No one likes a deadline but they are invaluable in providing the necessary motivation to bring about action.
Advice firms have just such a deadline fast approaching: 31 July is the cut-off date imposed by the Financial Conduct Authority for new and existing products or services open to sale or renewal to be compliant with the incoming Consumer Duty regulations.
According to a recent survey conducted by the Personal Financial Society (PFS), advisers recognise the potential of enhancing client perceptions around their proposition that comes with Consumer Duty.
Over 22% have prioritised demonstrating value for money as part of their adherence to this new legislation, while nearly 15% see creating greater transparency around costs and fee structures as being important.
Many of those we’ve met over the past few months are unaware of their new status
Advisers were also asked to indicate their level of preparedness for the Duty. Gold stars go to the 16% who claim to be fully ready. Nearly 80% indicated they still have work to do, although they feel they are making good progress. Significantly, a small proportion – 4% – have not yet thought about this pressing requirement at all.
However, the suggestion that such a large proportion of advice firms feel their preparations are largely in hand is at odds with the reality that has become apparent through our own conversations with the advice community.
While outsourcing investment solutions to third-party model portfolio service (MPS) providers has grown steadily in popularity, a significant number of advisers continue to prefer to manage investments themselves on an advisory basis.
Advisers who continue to manage client portfolios will be classed as ‘manufacturers’
It is this kind of adviser who must comply with much more onerous regulatory requirements. But many of those with whom we have conducted meetings over the past few months are unaware of their new status.
Advisers who continue to manage client portfolios under advisory arrangements will be classed as ‘manufacturers’ under Consumer Duty, unlike those that outsource investment to third parties and who will be classed as ‘co-manufacturers’ or ‘distributors’, depending on the nature of their relationship with their investment partners.
The regulatory onus is much greater on ‘manufacturers’ and they will bear the same obligations as asset management firms since they manage investment solutions on behalf of end consumers. As such, they are responsible for conducting value assessments across their processes and investment output. They must also carry out full target market analysis. This requires a far-reaching review of their services and products, with time running out.
Two options remain open for firms managing client portfolios in-house. They can continue to operate as before, albeit subject to the new regulatory oversight as manufacturers, or they can opt to appoint a third-party investment manager to provide investment solutions and operate as co-manufacturers or distributors.
Advisers cannot afford to hide from some very crucial decisions
Should a firm choose the former route, it must have completed all the reviews necessary to meet the incoming rules for their products and services by the end of April, ahead of the implementation deadline of 31 July.
Of course, Consumer Duty will have implications for co-manufactures and distributors as well, although their responsibilities will be shared in part with their investment partners.
Distributor status implies the adviser firm simply acts as an intermediary between an off-the-shelf MPS provider and the end consumer with no material input into the way investment mandates are managed. Advisers who have elected to retain a role in the way investment services are designed and managed will be considered as having ‘co-manufacturer’ status.
Both distributors and co-manufacturers will have elements of their operations which fall within scope of Consumer Duty, including customer outcomes, customer communications, distribution strategy and channels, product approval and review processes, price and value assessment, consumer support and redress systems.
This is not an exhaustive list of areas for review under Consumer Duty, and an adviser’s obligations will be nuanced dependent on their status as co-manufacturer or distributor. However, having outsourced their investment solutions to a third party, they should benefit from guidance and support from their partners.
Consumer Duty necessitates a detailed and frank discussion between the two parties to establish beyond doubt their respective roles in ensuring full compliance to the new regulations.
Consumer Duty has significant potential for reinforcing trust between advisers and investors by setting higher standards of consumer protection and ensuring the delivery good outcomes. However, if an adviser chooses to continue to run portfolios independently, there will be no escaping their new regulatory requirements, and if they are found lacking in any way, should not expect any clemency from the FCA.
With hard deadlines fast approaching, advisers cannot afford to hide from some very crucial decisions regarding the future of their proposition.
Jamie Farquhar is business development director at Square Mile Investment Consulting and Research
If you don’t manage your clients’ investments, what use are you? Sub-contracting out just adds to cost and a loss of control. Why would I stay with the adviser if a DFM does the work? Wouldn’t I go direct? After all, DFMs can plan as well.