Speech by Therese Chambers, our Director of Consumer Investments, delivered at the Festival of Financial Planning in Birmingham, organised by the Personal Finance Society.
Speaker: Therese Chambers, Director of Consumer Investments, FCA
Event: Festival of Financial Planning, Birmingham. Organised by the Personal Finance Society.
Delivered: 1 November 2022
Note: this is the speech as drafted and may differ from delivered version
- The FCA wants to see more consumers who can afford to do so investing their money safely.
- This will only occur in a better consumer investment market.
- Financial advisers play a major role in helping or hindering this better market.
- The Consumer Investment Strategy and Consumer Duty is a big change that should turn the dial improving financial advice, the consumer investment market, and outcomes for consumers.
Birmingham has been on a roll this year, and not just in sport with the Commonwealth Games, but being an important and substantial financial and professional services hub. That’s over 48,000 companies employing over 340,000 people and counting. EY announced that its first fintech hub would be based in Birmingham just last week.
Supporting more and safer consumer investments
By its nature, the FCA deals with and talks about significant consumer harm, which can sometimes create the misleading impression that we don’t like people investing. In fact, we’re broadly supportive of consumers investing because it allows people to maximise their quality of life, whilst channelling money to companies looking to grow and innovate, supporting the UK economy. Both these benefits are even more important in the current challenging economic environment. I certainly haven’t envied your positions in the last few weeks navigating the choppy waters of the financial markets!
We therefore support more people investing, and it is promising to see an increase in consumer investments accounts, with British adults holding any investment (excluding investment properties) rising from 29% to 37% over the last five years. At the same time, investment needs to be done wisely and safely, which is why our Consumer Investments Strategy, published this time last year, has a vision of a market in which consumers can:
- Invest with confidence, understanding the risks they are taking, and the regulatory protections provided.
- Access and identify investments that suit their attitude to risk and circumstances.
- Be better protected from scams.
- Get advice or support to invest, should they want it.
Our oversight of financial advisers is part of this Consumer Investment Strategy, and let me be clear, financial advisers are crucial to delivering it.
Through the decline of defined benefit pension schemes and longer life expectancy, people are more than ever making complex financial decisions about their money. Simultaneously, the choice of products that consumers are confronted with has increased. People can understandably find these decisions intimidating. In this context, financial advisers can play a vital role to help consumers navigate the choppy waters of the financial markets, steering a safe passage past scams and inappropriately high-risk investments and into a financially secure future.
The hazards have grown in size; FCA data published last week shows an increase in adults now holding high risk investments, up to 5.7 million, and a 47% increase in reported investment fraud losses in financial year 2021/22 compared to 2020/21, up to £915 million.
On the other hand, bad financial advisers act more like sirens than expert navigators, luring unsuspecting consumers with the prospect of riches but instead foundering their investments.
The fear that this can happen even after taking financial advice leaves a high proportion of adults afraid to dip their toes into the consumer investment market at all, leaving their assets on the shore and wasting away due to inflation. Indeed, 9.7 million British adults who have £10k or more investable assets hold the majority (75%+) or all in cash, an increase of 1.3 million since 2020, and the deterioration of the economic situation could see this trend continue.
Despite the fact that three-quarters of consumers indicate they would not be comfortable deciding where they invest or managing their investments without support from an expert or other guidance, the proportion of the population taking advice remains flat; 8% had taken advice in the previous 12 months in 2022 – the same as in 2020.
It is clear then that there is more to do to get the thriving Consumer Investment market the UK needs, and there is more that can happen in the financial advice space to enable that.
The Consumer Duty
It is in this context that the Consumer Duty has emerged, which I’d like to now explain further. The successful implementation of the Consumer Duty by firms will help ensure the outcomes sought by the Consumer Investments Strategy will be achieved. The 2 are intrinsically linked. The clue is in their names: the Consumer Investment Strategy and the Consumer Duty. Both exist to ensure better outcomes for consumers.
The Consumer Duty marks a significant cultural shift in what we expect from all firms that provide financial services to retail clients. We are seeking a change in industry behaviour by setting higher and clearer standards for consumer protection, and by getting firms to focus on delivering good consumer outcomes.
We expect you, and all financial firms, to take the Consumer Duty seriously, to understand how it impacts your business and to plan and prepare carefully for its introduction. We know the advice sector has become more professional, driven by the Retail Distribution Review (RDR). Advisers are now better qualified, with an increasing number achieving chartered status. And many firms have improved, and continue to improve, the way they deliver their advice. For example, in the increased use of technology to improve the quality and efficiency of their advice processes.
The fact is, however, that many firms are still falling below the standards we expect. That's demonstrated by high Financial Services Compensation Scheme (FSCS) costs, which are rightly a source of frustration for those firms doing the right thing.
The key change is the introduction of the Consumer Principle – Firms must act to deliver good outcomes for retail customers – this imposes a higher and more exacting standard of care than the principle of 'Treating Customers Fairly'. You also need to understand, monitor and act to deliver good consumer outcomes and to work actively to prevent poor outcomes.
The Consumer Duty has 3 straightforward cross-cutting obligations:
- A firm must act in good faith towards retail customers.
- A firm must avoid causing foreseeable harm to retail customers.
- A firm must enable and support retail customers to pursue their financial objectives.
The Duty means consumers should receive communications they can understand, products and services that meet their needs and offer fair value, and they get the customer support they need, when they need it. And, by giving firms a responsibility to deliver good customer outcomes, we hope to reduce the need for reactive regulation and burdens on good firms.
Applying the Consumer Duty to consumer investments sector
How does it apply to the sector? To understand this in more detail let’s breakdown the 4 Consumer Duty outcomes:
Firstly, consumer communications. Firms need to ensure their communications support consumer understanding of their products and services. The key here is that firms equip consumers with the right information, at the right time, to make informed investment decisions. For financial advisers, key areas of focus are likely to be in explaining the nature and extent of their advisory services, costs and charges and suitability reports.
Poor disclosure has been a consistent theme in the results from our previous supervision reviews of the advice sector. Too often firms respond to the communications challenge in disclosures that are over-lengthy, over-complex and fundamentally unclear. And we are expecting better standards under the Duty than the current rules.
Products and services
Secondly, products and services that meet consumer needs. And note there is a deliberate focus on both products and services for retail customers. So, firms providing advisory services will need to consider the Duty in how they design and deliver advice. And some firms will also be product manufacturers and so have additional obligations. Firms will need to have a clear target market or markets in mind for their advisory services. And they will need to ensure the design of those services meets the consumers’ needs, characteristics, and objectives. We know most firms seek to give good advice.
Our Assessing Suitability Review (2017) found that over 90% of the regulated advice given in the UK is suitable. But a minority of firms and advisers still give advice that isn’t and in some parts of the market, like defined benefit pensions transfers, where we found only 60% of advice was suitable. This is unacceptable and the consequences can be devastating for people.
So, the Consumer Duty gives us all an opportunity to focus on driving up standards further. The focus on target markets should be understood as the need to understand the varying needs of the different cohorts of customer that you will all have. We need to move on from one-size-fits all models to models which are genuinely designed to meet the needs of customers and which recognise that not all customers have the same needs.
When you are considering the products and services that will meet your customers' needs you will need to pay very close attention to the risks involved. You will need to ask yourself the question 'is this advice to invest in this product likely to cause foreseeable harm to this customer?' The answer may well be 'yes' if the product is high complexity, has a pay-out profile that is hard to understand (and harder to explain) and where the route to the provision of the advice involves incentive payments or pressure selling techniques such as those we have seen too often where unauthorised introducers are concerned. It is not enough simply to say that your customer has a high tolerance to risk. You will not be discharging your duty if harm is reasonably foreseeable.
Thirdly, fair value. Firms need to ensure their services offer good outcomes in terms of price and value. For financial advisers, this means the adviser charges that consumers pay must be reasonable compared to the overall benefits they receive. FCA research in 2020 found consumers who get financial advice do not always have a clear understanding of what financial advice costs. Many adviser firms also appear to face little competitive pressure to innovate and offer new, or more affordable, services.
Moreover, in a well-functioning market, we would normally expect there to be a broad distribution of charges, reflecting factors like different service levels, underlying costs to advice firms, and incentives for firms to compete on price. However, our analysis found significant clustering of adviser charges.
Our rules allow firms flexibility in how they set their charges, so it is important firms think carefully about whether their charging model is fair value for different groups of consumers. This could mean a firm identifies specific groups of consumers for whom their advisory charging model is unlikely to offer fair value. And where they need to make adaptations to ensure that it does.
Fourthly, consumers get the support they need when they need it. We expect firms to provide support that meets consumer’s needs and expectations. So where financial advisers have committed to providing ongoing services to their consumers, these should be delivered and delivered well. This is especially relevant given how much of financial advisers’ fee revenue comes from ongoing charges. Equally, where things go wrong and customers complain, we expect to see good levels of support from firms in resolving those complaints with consumer outcomes front of mind.
The Consumer Duty will not just be a significant shift for firms, but for us at the FCA too. It will be an integral part of our regulatory approach – in fact we are already beginning to think with a Consumer Duty mindset.
My area recently identified a situation in a firm where there was existing and foreseeable harm to retail customers arising from an unusual term in the customer contracts. We have taken swift and assertive action to get the firm involved to stop and plan a redress exercise.
We are constantly challenging firms to consider their current practices through the lens of the Consumer Duty – I cannot emphasise enough that this is a different lens to what you have been used to and even though the rules are not yet in force it requires your active participation to understand the degree and extent of the cultural shift that it entails. A tick-box approach to detailed regulatory requirements will simply not be good enough as that will never be sufficient to answer the question of whether a firm has secured good outcomes for its customers.
And what about smaller financial advisers? It is important to note that the expectations on firms of the Duty are proportionate to the role of the firm. I know there are many smaller firms across the adviser population and many represented here today. It is very positive to see you all so focused on how to deliver in the best interests of your customers. But, regardless of size, we want all firms to be focused on the outcomes their customers receive. We will be holding firms, including senior managers and boards, accountable.
Implementing the Consumer Duty
So, when is this happening?
We have listened to firms’ concerns on the timetable for the Consumer Duty. We have delayed the introduction of the new rules for new and existing products and services until 31 July 2023. That is 12 weeks longer than originally proposed. And, we have provided an extra year to 31 July 2024 for closed products and services to be covered by the Duty. During the implementation period we will be monitoring firms’ readiness. And we have also set a milestone of 31 October for firms to have developed and got their management body to agree their implementation plans, a deadline that passed yesterday.
I’ve mentioned many new obligations, but what is the benefit for firms?
Well, the focus on outcomes should mean there is more flexibility for firms to compete and innovate in the interests of consumers. Firms that get consumer outcomes right should see rewards in the marketplace. And finally, firms that do the right thing should welcome stronger action to tackle competitors who drive down standards.
Upcoming policy work
We are also undertaking other policy work which will benefit the financial advice industry and in turn those consumers who need support to make investment decisions.
We have listened to industry and consumers and are working on proposals for a simplified advice regime for investment into mainstream stocks and shares ISAs. We recognise that in some areas, where investments are relatively simple and customers’ needs are simple too, existing regulation can be burdensome. We want to allow for more flexibility for firms offering simpler forms of advice, and more flexibility in how customers can pay fees.
The FCA wants more consumers to have the confidence to make effective investment decisions where they have the means and risk appetite to do so. Our research shows that many consumers feel they need the personal recommendation advice provides to enable them to navigate the bewildering array of investment choices available. We want to help advice firms step into that gap, in a safe and proportionate way. This should also have the significant collateral benefit of increasing trust and confidence in the advice profession, something which is in all our interests.
Once the FCA has greater rule making powers under the future regulatory framework legislation, we will be able to do more. We’ve already announced that, to get ready for these changes, we want to carry out a holistic review of the boundary between advice and guidance. Our aim with this is to understand where existing regulation may carry a disproportionate burden, and to explore ideas to reduce that burden, whilst continuing to provide the right level of consumer protection.
As our starting point, the weight of regulation should be commensurate with the level of risk to the consumer. This is likely to mean a move away from some of the more one-size-fits-all aspects of the existing MiFID regime. However, consumer circumstances and needs vary across and between individuals, and indeed for individuals throughout their lifetime. So this is a complex topic that deserves full consideration, and we look forward to hearing from you all.
Advisers will also benefit from us strengthening the financial promotion rules on high-risk investments, for which a policy statement was published in August. Although high-risk investments have a place in a well-functioning consumer investment market for those who both understand the risks involved and can absorb potential losses, our consumer research shows there is often a mismatch between consumers’ investment decisions and their stated risk tolerance.
Our InvestSmart campaign will help educate younger, less experienced investors to help them have a safer investment journey. And our new rules will alert consumers to higher risk investments and further differentiate the journey a consumer takes when looking to invest in a high-risk investment, compared to the journey when investing in a mainstream investment.
Continuing supervisory work
We’re also cracking down on those who don’t do the right thing by continuing to disrupt unauthorised businesses. Many firms and individuals carrying on unauthorised activity are likely to be scam firms and involved in some aspect of investment fraud. We are now scanning an average 100,000 websites created every day to identify newly registered domains with characteristics that could be used for scams or fraud. Also, in the last financial year we published 1,844 consumer alerts about unauthorised firms (a 40% increase).
But that’s not all – we’re shifting from reactive to proactive work at all levels of the organisation in a way that will tackle problem firms more quickly, thereby reducing the liabilities they incur, which ultimately end up costing money to good financial adviser firms. Indeed, we’re preventing more firms from becoming authorised in the first place. We stopped 1 in 7 new consumer investment firms who applied for authorisation from entering the market in 2021/22 (this figure has been updated following review).
These shifts are taking place in our supervisory work for financial adviser firms too. And where we find wrongdoing we will put it right - we have just completed our supervisory work on enhanced transfer value pension transfers (ETVs), resulting in 3,985 consumers receiving redress totalling £244m where we found that unsuitable advice.
So, to bring together all the strands I have discussed today, this is a pivotal moment in how the FCA regulates and supervises the Consumer Investments industry.
The Consumer Duty is a gamechanger for us as your regulator. It should be seen as providing a higher standard of protection for consumers. It will make it easier for us to intervene more quickly and effectively where we identify poor outcomes for consumers.
Customer outcomes, rather than technical compliance with rules, are the focus of our thinking and they need to become the focus of your thinking too. We expect to see you delivering good customer outcomes and be able to provide evidence that you have done so. In, addition, you will need to demonstrate to us that you have not facilitated, or are not the cause of, poor customer outcomes. You should expect to see us acting much more quickly and assertively where we find failures in firms meeting the Consumer Duty.
For many firms, the new Duty will require a cultural change. Cultural change cannot be achieved simply by adjustments in governance, MI, and processes. Yes, these can support cultural change, but firms’ senior management need to clearly demonstrate to the rest of their colleagues throughout their firm what putting good consumer outcomes at the heart of their business means. Firms which view the new Consumer Duty as simply a change to governance and processes are doomed to fail from the start.
All this aims to strengthen the link between good consumer outcomes and successful firms, reshaping the incentive structure so that its only when advisers do well by their clients that they do well for themselves too.