To put customers’ needs first, question everything you do

The FCA’s consumer duty rules come into force from July. To deliver on them, wealth managers may need to modernise their processes 
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Firms that provide investment advice to retail customers will need to pay particular attention to the new rules coming in from July. The consumer duty, as set out by financial regulator the Financial Conduct Authority (FCA), requires firms to put customers’ needs first on everything from making it easier to switch or cancel investment products, to bringing an end to rip-off fees, long waiting times on the phone, and lengthy and unclear terms and conditions.

The new rules will come into force from 31 July for new and existing products or services that are open to sale or renewal. Closed products or services that are no longer marketed or distributed to retail customers, nor open to renewal, have an extra year before the duty comes into effect.

For consumers, the benefits are obvious. If you invest money, it should be clear what you are paying your provider for. Likewise, if you have a financial adviser it should be easy to see whether your adviser is acting in your best interests.

What changes are required?

But are wealth managers ready for the changes? Chris Jones is proposition director at Dynamic Planner, a technology platform used by more than 40% of UK investment advice firms. He warns that the consumer duty will require a significant cultural change in the industry, even if many of the practical changes are in hand.

“Most people we interact with are completely aligned to the new duty and already act in good faith. But there are a lot of habitual business practices, systems and controls that haven’t really changed in 50 years. This is what the FCA calls ‘sludge’ – the cause of most bad experiences in financial and other services. It will take time to modernise these systems,” he says.

Day to day, wealth managers’ mindset will have to shift from focusing on gaining new customers and then upselling by convincing them to buy more or new products. Instead, their focus should be checking whether their products are genuinely suitable for the customer buying them. If not, the customer should not be sold them.

“Many firms, either through the design of their apps or via aggressive communications, try to get customers to trade too frequently for the purpose of increasing their profits. But this may not be in the best interest of customers. This is the type of behaviour that will be looked at under the consumer duty,” says Karan Kapoor, global head of regulatory risk and consulting at Delta Capita.

How does consumer duty incorporate lifestyling?

But the most significant change will be in client segmentation. Customers will be grouped by need and circumstance rather than wealth. There will be an emphasis on the better use of client analytics to understand each client’s needs and their investment journey. Companies will have to understand a client’s lifestyle in order to identify trigger points where the client may need advice, at the right time and the right price. 

A lot of business practices, systems and controls haven’t changed in 50 years

Those with self-invested personal pensions (SIPPs) who are approaching retirement should be contacted by their adviser and have their retirement options fully explained. Likewise, a client with a junior investment ISA should be contacted when they turn 18 and their junior ISA is about to be switched to the adult equivalent. They should receive clear information about their choices, even if that involves explaining that they could transfer the money elsewhere.

Much of the focus will also be on how advisers identify and communicate with vulnerable customers, such as those who are in poor health, have a cognitive impairment or poor literacy or numeracy skills. Firms must provide communication guidelines to staff to promote awareness, and training must be given so that staff are capable of handling and spotting vulnerable customers.

Companies will also have to get better at communicating with their clients more generally, especially in terms of talking in clear language, increasing customer engagement and explaining investment products in a clear and concise way – either through text or video.

Is there a risk of complacency?

Hugo Bedford, CEO of wealth management firm JM Finn, says that all his 310 staff are receiving training so that they know what they’re heading towards. “The key is engaging staff along the journey, through seminars and other formal training. Some elements of the duty have evolved over the past few months and as we get nearer the July deadline we’ll develop and implement even more ideas. The whole firm is involved.”

But many wealth managers say they already operate in good faith with their customers, and that consumers are unlikely to see major changes. Two-thirds of advisers say they will not be changing their charges for services or products, according to a recent survey of 600 advisers and planners by financial services consultancy Lang Cat Financial. 

The same survey also revealed that 61% of advisers expect minor changes to information communicated to clients, with 27% seeing no change at all. Just 6% said they expected significant changes in their client communications in the coming months. Almost 70% said they expected no changes in their approach to vulnerable customers.

But there’s no room for complacency. Dean Gough is head of operations at wealth manager Financial Planning Corporation and warns that firms mustn’t fall into the trap of seeing consumer duty as a box-ticking exercise. The new regulation will raise the bar for the industry and the expectation of clients, he says. Those who haven’t heard from their adviser in years, have no idea what their fees are paying for, or how their investments are helping them to meet their objectives should expect to see a change.

Is there more to come?

What’s more, this may simply be the first of a series of changes as part of the FCA’s three-year plan to boost consumer confidence in the financial services industry. It’s prioritising creating real transparency and ensuring consumers are getting value for money. 

So, as firms adjust to embedding the customer perspective at the heart of their business model, they’ll need to get used to the idea of overhauling their processes. The FCA has promised to call out firms that aren’t complying with the new rules from the end of July, so wealth managers should start changing their practices now if they haven’t already.