Introduction
The financial planning sector has long been accustomed to ad valorem pricing models, particularly those based on assets under management (AUM). However, a recent report by TCC Insights has put these models under the spotlight, questioning their fairness and compliance with the newly enforced Consumer Duty regulation. This article delves into the key issues raised and offers insights into what financial planning firms should consider moving forward.
The Consumer Duty and Fair Value
Effective from 31st July 2023, the Consumer Duty regulation mandates higher standards of customer care and requires FCA-regulated firms to deliver good outcomes for retail customers. Central to this is the concept of ‘fair value for money,’ which necessitates that firms offer products and services at a price proportionate to the benefits provided.
The Question of Fairness in Ad Valorem Models
The TCC report raises a pertinent question: Is charging a flat 1% rate for both a £500,000 and £1,000,000 investment fair? Can firms justify that the latter service took twice the resource and time to deliver, given they are asking for twice the compensation? This is a critical issue, especially in the wake of the ‘fee for no service’ scandal.
The FCA’s Expectations
The FCA favours a ‘principles over rules’ approach, meaning there’s no set roadmap for firms to follow. This places the onus on firms to develop their own criteria for defining ‘fair value,’ backed by both quantitative and qualitative evidence. Firms are also warned against relying on market ‘norms’ and are encouraged to challenge their own assumptions.
Steps to Compliance
- Regulatory Gap Analysis: Understand your existing processes and identify gaps in compliance.
- Policy and Procedures: Develop robust policies that align with the FCA’s best practice guidance.
- Monitoring and Reporting: Establish comprehensive reporting systems to track progress and provide evidence of compliance.
- Remediation and Implementation: Make necessary changes to ensure long-term compliance.
- Ongoing Evidencing Support: Utilise next-generation MI and RegTech to showcase compliance efficiently.
- Periodic Health Checks: Conduct regular reviews to ensure your strategy aligns with evolving regulations and customer needs.
Conclusion
The introduction of the Consumer Duty regulation necessitates a re-evaluation of existing ad valorem pricing models. Firms must now not only ensure that their pricing structures are fair but also be prepared to provide solid evidence to back their claims. The time for complacency is over; proactive steps must be taken to align with the new regulatory landscape.
For those seeking specialist support in building a compliant fair value framework, now is the time to act. The stakes are high, but so are the opportunities for firms willing to adapt and evolve.
Disclaimer: This article is for informational purposes only and does not constitute financial or legal advice.
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