costs of products and the benefits that they will bring to consumers, for example.

And, you know, we just need to think about the example of where we might have someone who isn't a sophisticated investor only has a pension, and so for them, they need a sophisticated product. They don't need to be on a on a platform, perhaps. But then you might have someone who's got many wrappers, who's got fairly sophisticated investment needs. And for them, you know, the extra cost involved in and being in a platform or having discretionary fund management, then that is something that would be really beneficial for them.

I think one of the main challenges is going to be evidence and I think firms are going to have to look at the resources they've got, especially thinking about kind of the rule of the principle and compliance.

And that's going to become more important, and we may see that additional training’s needed, especially in certain sectors. If we think about the fact that you know, a lot of the wealth and management and wealth kind of professionals have induced to it being more heavily regulated, then they might not need as much help. But I think if you're in the mortgage adviser space, for example, then they've not been used to this level of compliance.

And so they might need a bit more help, especially thinking about things like a risk and, you know, having these robust conversations about chance and probability and risk. So I think that there's going to be costs involved. There's going to be that challenge of working out how do you kind of expand. And if they don't have the time or resource or the knowledge, then they need to have a robust process for referrals.

So it's kind of working out what they want to do and what they can do so that, you know, for the client, it's the best possible scenario.

Fiona Hanrahan

Thanks, Clare. What would you say to that? Ryan?

Ryan Medlock

OK, so we know that, you know, the FCA effectively wants to set out a very clear expectation of how firms assess the price of their products and services and, you know, how these offer fair value. And I think that's probably opens up regulatory activity in an area that you know, we've not seen before around the fees being charged by advisers.

And I think the challenge for advisers is going to be around building a consistent process for assessing value, but one which is flexible at the same time is obviously it's going to need to take into account, you know, things like different propositions, different pricing models. And as part of that, firms are going to need to look at, you know, the costs, benefits, comparable products, comparable services, you know, in the level of granularity, which hasn't really been done before.

So I think for me, the challenge is building a process to do this and then having strong governance and review processes built around to review.

Fiona Hanrahan

And Jamie, anything to add about challenges?

Jamie Jenkins

Yeah, to agree with what's been said. I mean, I think one of the key themes will be for advisers around value for money. Now, I think certainly all of us around the table on this podcast would agree that advisers bring great value to their clients. And I think there's plenty of evidence to show that. But it is costly getting advice.

And I think there are probably some people, some clients of advisers who have maybe set out with sophisticated intentions of what they might use in terms of products and features and investments that, you know now, evidently aren't using those and are those kind of additional services that are being paid for unnecessarily. I think those sorts of questions will arise where clients, particularly with longer standing clients.

And but I think I think that's a really good point about evidencing. I mean, that's going to be an area that this quite challenging for all of us really involved in the chain of delivering services and products to clients. And the danger, of course, is that it becomes a bit of a tick-boxing bureaucratic exercise rather than one that really adds value.

And that's the bit I think we need to focus on as we start to execute on delivering the Consumer Duty.

Fiona Hanrahan

Thank you.

So thinking about our research, I think the most positive thing that surfaced is that 54% of advisers not only recognize the need to make changes to their business, but the vast majority of this population are also confident they'll be able to make the necessary changes to their businesses before the April deadline next year.

Jamie, are you surprised by how confident some advisers are when it comes to adapting their business to meet the breadth of this FCA ambition?

Jamie Jenkins

No, I'm not. I mean, at the end of the day, advisers are absolutely at the cutting edge of dealing with clients and customers in a way that many other organisations in the delivery chain, if you like, in financial services aren't. And I think, therefore, advisers are very well placed to understand what kind of outcomes their clients are getting.

Whereas if you are operating a, you know, you're offering a fund or your discretionary fund manager or a platform provider, you're not you're one or two steps removed, at least from the end client, if you like, and therefore, it is harder to see through to the outcome that they get and your contribution to that. So I'm not surprised.

I think advisers are just really close to the client, to the customer, if you like, at the end of the day. And but it doesn't mean there's no challenge in there. And as I said, there will still be a requirement on advisers, just as there is on everyone else, to demonstrate that they are actually delivering really good outcomes, but they're well placed.

Fiona Hanrahan

Thanks, Jamie. And given this will be a step change to the FCA approach, it might be surprising to hear that one in four advisers don't expect to make any changes to their business, mainly because they believe they already comply with the new regulations.

So Clare through your conversations with advisers, can you relate to this finding? And if so, do you think there's a risk that some firms could be underestimating the level of the change that's coming?

Clare Moffat

So this is something that is being discussed, rightly discussed a huge amount just now. So providers are talking about it, advisers are talking about it, professional bodies are talking about it. And the networks and service providers, are out there talking about it at events. But I do think there are some advisers out there who don't think it applies them - now that it could be because they have already been treating their customers fairly, they've perhaps been subject to the PROD rules. And so it's not as much of a sea change for them, they think.

So that's maybe just thinking, well, there might be a bit of tweaking and they're more familiar with dealing with a lot of regulation. There are some ideas I mentioned that there might be more significant impacts. And certainly we've been hearing from mortgage brokers at protection events that some of them weren't clear on what they had to do and they would have such a big impact on them.

So that's definitely one where we've been talking about it at events and we've been hearing that feedback. But even for those advisers who have been doing this and, you know, providing this, you know, excellent level of service really looking after their clients, it's not just that they're doing this, it's that they're demonstrating and evidencing the fact that they're doing it. And there's a section in the Consumer Duty paper talking about monitoring and governance.

And I think, you know, that it's really important to think about that. Firms have to assess, test and understand and evidence that outcomes their customers are receiving. So what's good practice, what's poor practice? And if it if that doesn't happen, if there's not that evidence, then how will firms know that their products, their services are performing as expected?

So from what we're hearing, that could actually be one of the trickiest aspects of the Consumer Duty. So even for those firms who who are doing everything in the right way, it's about you know, if the FCA turned up tomorrow and asked, how are you proving that they have to be able to prove it?

Fiona Hanrahan

Thank you.

Now, I think the most surprising statistic from our research is that almost one in five advisers haven't actually even heard of the new Consumer Duty, which is obviously pretty concerning. So what do you think can be done between now and next April to help those advisers who, you know, could be sleepwalking into potential regulatory penalties? Let's go to Ryan first.

Ryan Medlock

Yes. I mean, look, the rates of regulatory change in recent years has been extreme, to say the least. And, you know, there's certainly been a lot of regulatory noise. You know, as a practical example of that, outwith the Consumer Duty, to you look at what the regulators are doing around their ESG agenda. So in some ways, you know, you can see how some detail or some awareness may be lost among that noise.

That said, I think it was a very surprising finding from the research. And I think, you know, we all have a role to play in raising awareness and supporting the advice community to get ready. Obviously, you know, we're hopeful of getting some clarity from the regulator in July. And as we approach next April, you know, I'd suggest to advice firms implement procedures to regularly review and document your different processes if they haven't done so already.

And by that, I'm talking about the investment models they use and, you know, be that DFM model portfolio, their own investment portfolio, a packaged solution, document and review, you know, the service and support which has been provided to clients and everything in between.

 

Fiona Hanrahan

OK, thanks, Ryan and Jamie, have you got anything to add there?

Jamie Jenkins

Yeah, I think I mean, it was it seemed surprising reading that and I suppose when I when I reflect on it, I mean, I think we've got to be honest that the there's certainly some advisers thought that it was largely something for providers to do. And I'm not hugely surprised by that, given that a lot of the attention was directed initially, certainly in the press on providers and the role that they played in delivering on the Consumer Duty.

And it is by nature of any large piece of legislative change, it tends to be consumed more readily by the big compliance departments as part of big providers in a way that, you know, small advice firms, you know, just don't have those sort of resources. So perhaps on reflection, I'm less surprised. And I also think I'm encouraged by the sheer level of articles and events, podcasts such as this, that are now taking place.

So I think even in recent days and weeks, we've seen a real step up in the public conversation in the industry about the Consumer Duty. So I do think that has either changed even since the very recent research we did, or at least it has changing rapidly now. And I suppose, you know, I agree with with Ryan as well.

I mean, there's clearly a duty upon us as providers to help work with those advisers that we partner with to make sure that they're prepared and that we do our part to complement what they do. And I think, you know, networks and others will be doing the same, if not already.

So I'm not overly worried. I suppose the only kind of word of caution is that if there are significant changes needed, then obviously any advice firms that leave it too late to just start thinking about the Duty might find themselves up against quite a tight deadline for actually implementing it.

Fiona Hanrahan

OK, thanks, Jamie, and Clare, have you got anything to add to that point?

Clare Moffat

Just agree with what Jamie and Ryan have said. Just one other point I thought it might be worth considering here is that in the consultation paper on this, almost all of the respondents said that the agreed that the consumer agency would succeed or fail based on how the FCA supervise and enforce it. And that kind of speaks to that point that Ryan was making about sometimes when we've had so much regulatory change that maybe people feel it's been getting a bit lost in the middle of it.

So actually, you know, the FCA have been talking about this a lot. Obviously, but it's got to be everybody kind of talking about it and really sort of explaining how important this piece of regulation is. And how it's going to be that kind of fundamental shift in how consumers are dealt with.

Fiona Hanrahan

Thanks, Clare. I guess we've already touched on this a little bit, but when advisers were asked who they'd look to for help in preparing for the new duty, their network and product providers were clearly identified as primary sources of expected support what role do you think providers have to play in helping advisers prepare for the new rules coming in?

Let's go to Jamie first.

Jamie Jenkins

Yeah, thanks, Fiona. I think I mean, I touched on it briefly earlier. I think the key is that providers, you know, fulfil their part of the duty, but work in concert with advisers to make sure that we are, you know, collectively delivering good outcomes to customers. We can't just do this on our own. I don't think any party can do it on its own.

We're all inter-dependent on each other to deliver those good outcomes. So that's really important. I think we've got a lot to do in terms of communicating and helping use the might of our, you know, bigger compliance teams and functions to help advisers work through some of the detail and some of the practical implications. I think there's a more slightly more philosophical point as well.

And, you know, I think there is a role for providers here, particularly to lead from the front in terms of how we approach this. So if we all, as an industry decide that it's a box-ticking exercise that adds bureaucracy, you know, to an already good process for customers, then that's probably what it'll end up being. But if we approach it from the point of view, this is something that will really step up our relationship with clients and ultimately improve trust in the industry overall - that's got to be a good thing.

And I think the right mindset is important here and providers have a significant role to play in that.

Fiona Hanrahan

Thank you. And Clare what role do you think providers have to play?

Clare Moffat

And so and I think this was touched on a little about earlier, but by helping out with things like webinars and articles looking at the key components, but I think importantly breaking down the Consumer Duty in a way that makes sense to adviser businesses or actually the practicalities of doing it. So not just explaining 243 pages in detail and what that says or what actually the final rules see actually.

What does this mean for your business? What does it mean for how you can help your clients? What does it mean in terms of examples of good and poor service for example? So really helping them by bringing it to life with the kind of day to day activities they carry out for their clients. I think that's where we could probably help with things like that.

Fiona Hanrahan

And Ryan, what have you got to say there?

Ryan Medlock

Yeah, for me it's absolutely that point that Clare was just talking about that that practical support angle from providers. So, you know, how do you measure value? How do you review your target market? How would you assess the benefits of your marketing communications, those type of things. nd then then secondary to that is, you know, research papers, this podcast, genuine thought leadership content which you know, can help, I guess flesh out some of the colour and provide a bit more context.

And again, going back to that point I was talking about earlier, you know, the amount of regulatory change that has been in recent years, I do genuinely feel is that there's a bit of regulatory fatigue creeping into the market at the moment. So yeah, I think it's really, really important to provide both practical support and insight.

Fiona Hanrahan

Thank you. So finally then, the majority of advisers we spoke to through the research are currently sitting on the fence as to whether they believe the new Duty will have a positive or a negative effect on their customer outcomes.

So given the rules aren't yet in force, you know, this may be expected, but what are the key proof points you'd want to see when we come to measure the future success of the Consumer Duty?

Let's go to the Clare first.

Clare Moffat

And so just under half of advisers be spoke to in this research were unsure whether they were going to talk to their clients about this. And I mentioned the earlier thing that was quite interesting to see, actually. But in terms of the proof points, I you know, the Consumer Duty paper actually gives us some things, you know, the ways that they want to measure future success.

So the actually there's going to be customers are going to pay a fair price for products and services, which will mean fewer complaints about true value and unexpected fees and charges because they're being sold things which are designed to meet their needs. They'll get good customer service and they'll have increased confidence and financial services. And that's really key to me.

Because it might not be the advisers do talk to their clients and explain, you know, what’s one  bit of regulation to a client as opposed to another bit of regulation, but actually clients do understand when they're getting a better service. The you know, if they're gaining confidence, if they feel that they're being truly looked after, that's for you know, we'll notice the difference.

So to me, that proof point of increased confidence is one of the key things. And, you know, greater financial resilience across society has got to be something that we all want.

Fiona Hanrahan

Thanks, Clare and Ryan, have you got anything to talk to us about on proof points?

Ryan Medlock

Yeah. So I'll just say there that I think for me, one of the key litmus test is, you know, effectively proving that you are treating your clients well. Now, clearly flexible approaches to determine this are obviously going to need to be adopted and, you know, reflect things like different propositions different pricing models, different levels of service and so on.

But I think, you know, future success hinges on firms being consistent in their own approach to assessing value. So I guess to give an example, you know, in two years time, we may all look back on this particular period of uncertainty while we're waiting for the rules and think, well, you know, that was a that was a lot of worry for nothing.

But equally, some firms might look back on this period and perhaps wish to do more groundwork to get ready. So I think for me, I think the key or one of the key future successes will be based on how firms adopt these requirements. And, you know, ultimately the tangible benefits that that will ultimately bring to clients.

Fiona Hanrahan

Thanks, Ryan. So, Jamie, you get the last word then. Have you anything to add?

Jamie Jenkins

Thanks. So I'd agree with the only thing perhaps is I was somewhat surprised by the number of advisers who said they would be or intimated they would be speaking to clients about. And I suppose in a way that's surprising because, you know, how many advisers would proactively talk to clients about changes in regulation unless it was something that very directly affected that client's circumstances.

So I'm pleasantly encouraged by those, you know, those sorts of numbers. I think you know, I mean, at the end of the day, this is about engendering a cultural and behavioural shift across the industry. And I think if we treat it that way rather than a kind of box-ticking exercise, as I've mentioned before, then I think we will make great strides.

And I think the true test if I read between the fairly obvious lines from the regulator, is if we get to a position where, you know, we just don't see, you know, the mis selling scandals through endowments or PPI or, you know, more recently the problems around DB transfers with British Steel, if we don't see any of that any more we see it far less frequently, at least then we must have achieved something in terms of moving away from some kind of mindset that allowed that to happen in the past.

And I do hope that this is the start of that journey.

Fiona Hanrahan

Thanks, Jamie.

I'd just like to thank all my guests for their time today. And if you would like to find out some more about the issues we've discussed around the consumer agency, please visit our website at adviser.royallondon.com/ConsumerDuty. Thank you.