Consumer Duty is not just new regulation requiring some paperwork. It will be as substantial in its implementation as it is in its scope. It represents a continued shift towards an outcomes-based approach to regulation and a drive toward a culture of “consumer first”.
Adding a new Principle demonstrates the industry regulator, the Financial Conduct Authority’s expectation that it’s how firms behave, think and operate that concerns them the most.
“You have to listen to the notes she’s not playing”
Yes, I just quoted Lisa Simpson.
Where the industry can be weak sometimes is looking for specific instructions and reading the words like they are a procedure document, rather than considering the spirit and noting what they don’t say.
With Consumer Duty, the FCA expect firms to decide for themselves what good outcomes, consumer first and foreseeable harm look like. They don’t set that out for us to follow slavishly. That will test firms’ culture and place focus on the challenge and difficult conversations that take place. It also means implementation works best when the fund board sets the tone and gives clear direction at the outset, before everyone runs off to create data and MI (management information) packs.
The Assessment of Value (AoV) process created similar challenges that we can learn from. I worked with an excellent iNED who would repeatedly bring AoV discussion back to the original question; are the costs justified in the context of the value delivered to investors? This prevented talk of what could be done rather than what should be. It reminded everyone that it was value to the investor that mattered, not just comparison with everyone else. Throughout the industry though, questions like “does AoV let us charge this much” or “how can we justify this fee” are still being asked, showing how far some still have to go.
First Line First
As a fund board director, I would take comfort when first line teams made confident and knowledgeable contributions in regulatory change discussions. Spotting the quiet ones could help identify where the risks might be arising. The executive and their teams need to feel empowered, confident that they are striving to do what feels right when the consumer is front and centre.
To that end, all teams need to feel able to act and challenge as the spirit and principal requires. Saying it while basing rewards on profit alone creates role stress, to the detriment of the business and its customers. Leaving it for second line teams creates conflict, resource pressure and potential misalignment of corporate strategy with implementing measures.
Aim for perfection, but don’t wait for it.
An element of the new requirements rests on distribution and distributor oversight. A thorny issue that has everyone pointing the finger at everyone else. The Fund Boards Council Report on Distributor Oversight authored by senior adviser Simon Hynes was instructive and I’d highly recommend reading it if you haven’t already. Based on unique proprietary research covering distribution oversight across multiple fund structures, in the UK, Luxembourg and Ireland, the report addresses key issues including; roles and responsibilities, key challenges, common features and differences across the jurisdictions and examples of good practice. Key excerpts are available here and the full paper is available to FBC members here.
Aside from the required oversight of distributors, understanding distribution and the flows of data plays a vital role in determining how to assess service and communication with end customers. Having seen how hard it is to get consistent (or any) detailed information from distributors I know there is no easy fix.
The best results I have seen come from firms that get their marketing, sales and distribution teams to lead on it. Not just passing over data to play with but with profiling and using sales and marketing concepts to arrive at conclusions. If any sales/marketing teams say the funds are for “everyone” and distribution is via “everywhere”, tell them the Chartered Institute of Marketing want a word! How well authorised fund managers (AFMs), particularly independent AFMs, cope with this will be driven by their experience with marketing and distribution, which can vary significantly.
In any case, the inconsistent provision of data means that waiting for perfection leads nowhere. Pragmatism and clever use of what’s available will be essential.
Take a standard retail fund. Platforms provide varying degrees of data, but you know the market that each serve – D2C, advised, DFM etc. I know some platforms will provide investor demographics, average holding periods and liquidity data. Where more detailed information is available (from wealth managers co-manufacturing with independent AFMs, direct registers and sales teams, for example) it can be used to augment, so you start to create a picture of the investor base. Creating investor profiles from this can also be very useful.
I could write much more on the implementation of PS22/9. The fact I have used the word “feel” four times more than the word “rules” speaks volumes. How firms arrive at their implementation methods is as important, if not more so, than the measures themselves. Culture and collaboration are key, waiting to see what everyone else does is not.
Wayne Green is the founder-owner of FinServ Dynamics, a consultancy that supports financial services firms and their providers with governance, product development and strategy. More details here, and Mr. Green can be contacted at firstname.lastname@example.org. Before setting up FinServ Dynamics, Mr. Green was an executive director at The Marlborough Group. Following eight years as Joint Managing Director of Marlborough and IFSL, he was appointed co-CEO of IFSL. Wayne also held non-executive director roles on their Guernsey and Ireland ManCo boards.