Consumer Duty – friend or foe?

June 2023

Yet more column inches for you to consider regarding Consumer Duty. What can anybody tell you that will be helpful to you?

For most advisers, the Consumer Duty is simply the latest effort by our regulator to get advisers to treat clients fairly and not rip them off. How hard can that be?

One of the things that I feel is important is that advisers need to look at their own products – their advice process.  This is not simply the process that involves – know your client, set objectives, do research, present and then implement. More importantly and in my opinion, more interestingly this involves looking at their ongoing service and client reviews.

This originates with the IDD and fee agreements. Do the clients understand how and when they are going to pay the adviser for their service? More importantly, do they understand what they are going to get from the adviser in the future for that payment?     

This comes into the realms of segmenting clients into service levels. Traditionally, this has largely been done using size of funds as the judgement. This should really be done by time of life. So, you may have:

  • young borrowers
  • young people getting established.
  • People protecting themselves.
  • People planning towards retirement.
  • People at retirement.
  • People in retirement.
  • People planning for inheritance.
  • People planning for long term care.

This list is not exhaustive and also planning for most of those elements may not happen in that order and most likely may happen together and need to be prioritised into short-term and long-term goals. 

Anybody who has attended the FCA Live & Local events (strongly recommended) will know that the FCA makes the difference between price and value. Price is what you pay. Value is what you get.

So, the blanket application of 0.5% – 1% may not prove to be appropriate for many people – neither clients nor the adviser firm.

Someone with £1m will pay £5,000 per year. Someone with £100,000 will pay £500 per year. There will always be an element of cross-subsidy.  This is accepted by the FCA.  If an adviser values their time at £200 per hour, then the £1m client pays for 25 hours and £100k client pays for 2.5 hours.  It depends how much the adviser does for a client, but neither of these figures are likely to be right for either of those clients.

Advisers need to do the exercise of working out how much time they actually spend with their clients.  Whilst this may take some time, it may prove worthwhile if it gives a more accurate valuation of the adviser’s time and therefore the value of the adviser firm.

Treating clients fairly does not mean giving them all the same service or charging them the same amount of money.  This exercise may well lead to increased charges for clients and the FCA will not be concerned, if it can be seen that clients are receiving fair value.  

Do the exercise, you may be pleasantly surprised that you can reasonably increase your charges.  The FCA needs adviser firms to be profitable to remain operating.   Remember to keep the evidence of your consideration of this issue.

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.