Financial advice has a huge advantage over algorithms under the Financial Conduct Authority’s (FCA) new Consumer Duty rules, according to David Tiller (pictured), commercial and propositions director at Quilter.
Earlier today the regulator issued final rules and guidance for the new Consumer Duty with firms given 12 months to fall in line.
Tiller said: “As expected, the final rules for the new Consumer Duty have not changed significantly since the consultation paper. The one exception being a delay to timescales, which is entirely sensible to ensure the new Duty is implemented effectively.
“The regulation is ambitious, far-reaching and the terms are broad, meaning it will be of consequence to all retail financial services. Firms will have to re-evaluate how they collect and collate data; implement a wave of new procedures and ensure culture is laser-focused on good customer outcomes.
“In fact, the most impactful of the 12 Principles of the new Duty is the final one, which states ‘a firm must act to deliver good outcomes for customers’. This really couldn’t be clearer – if you are serving customers, you must act to deliver good outcomes. No excuses, no passing of responsibilities. This is regulation that will sort the wheat from the chaff.
“Financial advice firms have proven time again to be incredibly resilient to change and most will be building on strong foundations but will have work to do to prove the value of their services.
“However, it is far too simplistic to link value to the cheapest price, given that the Consumer Duty also focuses on the avoidance of foreseeable harm. Customers will need to accurately understand the value of what they are paying for and the limitations that could reasonably cause foreseeable harm.
“For example, it is foreseeable that a pension that is insufficiently flexible may not meet a customer’s future income needs. The regulator’s view is clear – firms must ensure there is a reasonable relationship between the price a consumer pays for a product or service and the benefits they receive from it. Clear causal links must be made to the customer outcome, with measurable value assessments.
“When it comes to good outcomes, advice, face-to-face or otherwise, retains a huge advantage over investment algorithms, which cannot measure whether a user hesitantly selects ‘adventurous’ for their risk appetite and really does not appreciate what it means. When it comes to making complex personal finance decisions, understanding the analogue side of human nature is an important filter, even in a digital world. However, this must come with good governance, as the regulator will expect evidence of the ensuing conversation demonstrating the clear cause and effect it has had on the advice given.
“That’s why, as we implement the Consumer Duty, we have to ensure that we can explain the value of advice in an evidential and data-driven way. This includes considering total fees and the end-to-end value provided to the client. Driving down a fee in one place in exchange for a higher one elsewhere simply won’t fly. Platforms and investment business have to do their bit by clearly explaining the value of their services and supporting advisers with reporting in an efficient manner.
“Firms will have to become more customer oriented before the point of sale as well as after. This will include clear segmentation of target markets to consider their characteristics and vulnerabilities – traits that advisers are well placed to identify. With the Consumer Duty, the future is no longer binary. It’s no longer just about what clients pay, it’s about the value provided and the impact this has on customers achieving their outcomes.
“This should be a cause for celebration rather than despair. More than ever before, there is an opportunity to demonstrate that advice is worth paying for. But we need to work things through carefully and logically to evidence and calibrate advice’s true value.”
