Tim Sargisson, former CEO Sandringham Financial Partners.
My background is as the CEO of various regulated businesses, including IFA, SIPP and Platform businesses, over the last twenty-plus years. My role ensured a strong focus on governance, oversight and risk management.
That last sentence may appear incongruous after nearly four decades of regulation. That is to say; we expect that all regulated firms fully embrace risk management with requisite levels of governance and oversight. But unfortunately, this is only sometimes the case.
I mention this because manufacturers probably peer over the fence and see the challenges around distribution as someone else’s problem. FSCS, PII cost increases, and reputational damage around poor advice excepted. Consumer Duty will change all that, and this challenge needs to be fully recognised and appreciated.
Suppose we take pension freedoms as an example. Figures from the House of Commons Work and Pensions Committee in January 2022 show that since their introduction in 2015, some 1.7 million people have flexibly withdrawn over £45 billion from their pensions. Moreover, fund managers and investment houses have done well out of this transfer, as monies flow from institutionally priced funds to more expensive retail funds. But, in addition, and this is the critical point, the liability for the advice to transfer remains with distribution, not the manufacturer. Unless the two are synonymous with each other.
Under Consumer Duty, this position must change. Whereas previously, product manufacturers had little regulatory reason to give much thought to what happened to their products once passed to distributors, including platforms. With the advent of Consumer Duty, it is primarily the responsibility of manufacturers to identify a target market and generally the responsibility of distributors to follow it. The rules require firms to identify the target market sufficiently granularly, considering the product’s characteristics, risk profile, complexity and nature. Distributors may have a specific distribution strategy to supplement the manufacturers, but it must be consistent with the manufacturer’s intended distribution strategy and the identified target market.
Manufacturers will require information from distributors. And here’s part of the problem. According to Mike Hogg, director of strategic platforms, savings and retirement at Aviva, distributors are not sharing vital consumer data with manufacturers. The worrying thing is that this isn’t new. Back in 2017, MiFID II set clear expectations for manufacturers to make available to distributors appropriate information on the financial instruments and the product approval process. And for distributing firms to have adequate arrangements to obtain such information and to understand the characteristics and the target market for each financial instrument. In addition, distributors are expected to provide manufacturers with information, including sales and views on whether the product and distribution strategy remains consistent with the target market’s needs, characteristics, and objectives.
But despite MIFID II and Consumer Duty, how realistic is it to expect manufacturers to engage with over 5,000 retail firms responsible for product distribution? Where 90% are SMEs, each with a unique approach to holding client data.
To be blunt, I remain pessimistic about how quickly things will improve and extremely unlikely in the short term, while distribution remains fragmented and disparate. But, undoubtedly, a wholly joined-up distribution chain will improve data quality, where large firms better recognise the importance of data. In addition, large companies have deeper pockets and are more likely to leverage data through machine learning, where computer systems learn, improve, and evolve as they take in new data.
Consumer Duty will force all firms to recognise that data is one of the most valuable business assets and can impact better customer outcomes. That’s why manufacturers must deploy the right tools and technologies to fully leverage all available data and make it as accurate as possible.
Distributors will require training from manufacturers as well as information on value assessments. However, in many cases, those mechanisms may need to be enhanced. In the fullness of time, manufacturers and distributors may prefer to have tailored contractual obligations on which to rely rather than arrangements based on goodwill and understanding.
All of which brings me back to risk management, governance and oversight.
Once manufacturers fully realise the full impact of Consumer Duty on their relationship with distributors, it is critical to understand that individual distributors are fully aligned with a manufacturer’s culture and values. Redefining the relationship between manufacturers and distributors may be why City minister Andrew Griffith used a recent dinner with industry bigwigs to attack the regulator’s consumer duty reforms, according to a Financial Times report. The realisation is beginning to sink in that implementation costs of Consumer Duty are high.
On the plus side, when manufacturers take greater responsibility for the conduct of firms distributing their products, this can only be a good thing, leading to better customer outcomes and helping to raise the bar across the whole profession.
Tim Sargisson is the former CEO of national IFA Sandringham Financial Partners and oversaw the sale of Sandringham to M&G Wealth in 2022. Previously he has held a number of CEO roles including at Prescott Lloyd and was MD at James Hay.