Firms face huge upheaval as new consumer duty starts on 31 July
The arrival of the new consumer duty on 31 July 2023 is set to bring about the biggest change in retail financial services since the Retail Distribution Review 11 years ago.
The Financial Conduct Authority (FCA)will require firms to act to deliver good outcomes for retail customers, on products and services, price and value, consumer understanding and consumer support.
All FCA regulated firms are in scope if they can determine or have a “material influence” over the outcomes for retail customers.
The new ‘catch-all’ phrase to watch out for is “material influence”. Consumer duty will only apply to firms if they can influence outcomes for retail customers.
Crucially, ‘outcomes’ are different to ‘performance’. Sara Cody, Society of Pension Professionals member and counsel (knowledge) with law firm Linklaters, notes: “The concept is far broader, covering things like whether customers understand the options available to them.”
She warns: “Even regulated firms providing services to defined benefit (DB) schemes could be in scope of the duty despite the fact that fund performance does not impact the value of the final pay-out.
“FCA regulated firms providing services to scheme trustees will be captured by the duty. They will not be able to rely on the fact that the scheme, who they contract with, is a professional.”
The FCA has laudable aims. The regulator hopes its new consumer duty will mean:
An end to excessive charges and fees;
make it as easy to switch or cancel products as it was to take them out in the first place;
provide helpful and accessible customer support, not making people wait so long for an answer that they give up;
provide timely and clear information that people can understand about products and services so consumers can make good financial decisions, rather than burying key information in lengthy terms and conditions that few have the time to read;
provide products and services that are right for their customers; and
focus on the real and diverse needs of their customers, including those in vulnerable circumstances, at every stage and in each interaction.
The duty is initially limited to ‘open’ products and services, applying to ‘closed’ schemes a year later. Neither employer or trustees (who are regulated by TPR) are in scope of the consumer duty as they are not FCA regulated firms and are not classed as retail customers but trustees should not get complacent as trustees and occupational schemes may also be indirectly affected.
An FCA webinar explains that the consumer duty rules aim to cover retail consumers, whether those consumers have a direct, or an indirect, relationship with an asset manager. It warns: “if the firm has professional clients, such as the trustees of a pension fund, but where the underlying customer is retail, the firm must consider the end outcomes for those retail customers.”
Casting the consumer duty net wide
The new consumer duty could affect any regulated firm. These could include providers, advisers, consultants or distributors, if they have a hand in the scheme design, its default and/or other funds, or the setting of prices and consumer understanding. The ambit is wide, and could extend to education or communications and/or consumer support such as helplines and complaints handling.
Steven Cameron, pensions director at Aegon advises employee benefit consultants or corporate advisers to make sure they, or any FCA regulated firms they work with, comply “with all aspects of the consumer duty relevant to the services they’re providing.”
Care is needed not to breach consumer duty rules, particularly when “setting up a new scheme, transferring to a different scheme or provider, changing the fund range or scheme level consolidation exercises,” Cameron warns.
All regulated services are captured within the consumer duty, even by employee benefit consultants (EBCs) or corporate advisers. “This applies whether services are being offered on a one to one basis, in groups or through mass communications,” stresses Cameron.
Both advised and non-advised services are covered although the obligations for non-advised will be different.
With 31 July fast approaching, EBCs should review their role in individual member support, the production of mass member communications, as well as in support services such as member-level consolidation exercises.
The only workplace schemes not in scope are those not in any way served by an FCA regulated firm, possibly some single employer trust-based schemes or some master trusts not supported by FCA regulated firms.
In a quarterly consultation, the FCA went further, indicating that regulated firms offering services to defined benefit schemes, which could materially influence outcomes, are also in scope.
Beneficiaries of trust-based defined contribution pension schemes where there is regulated activity by an FCA regulated firm are also caught by the new regulation.
Customer centric
Every decision at every level must be customer-centric. As Linklaters' Sara Cody notes: “For many firms in scope, particularly those not used to dealing with retail customers, this is requiring a cultural shift, which is not easy to achieve.”
Keep an audit trail
Much of what was guidance are now enforceable rules. Cody warns: “Evidencing is also key. It won’t be enough to just say that your firm delivers good outcomes for retail customers, in-scope firms will also need to demonstrate this to the FCA’s satisfaction.”
After the implementation deadline, the FCA has already hinted that it will act swiftly and assertively where it considers there is evidence of harm or risk of harm to consumers.
Implications for IGCs
Where a provider offers a group personal pension, it must have an independent governance committee (IGC) or governance adviser arrangement (GAA). Both bodies must make sure members receive value for money. Once the consumer duty comes into effect, providers must use the IGC or GAA ‘value for money’ assessment when carrying out its own value assessment under the consumer duty.
IGCs operate within an FCA framework but may have developed their own ‘value for money’ criteria. Cameron predicts there will be much overlap but also some differences between these and the FCA’s consumer duty expectations. Yet another issue to be wary of?
More detail needed
Master trust trustees also undertake value for member assessments and again, Cameron expects “much overlap but some differences" to the consumer duty approach.
The Department for Work and Pensions (DWP), the Pensions Regulator (TPR) and the FCA have been consulting on producing a consistent value for money framework to be applied across all workplace pensions, initially default arrangements.
A later phase will extend this to all funds as well as to individual pensions and to decumulation. The FCA has said it sees the framework as fully consistent with the consumer duty but Cameron is disappointed that there is currently “no direct mapping between respective criteria.”
Bespoke comms at risk
Many trustee boards now signpost members to an external provider at retirement, to help members choose appropriate retirement products and services. Helen Ball, partner at Sackers, points out: “The communications issued to members at those points of handover have, to date, been either bespoke or fairly “customisable” by trustees.”
Ball continues: “That works well because trustees can make them suitable for their own members and put their own ‘stamp’ on the wording and presentation of retirement information.”
One unintended consequence could be more bland and less bespoke comms as Ball believes: “some of those providers and master trusts will be more reluctant to change their standard communications in future.”
She fears: “Any changes from the new norm could risk master trusts and providers breaching consumer duty requirements or, at least, falling foul of some internal sign off requirements that may apply to anything that deviates from the pre-authorised generic communications."
Don’t bury your head in the sand
The separate universes of the FCA and TPR/DWP are coming ever closer. The reality, finds Ball, is that today, “most DC pensioners will have travelled across from occupational pension schemes into FCA regulated territory by the time they come to retire.
“What may seem irrelevant at the moment to many occupational pension scheme members," she warns, “could become really important to their retirement outcomes at a future date. That is why all trustees should be aware of the consumer duty and be mindful of its longer term implications.”
Customer centric focus
Why was such an onerous duty needed? Sara Cody puts it into context: “The FCA does not consider that the current treating customers fairly (TCF) regime is providing sufficiently good outcomes for retail customers, sufficiently often.”
She stresses: “The new duty is intended to go much further than TCF, which was often captured in firm policies and guidance but did not have a significant impact on day-to-day decision-making.”
Providers seem already geared up for the new approach. Phil Brown, director of policy at People’s Partnership, is typical: “Consumer duty is absolutely necessary if we are serious about ensuring that pensions work for the saver.”
He stresses: “The industry has an unfortunate history of scandals, including mis-selling, and unless some elements of the industry change behaviours, it is not beyond the realms of reality that we could have more in the future. The saver must be put first.”
Blurred boundary must go
What could really improve the customer experience, almost more than the new consumer duty, is ending the blurred edges on the advice/guidance boundary. This leads so many experienced trustees, pension managers and providers to play it far too safe when speaking to customers. The end result is that employees often make poor financial decisions, especially at retirement. Emasculated guidance is often of limited practical use while regulated advice is too costly for most of the UK population.
If the new customer-centric focus also leads to clearer delineation of guidance and advice boundaries, it could be a real boon. Otherwise, the imposition of the consumer duty could be one more ‘box ticking’ exercise, or worse, more cost for the industry and ultimately, for the consumer.
