Exam season is here, both for the kids across the country studying for their GCSEs and A-levels and for the 5,000-plus advice firms getting ready for Consumer Duty implementation at the end of July.
Financial Conduct Authority executive director of consumers and competition Sheldon Mills provided a stern warning of the consequences of failing to prepare in a speech at EY last month, indicating the regulator will take swift action against those who ignore it.
Like a firm but fair headteacher, he reassured firms they still have time – but advised them to make the most of it.
Concentrate first on what’s most likely to come up on the test
I know from my own conversations that many in the industry have set themselves strict revision timetables and have worked hard to bring their practices into line. The regulator acknowledged that, noting many firms are on course.
But what do you do if you’ve fallen behind schedule? Where to focus your efforts? As in your school days, if you don’t have much time to prepare, concentrate first on what’s most likely to come up on the test.
Value
Mills’ speech gave a big clue about the exam paper in the form of an emphasis on the price and value outcome of the Duty. With firms indicating that this is an area they’re struggling to get right, the regulator has provided some help in the form of a review of fair value frameworks.
Based on these initial findings, good practice takes into account value both in general and across product lines, including your service, with an emphasis on evidence. It captures the full cost of the product or service to the consumer, and factors in the characteristics of customers in the target market and what value might look like to them.
The important thing is to know what you’re paying for and why
Importantly, fair value does not mean the cheapest solution. Nor is a good outcome necessarily only about the strongest return. We cannot be certain which investment will perform best in the future or what day the client will take the money.
Consider, for example, a passive tracker versus an active, risk-managed strategy. If the former outperforms the latter over the long term, is that the best value for the client? Not necessarily.
For some clients, the comfort of the manager’s hand on the rudder might be worth a lower return – especially if the actively managed solution has avoided big swings in value along the way that may have caused distress or even disinvestment. The important thing is to know what you’re paying for and why.
Fees
If value isn’t about the lowest cost, does that mean you don’t have to think about your fees? Of course not. Consumer Duty doesn’t require you to cut your charges but it does mean charges should be appropriate. What that means is more choice and variety.
Gone are the days of one size fits all: a meeting every six months, a model portfolio, a regular newsletter and that’ll be 1% of your assets, please. Instead, firms could think about delivering what different client groups actually want, with proportionate charging options beyond the traditional bronze, silver or gold service, or even a menu of services, charged individually.
The Duty doesn’t require you to cut your charges but it does mean charges should be appropriate
It’s okay to do less and charge less – or do more and charge more – if it’s what the clients actually value.
Wherever you land, fairness and transparency will be key: fees will need to reflect the service provided and clients will need to know what they’re getting for their money.
Communication
That brings us to the Consumer Understanding outcome, which states customers can only take responsibility for their decisions where firms’ communications enable them to do so. Clients must be given the information they need, at the right time, presented in a way they can understand, so they can make informed choices.
A key area to focus on here might be evidence: how are you planning to demonstrate that the client has understood? One way might be to send a client survey with every communication: ‘Did you understand this?’ But if you were asked to defend the findings of that survey to the regulator, could you? Or would you know, in your heart, that most would tick ‘yes’ whether it was true or not?
It’s okay to do less and charge less – or do more and charge more – if it’s what the clients actually value
A more robust option might be testing communications scientifically, directly with consumers, recording findings and adapting materials accordingly.
Whether you’re feeling well prepared for Consumer Duty or scrambling to catch up, these are inevitably going to be a busy next few weeks for the industry. The good news is that, unlike the GCSE and A-level invigilators, the FCA is actively encouraging you to make use of the leading-edge technology available to you for the best results.
I wish you success as you work towards the deadline – and then a relaxing summer before it’s time to think about the next one.
Chris Jones is proposition director at Dynamic Planner
