One year on, is the consumer duty helping or hindering the City?
Today, the consumer duty’s final deadline comes into force. The set of regulations implemented by the Financial Conduct Authority a year ago has finally been set in stone for so-called closed products, with all financial services companies now forced to “put their customers’ needs first.
However, the process of implementing the consumer duty across a lot of companies has proven to be complex and time-consuming, as this week’s decision from the FCA to start stripping back the red tape shows.
“From our experience and our conversations with several discretionary fund managers, we know that management teams have spent considerable time getting consumer duty embedded across their businesses, which is in addition to the resource from external consultants used to build robust processes,” Christopher Cade, head of UK sales at Sarasin & Partners, said.
Some companies have had to revamp their entire pricing models to make them more fair, while others have just had to make minor tweaks to their business.
“It is also important to remember that consumer duty is not a ‘one and done’ exercise and costs will continue into the future – something that firms must factor in going forward,” said Stuart O’Sullivan, associate director at Protiviti.
“As well as the costs associated with consumer duty requirements, firms are saddled with the complexities of adjusting how they portray outcomes to customers, as well as needing to compile data from different sources and in different formats to ensure they are compliant with the new regulation,” he added.
Data from Octopus Money revealed that the majority of companies were moving to serve clients with higher assets as a response to the new rules, as the cost of dealing with smaller clients simply isn’t worth it anymore.
Some 75 per cent of financial advisers said serving small clients had become a significant challenge, and have been shifting the minimum asset threshold up to an average of £214,000, 12 per cent higher than last year.
To align with consumer duty, many companies (36 per cent) have had to hire more staff, but this has put pressure on profitability as at the same time, 34 per cent of advisers have been cutting fees to demonstrate a commitment to value.
“The cost of doing business is going up because of increased regulation and consumer duty. So the pressure on the asset management businesses, and their margins, is probably as great as it has ever been today,” Jock Glover, strategic relations director at Square Mile Investment Consulting, told City A.M.
Are things getting better under the consumer duty?
Despite the radical changes across the industry, it isn’t clear that customer experience has actually gotten better with consumer duty.
“The legislation has been written in such a way that it addresses an entire industry that ranges from car financing and micro-lending all the way through to pension funds, so it’s going to be a little bit clunky because it doesn’t cover the nuance of each individual bit within the sector,” explained Glover.
Indeed, 84 per cent of Brits reported no improvement in how financial providers treat them over the last year, data from Smart Money People found.
Instead, consumers complained much more about not being able to talk to proper support, instead being shunted to AI chatbots or untrained staff.
“It’s particularly concerning that vulnerable customers have not seen an improvement in their experience during this time,” said Jacqueline Dewey, CEO of Smart Money People.
Another problem with how the consumer duty is applied to individual sectors is that companies are often able to get away with skirting the rules, as asset managers are able to decide whether funds are ‘good value’.
“In an industry with about 4000 funds, 95 per cent of them saying that they’re good value for money, I think is highly questionable, but the regulator has said they’re happy for you to mark your own homework,” Glover said.
However, it is unclear what the recently announced consultation from the FCA on the consumer duty and wider regulation will yield to fix this.
One solution could be an outcomes-focused approach, but Nathan Willmott, financial regulation partner at Ashurst, warned that this could be “much more difficult and expensive for firms to comply with”.
“[This] can result in very different standards being applied across the industry – with the unwelcome outcome that some firms will gain a competitive advantage by adopting a less customer-centric approach,” he said.
So what are companies asking for? Beyond a simple loosening of the rules, one area of focus in the Financial Ombudsman Service (FOS), which Willmott complained was “costing the industry billions of pounds and significantly pushing up the price of financial services and products for consumers”.
“Even where products have been sold in full compliance with the FCA’s rules and accepted standards, the FOS has a very wide discretion to determine that customers have not been treated fairly and that compensation should be paid – not just in isolated cases but with implications for thousands of other customers,” he explained.