The FCA has stated they expect firms to step up and put consumers at the heart of what they do and will be holding senior managers accountable if they do not. The Dear CEO letter released on 8th November made it clear that the FCA’s supervision will be shifting to become more assertive, intrusive, proactive and data driven.
Recent examples of wealth managers reducing fees and amending early withdrawal charges shows the intent to drive real changes to pricing models to deliver fair value.
1. Personal accountability and the need to prove fair value raises the bar
The new rules oblige senior accountable managers to personally ensure and attest that the interests of customers are central to their operations.
Clear, digestible Board-level reporting will be essential to evidence compliance – accountable managers risk being undermined by questionable data.
The FCA have made clear that attestations of a compliant firm ethos will not suffice and neither will ‘tick-box’ exercises demonstrating compliant processes.
Clear management information, KPIs and data are necessary for a critical assessment of product and service fair value. The FCA is likely to assume the worst if the audit trail is poor so firms must close any data gaps.
While not currently in place, there remains the possibility that the FCA may ultimately introduce private right of action (PROA) for Consumer Duty non-compliance.
2. Pricing models are facing significantly harsher scrutiny
FCA-prompted adjustments to fees and withdrawal charges have already taken place. These have received substantial media coverage with reputational and financial impact. The precedent has been set for changes in actual charges, rather than just price-setting processes.
Wealth managers must consider whether their fee structure will stand up to scrutiny. Likely ‘red flags’ include:
- Pricing models that have been unchanged for a long time
- A lack of central oversight of pricing
- A lack of price transparency for bundled offerings and a lack of clarity over total costs
- Barriers, such as exit fees, that prevent consumers from switching in pursuit of better value
- Employee incentives and remuneration that are misaligned with the generation of good outcomes for customers
- Frameworks that are not tailored to accommodate vulnerable customers. We provide further insight on how to transform in the age of complex customer vulnerability here.
The challenge is now for managers to demonstrate that the benefits of the services they provide merit annual management fees in the range of around 1.5% – 2%, against the backdrop of cheaper distributors entering the market.
3. Wealth firms must consider the whole value chain when assessing fair value and pricing
The Duty has a very wide scope covering all firms who (co-)manufacture or distribute products for retail customers.
The complexity of fees and charges added to the often-bespoke nature of the services provided has helped create an opacity that the regulator is seeking to address.
The costs borne by an average retail consumer include some, or all, of:
- Financial planning fees
- Investment management fees
- Underlying product/fund charges such as transaction fees and custody fees
- Entry fees, exit fees and performance fees
All firms that are part of a product or service’s distribution chain must ensure that charges across the entire chain do not cumulatively result in the product/service no longer providing fair value. Sophisticated data sharing and management with clear governance over customer reviews will be vital. This must enable an auditable evaluation of how cumulative costs align to a given customer’s circumstances, risk appetite, outcomes, and product/service selection.
Given the variability of these parameters between customers and over time, understanding aggregated charges in real time will likely be necessary and will introduce an additional level of complexity.
4. Firms must embed sustainable, economically viable processes
The degree and method of meeting the Day 1 requirements for Consumer Duty has varied according to firms’ levels of technology infrastructure, team size and prior experience of assessing value under previous regulatory regimes.
Consumer Duty Day 2 broadens the scope to back-book products and maintains the pressure for continuous deeper adoption and compliance with the Duty’s underlying principles. We provide further insight on how firms should tackle the back book review here.
Efficiency will be key in accommodating this without prohibitive cost and while avoiding the crowding out of other valuable business activity. We provide further insight on focus areas for Day 2 programmes here, including discussion of how firms can benefit from embedding sustainable, cost-effective processes for the long term.