The Consumer Duty rules are coming, and they look certain to lead the whole distribution chain to question whether what they are doing can be improved and whether current operating models are leading to sub-optimal client outcomes.
Naturally many businesses will look internally for this and assess their own products and services.
Nestled in the Final Guidance (FG22/5) is the following paragraph relating to investment products:
Each firm has a responsibility commensurate to its role in the distribution chain and the degree to which it can determine or materially influence retail customer outcomes. The actual level of responsibility relates to what their real role is, rather than just what is set out in contractual terms between firms in the chain.
This throws up questions for how discretionary fund managers (DFMs) build their services, as well as how they manage, trade and market their portfolios to existing and prospective clients. For those distributing via platforms, the rules of engagement are about to change.
There is a lot to work through, and with a deadline only six months away, a collegiate approach is what is needed.
What will potentially be required is a fresh round of due diligence so DFMs and platforms are constructively questioning one another about the way they are required to run money and in particular what steps firms can take to avoid causing foreseeable harm – one of the defining principles of the Consumer Duty.
For example, do DFMs fully understand the trading cycles of a particular platform and how to trade most efficiently to keep transaction costs down? Furthermore, do they know how a given platform discloses fund costs and how this may differ to others in the market?
This raises the question of what the Financial Conduct Authority will be looking for when they assess if products and services are providing value. DFMs are going to need to ensure they have all the available and relevant information to ensure their services are priced accurately, fairly and operate consistently, regardless of how an investor accesses them.
And it can get quite technical too. Platform cash levels and the impact this has on returns will need to be considered, as well as who ultimately owns the relationship with the client and thus who is solely responsible for highlighting areas where customers are receiving poor outcomes. In comparison with the price of a platform, the treatment of cash can represent a significant percentage of the cost to the customer and thus cannot be ignored.
Platforms are not immune either. Is it incumbent on them, in the spirit of the Consumer Duty, to be proactive in assessing whether the portfolios that are available operate in a way that do not cause foreseeable harm? As a result, if platforms can recognise that a DFMs’ service is providing poor value, do they have responsibility to highlight this to them? The new regulations would suggest so. Whether or not this means they communicate directly to clients or advisers who use a poor value DFM service remains to be seen, but it is these considerations that need to be taken into account between platforms and DFMs.
This change in the dynamic between platforms and DFMs will have a knock-on effect for advisers too. Those building their own portfolios will have the same questions to answer. But for those outsourcing, they will need to properly assess if the portfolios they use via one platform are giving the best outcome for their customers. And if not, how can they encourage DFMs to explore new ways of offering value? Advisers will now have a duty and an obligation to their customers to hold both platforms and discretionary managers to account.
The Consumer Duty will change the way each firm involved in the provision of a service interact with each other. With a short timeframe to get processes in order it is vital these conversations take place sooner rather than later. DFMs have become integral to the way that customers and advisers can achieve their financial goals and this means we have to work collaboratively to ensure customers receive the best possible outcome available to them and understand how that is achieved.
