Love it or hate it, the Consumer Duty is upon us. Some politicians certainly hate it. Reports that City minister Andrew Griffith is no fan of the reforms are spot on, several people close to his thinking tell me.
One of his concerns, I’m told, is the breadth of the rules, which cover everything from banks and insurers to – whisper it quietly – advisers and platforms. FCA boss Nikhil Rathi made it abundantly clear at a Treasury Committee hearing on 19 July that there was no going back, and the whole value chain needed to step up.
“Firms have to think about their interdependencies, they have to think about how that distributor is acting to deliver good consumer outcomes,” he said.
But what does that actually mean in practice? With the deadline upon us, platform experts say they still have a host of unanswered questions.
Target markets and orphan clients
The premise of the Consumer Duty is to make sure retail customers, not professional investors, aren’t harmed. That is made explicit in its three overarching rules: act in good faith towards retail customers, avoid causing foreseeable harm to retail customers, enable and support retail customers to pursue their financial objectives.
Why then should I, as a platform that only works with advisers, care, you might ask? Well, ask any client who has not been able to take income thanks to a botched re-platforming, and you’ll soon see why; adviser platforms are absolutely critical to ensuring retail clients get good outcomes.
First of all, the Consumer Duty forces platform and advisers to set out their target markets, and check “whether any group of customers… are paying higher prices or receiving fewer benefits”.
There are still ‘big questions’ outstanding for platforms on this count, says one sector veteran, including whether the FCA will use the Consumer Duty to force platforms to take better care of orphan clients.
“Some platforms/providers have significant back-books they have moved to their new services. Some of these client banks of orphaned and unserviced clients are paying substantially higher fees,” says another platforms expert. “What are platforms doing to address legacy charges and support orphaned clients? For some of the life companies, these will be enormous costs.”
This is particularly relevant given the FCA’s latest Financial Lives Survey and its particular focus on the high cost of living and low financial resilience among consumers.
As of 18 July, the likes of Embark, Parmenion, AJ Bell and Novia had all made their target market assessments public.
The rules require firms to “consider the characteristics of the target market in sufficient detail to be able to assess the capabilities of the likely recipients”.
Arguably some haven’t done that; they give little depth into what the end client actually looks like other than that they are advised.
Novia’s two-page assessment says it is suitable for investors who have an FCA-authorised financial adviser and “a basic level of financial capability that would enable them to understand, and consent to, the advice being provided”.
Embark’s four-page report specifies that its platform has been “designed to be suitable for customers who have retained professional financial advisers to assist them”.
Parmenion’s three pages say it delivers its great outcomes for advised clients and is not appropriate for “clients who want to manage their investments themselves”.
They have all hit on remarkably similar formats, all referencing investing for the medium to long-term, taking at least some level or risk, and support for vulnerable clients.
Of the four, only AJ Bell actually details some more specific target segments – inheritors and young accumulators, accumulators and consolidators, approaching and at retirement, and outliers – listing their characteristics and needs.
But is the fact that all these assessments are strikingly similar an issue when most advisers have roughly similar client banks? That platforms, all, broadly speaking, do similar things? Maybe, but maybe not.
None of them mentions the thorny topic of orphan clients.
“To be fair they are all aiming at the same high-level target market,” Sparrows Capital compliance boss David Ogden says. “For adviser-only platforms it’s the adviser who needs to dig deeper into the service they offer and the fees they charge to identify the ones that suit specific client segments best.”
Consumer understanding
Consumer understanding is another one of the four outcomes required by the FCA.
Which begs the question: how on earth can a client in these target markets be expected to understand a complex platform, let alone prove they do?
The FCA says firms should “assume a low level of sophistication and capability unless there is documented evidence to the contrary”.
Showing the retail client understands the platform becomes a big question for both platforms and advisers.
Will platforms have to gather more information about underlying clients from advisers? Will they have to change their offering depending on whether a veteran planner or a rookie administration is using the platform?
Will advisers have to request more information about how their platform actually works? Or add questions to their fact-finds to show client really do understand what this piece of technology is used for?
In a January letter, the FCA said that “to implement the Duty on time, many firms need to work and share information with other firms in the distribution chain. However, some firms may need to accelerate their work on this important aspect of implementation.”
It may well have had platforms and advisers in mind when it wrote that.
According to guidance from industry group Tisa, “it is critical for firms to map out who is responsible for what within their firms, including who produces the communications, who tests and who is responsible for mandating standards of communication where third parties are engaged to design/distribute.”
That throws up another key question: where platforms are communicating with the end client, do advice firms have anyone checking it as it stands?
Customer support
Consumer support is another key pillar of the Consumer Duty. There are obviously platforms that allow advisers to delegate certain permissions to underlying clients. But how are adviser platforms meant to show they are supporting their customer when that is the financial planner?
“It’s a massive subject,” says another advice market veteran. “The implications have not been thought through.”
The FCA has already warned firms to be wary of “information asymmetries, consumer inertia, behavioural biases or vulnerabilities”.
How many of these asymmetries are between platform and adviser? How many are between adviser and client?
The first category is where platforms might have to up their game, because the Consumer Duty clearly states that “in the provision of customer support, firms must not unreasonably impact the ease with which a customer could switch or exit a product”.
Platforms having to support advisers changing provider would certainly be a huge change from the current status quo.
As Parmenion’s chief marketing officer Sarah Lyons recently wrote on Twitter, “moving platforms is too costly, complex and painful. And the fact that some still charge to leave their platform is astonishing.”
Value for money
That brings us neatly to another pillar of the Duty: confirming that the customer is getting their money’s worth.
The value assessments that have been issued by platforms so far are a swathe of green lights. But at what point would an advised platform not offer fair value? What is the cost of advisers having to make paper-based applications to multiple providers? What would be the cost to the retail client if that was passed on?
Moreover, will the likes of SJP have to split out value for the platform element now?
Another platform veteran suggest they might have to.
“Why will some business models justify charging higher fees for some services just because of their model, for example the True Potential platform at 0.4% but the adviser doesn’t pay compliance costs, or SJP advisers being largely capped at 0.5% ongoing to support the SJP product charges?” they say. “They will focus on total cost of ownership, but if they are paying more for a service which they could get much cheaper elsewhere how can this be justified?”
Hard or soft landing for Consumer Duty
That’s an awful lot of unanswered questions. But the biggest one is what the punishment will be for those that get it wrong. Because no one really knows how the FCA plans enforce against firms in breach of the Duty.
It could be a hard Duty. It could be a soft one. Either way, there is a huge amount of work still to do for platforms and advisers.
Photo by Julia Joppien on Unsplash
