FCA Consumer Duty
The introduction of the Consumer Duty is the biggest regulatory shift in financial services in recent years, and the first deadline at the end of October 2022 has come and gone. There were no fanfares, no reminders, but what we do know is that the FCA have stated “Take Consumer Duty seriously” and that “We expect firms to use the implementation period fully and to be able to demonstrate progress when asked.
So, is this yet another hurdle placed in the face of beleaguered IFAs, served up with a tight timescale for implementation, or is it an opportunity for forward thinking IFAs to buy in to the FCAs plan to “Deliver good outcomes for retail customers and to “Compete vigorously in the interests of customers”
The reality is it’s both, of course, it involves more work, but most IFAs I speak to on a regular basis would argue that they already look after their clients’ affairs to the best of their ability, putting their needs and interests first, and keep good records.
Let’s look at what’s involved:
The aim is to:
- Raise standards
- Reduce poor conduct
- Increase consumer confidence in advice
IFAs must
- Act in good faith towards retail customers
- Avoid foreseeable harm to retail customers
- Enable and support retail customers to pursue their financial objectives
These four outcome areas are covered
- Product and Services
- Price and Value
- Consumer Understanding
- Consumer Support
So, IFAs will need to be clear on the intent of their advice, and its desired outcome, and to be able to demonstrate they understand what the client wants. This will involve conducting research and assessing the evidence of what the client needs. IFAs are going to need to find away to collate this data and present it in a way for interrogation by the FCA.
Inevitably, IFAs are going to find themselves spending more of their valuable time collecting and analysing data and evidencing how they are helping clients understand their advice, and how it will deliver positive outcomes for them.
This extra work may be relatively easy to achieve for larger firms, with their own internal departments focusing on regulation, but for the smaller IFA, it is yet another challenge.
Looking at the shape of Financial Advisor firms in the UK from data provided by the FCA in RMAR returns earlier this year we can see the following
Table 6: Financial adviser firms- number of staff that advise on retail investments.
| Advisor Band | Number of Firms | Number of staff advising on retail investment products |
| 1 adviser | 2,423 | 2,423 |
| 2-5 advisers | 2,116 | 5,937 |
| 6-50 advisers | 532 | 5,992 |
| Over 50 advisers | 47 | 13,487 |
| Total | 5,118 | 27,839 |
There are still a good number of IFA firms with between 1 and 5 advisers, who will no doubt need some help to implement these new rules, and with the average age of an IFA around 58, probably many will now see this as a good time to retire, or at least merge with a larger firm who will be able to shoulder the burden of compliance work.
My worry is that with the smaller IFAs disappearing, this will lead to less choice for consumers. As many of the old guard sell up or merge, it would be far better to see old established IFAs moving into the hands of younger IFAs, who are more likely to understand the different attitudes prevalent among younger investors, especially that section of the population that are “unrepresented” and are increasingly confident in managing their own investments.
Whilst younger recently qualified IFAs will no doubt embrace these new rules, there is a problem; according to an article in The FT Adviser only 6 % of advisors are under the age of 30. The industry needs to do more work to attract younger persons into the profession.
Do we still need IFAs? of course we do, the FCA have already warned that that younger investors are taking on big financial risks, for many the long wait for investments to deliver returns is not as attractive as some of the more esoteric and seemingly exciting products such as crypto that are available.
It’s good that the FCA are clamping down on promotions for these products, as I have no doubt that many people have lost money and its excellent news that firms marketing some types of high-risk investments “will need to conduct better checks to ensure consumers and their investments are well matched.” Understanding “risk” is important, as is not being spooked when the markets take a tumble, as the world’s greatest investor Warren Buffet once observed “The stock market is a device for transferring money from the impatient to the patient.” Who better than an Independent IFA to explain this to you.
Going forward all IFAs face making changes to their business, if not already done so, there will be a greater requirement to keep customers informed and to help them achieve their financial goals, most of this can be achieved with the aid of technology; when I came into the industry eons ago, there was no internet, no mobile phones and pretty much everything was done face to face, investors also weren’t really interested in the investments recommended to them.
Now investors expect “Themes” and clear information, which must be delivered on demand to any device they choose all accompanied by highly visual easy to understand charts. We are moving rapidly to an on-demand world and with so much information readily available about market conditions, and not always from reliable sources IFAs, have an important job helping customers seeing through the noise by presenting them with clear accurate information to equip them to make decisions that are in their best interest.
Author
Alan Marks
Alan is a 40-year veteran IFA, currently working in IFA Consultancy and Mergers & Acquisitions and specialising in helping IFAs transform their businesses.