Coming to a practice near you – Consumer Duty

January 2023

Happy New Year. I hope that this year has started well for you.

As you will have seen, I have been producing in depth reports relating to Tax Efficient Investments.  The Seed Enterprise Investment Scheme report was released last week. The Enterprise Investment Scheme report is due out now. And by the time you are reading this, reports about Venture Capital Trusts and Inheritance Tax Solutions, BR/AIM investments should have been published. And finally, in a round up of those reports, the Tax Efficient Investments report. It has been quite a project. I have enjoyed it in a compliance anorak way.

Whilst most fund managers have produced their own entries, there have been some that I have put together myself. Mostly, quite successfully, but with the occasional blip.

One fund manager sent me their Investment Memorandum and a recent report from MICAP. So, I put together the pages based mainly on the information from the IM. Only to be told that the IM was out of date and I should have got all the figures from the MICAP report.  Obviously, the fund manager was unaware of the maxim “Keep it so simply that a compliance consultant can understand”.

Another fund manager came back to me “All the information on your page is inaccurate and out of date. Where did you get it from?” My answer? Your website!

Both of these incidents play right into the Consumer Duty and the Sustainable Finance Disclosure Regulation (SFDR), or the domestic equivalent Sustainability Disclosure Requirements (SDR) about providing accurate information for clients.

The FCA has introduced rules comprising:

  • A new Consumer Principle that requires firms to act to deliver good outcomes for retail customers.  
  • Cross-cutting rules providing greater clarity on our expectations under the new Principle and helping firms interpret the four outcomes (see below).  
  • Rules relating to the four outcomes we want to see under the Consumer Duty. These represent key elements of the firm-consumer relationship which are instrumental in helping to drive good outcomes for customers.

These outcomes relate to: 

  • products and services  
  • price and value  
  • consumer understanding  
  • consumer support

The FCA rules require firms to consider the needs, characteristics and objectives of their customers – including those with characteristics of vulnerability – and how they behave, at every stage of the customer journey. As well as acting to deliver good customer outcomes, firms will need to understand and evidence whether those outcomes are being met. 

So, the provision of clear, accurate, up-to-date information plays right into these principles.

As can be seen from the timeline below, fund managers should be reviewing their documentation and any financial promotions, which will include their website, to ensure that accuracy of any information in the public domain to maximise the potential for good customer outcomes and to minimise the potential for foreseeable consumer detriment.

Advisers are entirely reliant upon the fund managers to provide accurate advice as that is what they will be supplying to their clients. Therefore, it is right that the time limit for the providers is earlier for fund managers and providers, the manufacturers, than for the advisers.

This is an ideal opportunity for advisers to review their processes and documentation. Of course, this should be done as a matter of course on an annual basis. However, more likely reviews are undertaken as a reaction to regulation changes. At least, this year, everybody should be able to tick the box to say that they have done it.

I was asked by an adviser to review their initial disclosure documents. On close inspection, I ran into an issue that I did not understand a calculation in their fees. We had a discussion to clarify the issue and it was amended.

As advisers, we are used to jargon and assume that our clients understand what we are trying to say. The Consumer Duty means that we need to try to see things from the clients’ points of view. It has been suggested that advisers give documents to their junior members of staff, family members or even somebody in the pub to receive feedback about the contents of the documents and how easy they are to understand. How “normal” people would interpret our messages.

I have written some training on insurances relating to mortgage borrowing and delivered it to the advisers on Zoom calls.  Going on the fact that they were asking questions and their eyes had not glazed over due to death by Powerpoint, I think that the training was well received.

 As part of reviewing their processes, a couple of my mortgage broker clients have noticed that they write very little protection for all the mortgages that they complete. This lays them open to criticism that they are not doing the whole job by the FCA More likely, they are likely to receive claims from Claims Management Companies on the basis – “did your adviser tell you how to protect your mortgage?” Those unprotected mortgages could be quite damaging to a business.

The brokers have also been selling themselves short as they are more likely to earn more money out of a spot of insurance than they are from the lenders for a mortgage.  A significant loss of income to them.

Since the broker practices both have a lot of mortgages that they have written in the last couple of years, they have a ready-made set of warm leads to approach. Easy to do on the basis – “Now you have your feet under the table and your bills have settled down, we can now deal with the insurance/s that we spoke about when we organised your mortgage borrowing.”  Made a little more difficult by the current financial crisis.

As I may have said before, “the consumer duty is the gift that will keep giving” for compliance consultants and stop us from being a nuisance in so many other ways.