Duty Bound

Dan Owen Regulatory Development & Policy Consultant

“Independence is a state of mind.”

This is a newspaper quote from one Financial Conduct Authority (FCA) notary shortly after the Retail Distribution Review changed the independence rules for investment advisers. At the time, there was widespread uncertainty as to how the ‘new’ independence rules should be met. Quite how advisers were expected to lock into this cerebral transcendence was left largely unaddressed. But, time manifests consensus and very few investment advice firms will still feel uncertain about the application of these rules. Fast forward almost a decade and we find our sentient selves being challenged again, with one well known industry publication heralding that the Consumer Duty is designed to “fundamentally shift the mindset of firms in how they deliver for consumers.” The FCA itself has proclaimed that the Duty represents a “Paradigm shift in our expectations of firms.” Heady stuff. So what difficulties do we face in reaching this conceptual nirvana? Primarily, as with all principles based regulation, the Duty itself (along with many of its key elements) is subjective. Principles rely on a commonly held set of values and beliefs to govern behaviour, i.e. they require consensus.

Arguably, in relation to the new Duty, we don’t have that yet. It’s perhaps also difficult for a business to be truly self-critical in circumstances where the challenge is so overtly laid against a fundamental source of pride for so many firms; what they deliver for customers.

To achieve the self-criticality required to assess where we currently are against the Duty, we could look at how we, as both professionals and consumers, might behave in certain scenarios. Take for example one of the most subjective elements of the Duty – Price and Value.

No doubt we all have family members that have used financial services provided by others. If we put ‘mates rates’ to one side for a moment, would you be comfortable charging a family member your fees, or would you be comfortable if another adviser charged your family member the same rate of fees that you charge, for the same level of service? If the answer is ‘yes,’ then you can be pretty confident that fee levels will be appropriate under the Duty. The wider value assessment can (and should) then take into account costs to serve as well as features and benefits, allowing for reasonable profit margins. We could take the view that customers are perfectly capable of assessing value. If they didn’t think our service represented value, they wouldn’t pay for them. But our behaviour as consumers isn’t always that linear. For example, I have no idea what a crank shaft and fitting costs for my vehicle. If a mechanic tells me I need one, I will probably pay whatever he or she tells me it costs. Not because I hold a particular view on the integrity or skills of the mechanic, but because I want my car out of the garage. Although I may mumble something about the Georgian window tax, the chances of me shopping around are slim, even though I have little idea of whether or not I’m receiving value. You might do the same thing. Or you might consider this to be naïve, lazy or just plain stupid. The point is, a consumer’s willingness to pay isn’t always the best indicator of whether a product and/or service represents value. This is reflected in new Consumer Duty rules, which mean that we can’t take a customer’s willingness to pay into account when assessing fair value.

Assessment of behavioural approaches can be used across all four of the Consumer Duty outcomes of Products and Services, Consumer Understanding and Consumer Support, as well as Price and Value. For example, in relation to Consumer Understanding, how likely is it that our collective family member would read one of our disclosure documents and what would make them more engaging? Would it help them if it was provided in a format other than paper? Wherever we land on these types of questions is perhaps secondary to actually undertaking the exercise and being able to demonstrate that this has been done. The key will be to consider the requirements objectively with an open mind, further refining processes where this is needed and being unafraid to call out areas where wider change might be necessary. Time will do the rest.