Navigating the complexities of Consumer Duty has become a critical challenge for adviser platforms.
As the regulatory landscape shifts, these platforms are now under increased scrutiny to ensure they align with new regulatory expectations aimed at enhancing consumer protection.
Read on to discover the key issues adviser platforms must address in response to the Consumer Duty.
1. Consumer Duty on existing and closed products
The compliance challenge.
The FCA’s Consumer Duty requires all financial firms, including adviser platforms, to ensure that both existing and closed products meet the new standards set out by the regulation.
The Duty’s core objective is to ensure that firms act in the best interests of retail customers by raising the bar for consumer protection and fair value.
For adviser platforms, this has meant a comprehensive review of their entire product range, including those that are no longer actively marketed but still held by clients.
Despite the urgency of these requirements, not all platforms and providers have fully achieved compliance.
The second compliance milestone, which required adherence to Consumer Duty standards for closed products, has already passed, yet some platforms are lagging behind. This incomplete implementation poses significant risks, both for the platforms and their clients, as failing to meet these standards could lead to regulatory penalties and harm to consumer trust.
In spite of the complexities associated with the closed product deadline, platform providers should remind themselves that the consumer duty is not just in the interest of clients, but of themselves too.
2. The ‘double dipping’ concern.
Platforms' response to FCA on Consumer Duty and interest rates.
In December 2023, the FCA issued a “Dear CEO” letter addressing concerns related to the implementation of the Consumer Duty, particularly focusing on the practice of ‘double dipping.’
This practice is at odds with the Consumer Duty’s emphasis on fair value and transparency. At Defaqto, the data we hold for interest rates is still showing that many platforms are not passing on all of the interest earned on client cash to their clients, with some also charging clients to hold cash in their account. A case of deducting interest earned on the client’s money and charging them for the experience.
The FCA’s letter urged platforms to reassess their fee structures, especially in light of recent interest rate changes, which have bought renewed scrutiny on how platforms and advisers charge for their services.
However, we understand that not all platforms have responded adequately to the FCA’s concerns. This lack of response indicates a potential gap in compliance and raises questions about whether these platforms are fulfilling their obligations to provide fair value to consumers.
3. The impact on the adviser community and their clients
Navigating non-compliance.
Ongoing platform compliance challenges under the Duty have significant implications for advisers and their clients. Advisers rely heavily on these platforms to provide the backbone of their service offering, from investment management to client reporting. If a platform fails to meet Consumer Duty standards, the advice firm likely falls short as well.
This presents a dilemma for advisers, sticking with a non-compliant provider could expose their clients to potential harm and themselves to regulatory risks, while transferring clients can be complex, time-consuming, and costly. Advisers must balance the benefits of moving to a compliant provider against the disruption it may cause. Whatever the decision, it impacts on their ability to be Consumer Duty compliant and provide fair value.
4. Fair value assessment
Have adviser platforms revisited their obligations?
A key aspect of the Duty is ensuring firms provide fair value, meaning that the costs incurred by consumer must be proportionate to the benefits received. This requires a thorough assessment of products and services, considering factors like pricing, service quality, the options available and the outcomes delivered.
Assessment outcomes have varied: some firms have proactively simplified fee structures, reduced costs, and enhanced value for clients, while others have been slower to act, raising concerns about meeting FCA expectations.
While platforms' in-house assessments may offer some reassurance, advice firms are still responsible for undertaking their own assessments of each third party they recommend. A platform's fair value claim doesn't guarantee that the advice firm recommending it provides fair value by using it.
5. Raising the standards for consumer protection
Overview of Consumer Duty.
The Duty is designed to ensure that financial firms operate with a heightened focus on consumer protection. The Duty is underpinned by several core principles that set the standard for how firms should interact with retail customers:
- Acting in good faith. Firms are required to act honestly and fairly, ensuring that their actions benefit the customer.
- Avoiding foreseeable harm. Firms must take proactive steps to prevent harm to consumers, ensuring that products and services are designed and marketed with the customer’s best interests in mind.
- Enabling customers to pursue their financial objectives. Firms must support customers in achieving their financial goals by providing clear information, appropriate products, and ongoing support.
Platforms, like advice firms, must now demonstrate full compliance across their product range, including those no longer actively sold, and can also expect to report their actions directly to the FCA. It’s worth remembering this is not a one-time task - the FCA plans to will take action against firms that have not met the required standard
Navigating the future of adviser platforms
In conclusion, the introduction of the Consumer Duty has brought significant changes to the financial services landscape, particularly for adviser platforms.
They must now operate under stricter regulations, ensuring that all products - whether active or closed - deliver fair value and meet the heightened standards of consumer protection.
At Defaqto we see the Duty reflected in the selection criteria being used. Indeed, it's common to see platforms selected based on three foundation criteria:
- Target market compatibility
- AKG financial strength rating
- Defaqto service rating
As the FCA continues to monitor compliance, adviser platforms and the advisers who rely on them must remain vigilant, ensuring they adapt to these new demands to protect both their clients and their businesses. Those that succeed in aligning with the Consumer Duty will be well-positioned to thrive in an increasingly regulated and consumer-focused market.
Author: Darren Winfield, Defaqto Insight Consultant