Consumer Duty: a wake-up call to all? Dear CEO letter to Wealth Managers and Stockbrokers

Following the flurry of activity that preceded the launch of Consumer Duty back in July, things got a little quieter. However they have suddenly got loud again! On Wednesday 8^th November, the FCA wrote to wealth management and stockbroking firms, setting out two priorities for this sector, one of which was Consumer Duty. What they communicated in this letter with regards to Consumer Duty  priorities have a read-across all sectors and there was no ambiguity whatsoever in what the FCA found lacking.

The FCA findings

The FCA expects firms to have implemented Consumer Duty in full by this stage, which should have resulted in meaningful changes to delivering good client outcomes. In addition, firms should be able to demonstrate what they have done, if asked by the FCA.  Despite this, the FCA reported that many wealth managers and stockbrokers failed to meet their obligations in the following areas:

1. Products and Services understanding:

• Continuing to push products and services that are too high-risk or complex products and services for many clients;
• Being opaque about the risks of unsuitable portfolios, which are not in line with their client’s risk profile or appetite;
• Failing to be clear, fair and not misleading when communicating with clients by promoting products that are too complex to understand; and
• Not recognising that they may have vulnerable clients on their books.

The FCA then went on to outline in no uncertain terms, exactly what it expects firms to do:

• Be focussed on the needs and objectives of its target market and ensure that products and services are aligned to those needs and to client’s risk profile/appetite and circumstances;
• Look again the vulnerability status of clients e.g. What does vulnerability look like in your clients? Who might those clients be? Are they being accommodated appropriately?;
• Make sure that clients fully understand the products and services they buy and if they have limited understanding, it is not exploited;
• Where clients are being opted up from retail to professional, make sure that the systems and controls used as part of this process are robust;
• Where clients are opted up, they must be made fully aware of any additional risks or protections they may lose as a result, such as limitations to accessing the Financial Ombudsman Service, or FSCS; and
• When selling complex and/or unregulated investments to clients, make sure that the rationale for doing so can be fully justified and explained.

2. Price and Value:

The price that a client pays for a product or service should be reasonable relative to the benefits they can reasonably expect to receive. The FCA has reported seeing clients being charged for services that they do not receive, such as ongoing advice. They also specifically highlighted overtrading on portfolios to generate high transaction fees and providing a product or service which does not align with the needs of consumers (such as an expensive discretionary offering for a low-risk consumer). They also remain concerned about firms not consistently providing clear disclosures on their fees and charges, with the result that clients may not be aware that high fees can reduce returns on their investment, or firms not applying fees and charges consistently across their client base.

The FCA has again reminded firms of the importance of considering the value of products and services and considering all revenue streams when carrying out fair value assessments, for example not passing on deposit interest rate increases to clients as the base rate increases.

The FCA expects firms to:

• regularly assess the overall cost and value for money of products and services; and
• make changes when poor value is identified.

The FCA have also used this letter as a reminder about embedding Consumer Duty into the culture and operations of firms.

The letter is also crystal clear that the FCA is:

• implementing and operating a data led approach to identify outliers and problem firms in this sector;
• sending all firms a further survey in December 2023, which will be tailored to risks posed by a firm’s business model;
• making its supervisory activities more targeted, intrusive and assertive, including short-notice and unannounced visits;
• increasing engagement with firms on non-financial misconduct;
• using the Consumer Duty to intervene quickly against potential or actual consumers harms, on an individual or multi firm level; and
• considering in future engagements whether firms have taken appropriate action to rectify the root cause of any issues, which the FCA believes is often poor and ineffective leadership, governance, systems and controls and conflicts of interest management.

The FCA makes it clear that it wants to work with firms “to pursue bad actors and poor practices”, which in turn will benefit clients, raise standards and help good firms to prosper.

What next…

The FCA has scheduled a Consumer Duty webinar for the 6 December 2023 when I suspect they will share the outputs of the information gathering they have done in recent months through surveys, reviews and letters sent directly to firms.  They may also share in more detail, their expectations for how firms will assess, monitor and adhere to Consumer Duty going forward through outcomes testing and audits. It looks likely that the expectations of firms, including those in this Dear CEO letter, will feature in the 6 December webinar.  We will arrange our own webinar shortly after the FCA’s webinar to discuss what they covered and what it means for regulated firms.

If you are looking for help and support with regards to anything concerning Consumer Duty, then please access our Consumer Duty page using the button below, which includes helpful guides as well as how we might be able to support you. 

Consumer Duty