Consumer Duty Musings, from a lower league football fan

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Who are ya? Who are ya? 

When it comes to assessing the delivered value of client investments, it seems all participants in the fund distribution chain are on the hook following the implementation of Consumer Duty. No more a solitary view of value from the component fund providers. 

The Duty requires advisers/wealth managers at the sharp end to assess the value delivered and to justify the total cost of ownership for a client holding any given investment product or service. This seems an eminently sensible approach. Only advisers who spend quality time with clients looking at their broader life plans have the required knowledge to ultimately judge. But hang on, doesnt Consumer Duty also require platforms to produce a value assessment for their services? And wont fund managers continue to be required to churn out lengthy Assessment of Value (AoV) reports for every share class of every fund?  

The AoV reports, infamously not read by many ‘actual ‘clients and used by only 6% of advisers (according to Langcat in 2021), will now potentially be joined by AoV-style reports from both platforms and advisers. 

E-I-E-I-E-I-O! Up the football league we go!’ joyously sung by fans of lower league football teams whenever their team is winning comfortably. In the world of fund distribution post Consumer Duty could we actually end up with clients wading through three layers of value assessment? Almost A-O-A-O-A-O-V! Up the FCA league go we.’ Hopefully not.  

On the face of it, a process that requires an adviser to assess client value based on reading a platforms’ AoV having also digested c. 10 value assessments (to cover a typical number of fund holdings in a model portfolio), will not be straightforward (or quick). Is it a realistic expectation?  What is the chance that any end clients will increase their propensity to read fund managers’ AoV reports, let alone gorge on those prepared by the platform(s) who happen to execute some fund trades. Many advisers will rightly feel that they already assess broad value on a total cost of ownership basis for clients and that the chosen investment funds are purely a tool to power a broader financial or life plan. It does feel that the point of sale adviser is exactly the right person to have the best view and deliver the biggest proportion of client value. Their crucial assessment of outcomes delivered, whether this replaces or is part of a typical annual report will surely be the collateral most prized by the investing client.   

Who ate all the pies? 

Consumer Duty will at last, however, shine a quizzical light on the adviser fee element of total fees pie. Nextwealths excellent ‘Platforms Within The UK’ report found that the average fee paid by clients for advice was 68.4 bps.  

Why is it 68.4?  And why are fees based on a percentage of client investment anyway? How does the margin relate to the costs of providing the advice service? These and many more ‘fun’ questions can be expected by advisers who have the pleasure of sitting in front of the FCA referees for some post-match analysis.At least the FCA have made it clear that Consumer Duty rules will not apply retrospectively. In terms of other fees, the commonly held view among commentators seems to be that platform and fund fees will most likely continue to fall more than the advice fee element, which may stagnate after years of unchallenged growth. One to watch, for sure. 

The new Consumer Duty requirements will at least have teeth. The introduction of the FCAs Senior Managers Regime a few years back was a key building block that really does mean Consumer Duty miscreants could just feel the crowing chant of youre getting sacked in the morning from the governance terraces’. 

In the regulatory champions league, the FCA has played a blinder and arguably stolen another RDR-sized lead over its EU fund governance rivals. One-nil, to the Ingerland? OK, the FCA is not technically just an English regulator (Scottish, Welsh and Northern Irish readers can feel included here, no World cup jibes needed). The FCA deserves credit for leading the way with a principles-based regime that tries to bring all market participants together. Yes, the lack of prescribed detail is a frustration to many and there is an awful lot left for industry to work through’ but it is hard to argue with the very laudable principles. This encouragement for cross-segment collaboration certainly came across in the FCAs own Consumer Duty webinar in October. 

For fund boards, with consumer duty plans agreed and the broad strategy in place, the focus will now move to execution. Executive teams will quickly run into data challenges and deliberations over what can/cant be obtained to help in building appropriate dashboards to measure client outcomes.  

Were gonna score in a minute’, bellow the consultants and lawyers from the sidelines. The Duty does seem to be getting a suitably large degree of focus across the retail financial services market in general. However, with 56% of advice firms, on average, still feeling that Consumer Duty will have no impact on their business (source Netwealth) there is clearly plenty still to come. 

Good times never seemed so good. So good! So good! 

Vertically integrated firms certainly seem to have some apparent advantages when it comes to meeting the challenges of Consumer Duty. Any combination of in-house technology, bespoke platform and captive distribution/advice teams confers greater potential for client look-through and insight. Advice fees are often higher than the 68.4bps adviser average quoted by Nextwealth, and although they can be uncomfortably bundled as part of an overall fee, there is clearly the means to define the data and reporting needed to fulfil Consumer Duty requirements with minimal reliance on external parties.  

This financial and data advantage could even ultimately turn the heads of previously fiercely independent’ advisers. Many IFAs seeking a career exit strategy, have already succumbed to the charms of the big club advice consolidators and there has certainly been some comment that Consumer Duty could yet provoke another acceleration of this trend over time.