Consumer Duty – What are we up to?
May 2023
Where sustainable investment meets consumer duty
At a meeting this week, I met a man who has specialist knowledge, including a doctorate on the subject of modern slavery. Naturally, I launched into how difficult my life is as a compliance consultant. But he gently guided the conversation towards people working in sweat shops producing clothing, or people working in mines to find rare metals and children working in both these environments. He also talked about the Uyghurs in China being persecuted by the Government.
This man works for a fund manager and as part of their stewardship, they lobby companies towards better practices in line of sustainability and responsible governance. He said that the new labelling of the funds that the company runs would be “improvers”. This is the middle out of the three labels – focus, improvers and impact.
Proposed sustainable investment labels’ definitions and channels for achieving positive sustainability outcomes
Sustainable focus |
Sustainable improvers |
Sustainable impact |
Definition: products with an objective to maintain a high standard of sustainability; invested in assets regarded as environmentally and/or socially sustainable. |
Definition: products with an objective to deliver measurable improvements in the sustainability profile of assets over time. |
Definition: products with an explicit objective to contribute to positive sustainability outcomes in a measurable way. |
Primary channel: influencing asset prices. |
Primary channel: stewardship aimed at improving the environmental or social sustainability profile of assets. |
Primary channel: directing new capital to projects and activities that offer solutions to environmental or social problems. |
Secondary channel: continuous stewardship activities. |
Secondary channel: identifying funds that are best placed to improve their sustainability profile over time. |
Secondary channel: continuous stewardship activities. |
Source PRI
This week the FCA reached out to the Association of Professional Compliance Consultants (APCC) as it is undertaking a project on the extent to which ESG is integrated into the investment advice journey in the UK. The FCA is exploring how to introduce rules for financial advisers aimed at confirming that they should take sustainability matters into account in their investment advice and understand investors’ preferences on sustainability to ensure their advice is suitable. The FC A is looking to gather views from APCC members as to the current level of ESG integration in the advice process, the role of compliance consultants for financial advisors, and what potential regulatory intervention might look like.
This is an integral part of the ongoing Consumer Duty implementation as part of the advice process. Previously, a lot has been done to highlight dealing with vulnerable clients. The breadth of the vulnerability issue and what may constitute a vulnerability is making advice increasingly complex.
I have been telling my client IFA firms that they also need to be addressing sustainable investment with the same vigour. Many firms have incorporated questions into the fact-finding process. I wonder whether that will be the sufficient evidence that the FCA will be looking for in future.
Sustainable investment is a source of concern to many advisers. I have met some that said that they raise it with their clients and the clients do not want it. For me, this is a concern. How was it raised? What was the discussion? Was the adviser positive about sustainable investment? Or was it dismissed because many of the funds under-performed last year against funds that contained oil due to the price of oil booming?
Unfortunately, for advisers, sustainable investment is a complex subject. It involves positive and negative selection criteria. There are several levels of sustainability, now under three labels. The advisers are entirely reliant on information from the fund managers. What happens if the client has specified a preference that has led to a choice being made; only to find out that the fund manager has gone against that choice in the next review? Then there is the possibility that some tree-hugging client will know far more about the subject than they do. Never a good look for advisers that want to be considered as the fonts of all knowledge.
Advisers have been deluged by the fund managers sending out lots of new documents that have been re-written for the fund managers to comply with Consumer Duty by the end of April. Not sure how much of this will have been read. I can only hope that it has not been printed too often.
Recently, there has been an issue raised about manufacturers and distributors in financial services. I am not sure about the manufacturers label. I would have thought providers or producers may have been better. But nobody asked me! It is logical that an insurance company or fund manager is a manufacturer and an adviser distributes that product. But an idea has recently been introduced that advisers are also manufacturers. Of their own advice process. Or co-manufacturers if they are constructing investment portfolios.
This is not a new concept as the FCA wanted to move in this direction with the RDR. To move away from commission to sell advice. This would make the advice a product in its own right. Unfortunately, this idea was side-stepped by the re-labelling of commission as adviser fees. The world went forward without breaking step.
However, advice as a product would bring advisers into the same professional realms as solicitors and accountants who charge for their services. Advice should be used as a driver for a lot of business as most clients would be attracted to working with an adviser that they like and trust and providers the service that they want.
We have until 31st July to move the advisers towards being Consumer Duty compliant. Most are already compliant. They simply need to work towards having evidence that they are doing the right things.
I have written some training on consumer duty 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 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.