The Consumer Duty is not just for Christmas: a financial platform focused overview of key Consumer Duty considerations
14 Dec 2023
6 min read
The Consumer Duty has had a huge impact on firms providing retail financial services and the FCA has made it absolutely clear, the Duty is “not once and done”, it is here to stay.
Of course, platforms were here before the Consumer Duty was born, but it is fair to say that the arrival of the Duty has given new vigour to certain pre-existing obligations and stimulated some all-important re-thinking. All firms providing financial services to retail customers must keep the Consumer Duty ever-present at the front of their minds and platform businesses are no exception to this.
Recent trends
Platform businesses from the entire “platforms ecosystem” (platforms, advisers, and distributors etc.) have been the protagonists in some of the most recent and interesting news features in the application of the Consumer Duty.
Here are some of the key points that have given pause for thought over recent weeks:
Every consumer is unique: consumers have different levels of assets and different needs; some have smaller, simpler investments and need plain vanilla solutions and others have bigger sums to invest and different, more complex options available to them. Segmenting clients into distinct types might help to make various obligations and arising process and systems easier to deal with, but there is no “one size fits all”.
Fees and fair value are “musts” to get right: the answer to the question of whether a consumer has been provided with fair value will involve looking at all costs including, for example, minimum fees, wrapper fees, transaction fees, transfer and exit fees. What is fair for one consumer is not necessarily fair for another, for example, there may be minimum fees applicable to some platforms making them unsuitable for small portfolios. And of course, value is not just about price…..more on this is in the “recent example” below.
Understand what you offer: all participants in the platform ecosystem must understand the nature of the products and services that they manufacture, recommend, promote, sell, or distribute. This is a big topic but here are some key points around it:
- Detailed understanding goes not just to the nature of the products and services on offer but also to the functionality and capability of a platform including, for example:
- what technical support is available both at the outset and on an ongoing basis?;
- what does the client-facing end of the platform look like, is it intuitive and user-friendly, does it help the “consumer experience”?;
- is there a customer support team?;
- what does the adviser-facing system look like?; and
- how well are the client-facing and the back-office systems working together?
- What systems are in use: are they manual ones or advanced software driven ones? Some platforms are using advanced technology and solutions that can free up their professional staff from manual (therefore prone to human error and likely inefficient) areas of the operation enabling them to increase efficiencies, scale and add real value to nurturing their client relationships. On the other hand, technology systems can also introduce operational risk of a different type.
- Is back-office integration in place? This can help clients who have assets in more than one place, enabling data to be seamlessly aggregated from multiple providers and so improving security and accessibility of data, and enabling clients to view their investment position holistically.
- What do the reviews say? Press coverage and third-party reviews could go a long way to highlighting products and services to avoid or ask probing questions about: are there stories about advisers or consumers having a poor experience, for example, having out of date technology, being slow to respond to queries etc.? There are potentially very serious reputational and other repercussions from getting the consumer experience wrong and so platforms need to be following the trends and evolving service level offerings, in addition to assessing their own complaints activity. If there is some bad coverage, importantly, has that been taken heed of and improvements made accordingly?
- Are “bolt-on services” available? These additional services provided by back-office service providers can secure platforms firmly within the client journey by, for example, enabling easier log-in experiences by removing the need for passwords every time, and connecting with other providers to facilitate hubs enabling clients to see all of their financial products (including current accounts, savings accounts, stocks, shares, mortgage, pension, loans, insurance policies etc.) in one place. Providers who are investing in technology to support connectivity and efficiency may be able to offer improved levels of accessibility and client experience, including by being more cost effective and competitive, and be susceptible to fewer errors.
- How does the client-facing documentation look? For example, are there guides on how to use the platform, guides on investing and the associated risks, and do these guides assist in enabling the customers to understand the platform and how it will help to achieve their financial objectives? Really good client-facing literature needs to be client-friendly, expressed in appropriate language and designed to help customers to make good financial decisions, with clear messaging, helpful images, making full use of plain English and techniques such as layering to signpost the way though complex information.
- Has a deep-dive been possible? Who is the provider behind a platform, what does the governance look like, and are there suitable policies, procedures and controls in place to guard against critical risks (like fraud, cyber and data security) and other things that could go wrong?
All these myriads of different things reinforce the need to consider the Consumer Duty on a continual basis and not just when a product is launched or at the start of the client journey.
There will be a need for constant monitoring for new information, new risks and for new entrants to the market who might challenge the status quo for established providers by offering new options for consumers.
There will be a need for training, refresher training and an ongoing dialogue between different parts of the ecosystem about the different products and / or services available.
There will be a need for constant investment to keep up with and move with the times, including consumer expectations.
There will also be a need for an awareness and possibly an empathy, particularly in the current economic environment, to be aligned to the prevailing economics.
A current example: treatment of customer cash balances
The FCA has demonstrated that it has a keen eye and is watching, very recently indicating in a “Dear CEO letter” to all platforms that following a recent survey the treatment of interest earned on customer cash balances is under scrutiny and that firms are expected to meet the regulator’s expectations around the Duty in this space. Of particularly serious concern to the FCA is the practice of “double dipping” where firms retain the interest earned on customer cash balances and charge customers a fee on cash held.
The message from the FCA around the action it needs to see from all firms operating in this space is consistent with much of the aforementioned, and platforms should:
- review their practices and think about whether they demonstrate good faith, honesty, fair and honest dealing, and are consistent with the reasonable expectations of consumers (prevailing high interest rates have meant big returns and so this is an important issue);
- make fresh fair value assessments and stop any behaviours which offend these principles (specifically, stop “double dipping”);
- review and update customer terms and other key documentation on the treatment of cash balances;
- ensure that relevant consumer communications meet the consumer understanding outcome and enable properly informed decision-making and are clear, fair and not misleading; and
- ensure that the products and services are designed to meet the needs of the customers for whom they are intended.
The FCA will review the responses that they receive from platforms to this letter and will be unlikely to be hesitant in taking further action to ensure consumer protection and good outcomes for consumers. Expect more on this next year!
If you want to hear more about how we can help you in this space, please get in touch with Martin Cook or Anna Davis, or click here to find out more about our Financial Services Regulation team.
“Firms are expected to have fully implemented the Consumer Duty (the Duty). They should do this by demonstrating adherence to the cross-cutting rules by acting in good faith, avoiding causing foreseeable harm, and enabling and supporting retail customers to pursue their financial objectives. Firms should also demonstrate that they are meeting the four outcomes of products and services that are fit for purpose, price and value, consumer understanding and consumer support…”