Last week saw the publication of the FCA Consultation Paper CP21/13 “A New Consumer Duty”, calling time on unfair adviser charges. CP21/13: A new Consumer Duty | FCA. If you are a financial adviser, how might this impact you and what steps do you need to take next to deal with the challenges ahead?
The good news for regulated advisers is that it is only a consultation, and implementation of rule changes is a year away, July 2022. The bad news is this could be the last year you can take overly high recurring revenues for your practice, which could detrimentally impact the immediate valuation of your business depending on the fair value assessments.
The main impact are new “FEE FOR SERVICE” provisions. Fees must represent “fair value”. The benefits consumers receive must be reasonable relative to the price they pay.
The consultation proposes wide reaching reforms, with the introduction of a new Consumer Duty as a Consumer Principle, Cross-cutting rules, and Four Outcomes for Communications: Products & Services, Customer Service, and importantly Price & Value. There is also the suggestion of a private right of action (PROA) for breaches, potentially leading to another suite of CMC claims sweeping the market.
It suggests that some firms may be exploiting consumers’ weaker bargaining positions, asymmetries of information, lack of understanding, or behavioural biases (such as 4.83 Optimism Bias: unrealistic expectations about a reasonable level of investment performance).
Firms must not disguise risks through misleading framing, omission, or burying key terms in documents they know customers won’t read. Vertically integrated firms are included in the rules. Parties in the chain receiving remuneration which appears to significantly exceed the cost incurred in distributing the product are all held accountable, regardless of whether they are customer facing.
On Pricing and Value, key takeaways:
- Must represent fair value
- Must be a clear and consistent approach
- Benefits must be reasonable relative to price (4.77)
- Given throughout the lifetime of the product/ service relationship
- Considering the extent of cost and charges the consumer may pay over the full term
- Considering the overall value chain (platform + funds + advice) and the higher overall fee
- Considering outcomes for different groups (4.96)
- Servicing fees charged as a percentage of the value of the product are NOT automatically assumed to be fair value (4.97)
- Senior managers to be held accountable (4.100)
- Firms are expected to amend prices accordingly (4.102)
It is not applied retrospectively or judged with the benefit of hindsight. Private rights of action may apply. Terms to come into effect July 2022.
You have work to do if you or your firm are charging one customer significantly more than another for the same level of service, as can often happen on a percentage of assets fee. Your ongoing service must also be fit for purpose in delivering the benefits that consumers reasonably expect (this could be the end of fee-for-no-service), and you should not be using optimism bias to justify prices (those annual investment performance meetings you’ve been having).
Deadline for response to consultation is 31st July 2021.
The regulator is letting the firms and senior manages off the hook somewhat by giving notice that rule changes are to take effect from July 2022, with no backdating. That is not what happened in other markets.
Building the Wall Between Advice and Product – The Academy of Life Planning (wordpress.com)
Fee for service advisers are more trusted – The Academy of Life Planning (wordpress.com)
Most IFAs are Fee For No Service – The Academy of Life Planning (wordpress.com)
What Happened Down Under – The Academy of Life Planning (wordpress.com)
What else?
I can see the naming of advisory services also being impacted by rule changes, with advisers having to better label their services consistent with the service they actually deliver. For example, where a consumer reasonably expects financial planning, and they receive instead advice on a particular investment. The preferred label might be “Financial Planner AND Independent Financial Adviser”, rather than simply “Financial Planner”. I am not sure a regulated adviser will be able to call themselves something outside of the FCA’s perimeter without it possibly being considered misleading.
If you want to become a non-intermediating financial planner contact us today to find out how the Academy of Life Planning can help you.
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