A high proportion of articles and presentations in our sector at the moment seem to be focused on Consumer Duty and what is needed to meet its requirements. This is hardly surprising when the initial plans need to already be in place, and most of the rules need to be embedded by the end of July next year.
But one question I am asked frequently by smaller advice firms is "how does all this apply to me"? On face value, you can see the dilemma. Trying to distil 161 pages of policy statement and 121 pages of finalised guidance into an action plan could be tricky for a firm with a dedicated, significant compliance resource but is likely to be an even bigger challenge for a firm with only a few employees.
The first thing to say is don't panic! The FCA is aware that firms will need to take into account ‘proportionality' - effectively what can be reasonably expected of a prudent firm regardless of size. I think it's also pertinent to remember a comment from a previous FCA feedback statement which encouraged firms to ask "is this right?" rather than "is this within the rules?"
But, nonetheless, there is no doubt small firms will need to take some action. Here are some practical tips which might help, broken down by the four outcomes the FCA is seeking to improve. As always, I should point out these aren't all-encompassing.
Consumer Understanding I've heard various ideas on how to do this, but why not write out to a client ahead of their annual review with a short questionnaire asking them questions around the product they have, what investment risk (if any) they think it has and the benefits of their recommended solution. The client should be asked to return this ahead of the review, as it can then be discussed and documented as part of the review process. In that way, as reviews are conducted over the years it can hopefully be demonstrated that understanding is constantly improving. Use an executive summary in your suitability report if you don't already do so to provide a short explanation of the risks and benefits of what is being recommended, as well as the costs. Consider if this is understandable to vulnerable customers. Product and Services Segmentation isn't a prerequisite of either PROD or Consumer Duty, but it may well be that even in a small firm it would help to segment a client base into different client types. However, in practice for a small firm, this may be a very simple split based on what level of service and fee agreement is agreed with the client. I'd avoid basing it on investable assets, which has been used by some in the past, as in reality, the needs of clients who happen to have a similar level of investment can be very different Check that due diligence and research that feeds into the advice process and any CIP/CRP is up to date and documented accordingly Document the rationale in place for the charging structure for each segment (if used). Select a small number of typical clients to test the time taken and cost to deliver the advice. Ensure this also covers ongoing advice Ensure business continuity processes are in place, in the event of an emergency such as loss of communications. Will clients know how to contact you outside of their normal method? Price and value Ensure fees are clear and easily available, such as on the firm's website - if applicable Benchmark your fees against an independent source such as unbiased. This should be both on an initial and ongoing basis. In my experience, small advice firms often go 'above and beyond' more often than larger firms, so if this is the case then that may be the reason a fee level is higher than average. The regular testing of some sample client perspectives on their assessment of the value of the advice should provide really useful evidence. This is an ideal time to remind them of what the advice has achieved, such as £ tax savings due to estate/pension planning, bed and ISA process, the advantages of cashflow planning & forecasts, risk profiling, communications/newsletters and any other services provided or facilitated, such as power of attorneys, wills, trusts etc. Again, this could be a precursor to an annual review, with the intention of discussing any queries with the client at that time.Consumer Support
Analyse and state typical turnaround times to manage client expectations For a one-man adviser firm ensure a locum is in place to assist clients if you are unavailable for whatever reason, and also plan how client contact with the locum will work Consider whether anything additional needs to be done for vulnerable customers. This is certainly one area where ‘one size doesn't fit all'. Generally, most experienced advisers will already be well on top of this, but it's worth considering some simple pointers such as What form of communication is most appropriate for the client given their circumstances? Should I encourage the client to bring a family member into the communication loop if that is likely to improve understanding? Is it beneficial to bring more outside parties into the proposition? As well as more traditional third parties such as accountants and solicitors, organisations like the National Bereavement Service can provide an excellent service at a difficult time.Finally, don't forget the requirement to produce an annual report to show how you are meeting Consumer Duty requirements. This must be provided to the FCA upon request along with any MI that sits behind it and should be available no later than July 2024.
There is no prescribed format for these reports, but it might be useful to work backwards. Start from what information you would like the report to contain, then ascertain how the MI can be constructed to evidence the requirements, and then tweak any processes to ensure they are suitable. In order to help put the report together it might be useful to read the ‘key questions for firms' in the finalised guidance starting on page 112.
Finally, it's also worth mentioning that for very small firms there is some excellent support out there available from networks and service providers. They may also offer a random file check so an adviser can have peace of mind that they aren't ‘marking their own homework'.
Many providers, including us, also have dedicated Consumer Duty content on their websites for those looking for more assistance.
Vince Smith-Hughes is director of specialist business support at M&G Wealth
