Tony Müdd: Principle 12 - What does it really say?

It was the Financial Services Authority (FSA) who first introduced principles-based regulation initiatives, having accepted that prescriptive regulation doesn't deliver upon statutory objectives - Hector Sants, FSA chief executive, in a speech 17 October 2007.

One of the first such initiatives was Treating Customers Fairly (TCF), followed by the Retail Distribution Review (RDR), the introduction of which most of us will remember with varying degrees of affection.

RDR, by the FCA's own definition, was designed to provide greater clarity about the different types of financial services available to retail consumers and to improve transparency around the costs and fees associated with financial advice. It was also designed to establish a resilient, effective and attractive retail investment market to aid consumer confidence.

TCF, which the FCA requires to be evident at all levels within all adviser firms and to be taken into account during product design by Providers, has six consumer outcomes.

These deal with; fair treatment of consumers, identification of target markets, the need for clear information, suitability of advice, appropriate products and the avoidance of post-sale barriers.

Question - does this all sound familiar?

It should, because if I was to now summarise the aims of the new Principle 12, more commonly known as Consumer Duty, you would think I was repeating myself; so, I won't.

Don't get me wrong, I have always supported the aims of TCF and RDR, to increase professionalism in our industry while also raising the bar in terms of consumer protection.

However, what does it say about the FCA's view of the industry when they introduce regulation, which appears in ‘principle', no pun intended, to already exist. That will, in their words, signal a "Paradigm shift in their expectations." By the FCA's own estimation, this will come with an implementation cost of between £688m - £2.4bn.

I think the message is very clear. They must believe TCF and in large part, RDR has failed.

Failed to deliver a resilient competitive financial services market, failed to deliver robust consumer protection and while there has been some success around greater transparency on costs, it has failed to deliver greater consumer understanding of costs.

Doing it better

I am not seeking to be controversial; I am certainly not seeking to be critical of our regulator, but it is very difficult to draw any other conclusion. We all know there are poor practices, elements of financial services that could be improved and areas of consumer protection that could be done better.

In my experience, however, the vast majority of financial advisers are good, hard working, honest individuals who very much want to, and do, help their clients achieve their long-term financial goals.

To that end I am not arguing against Consumer Duty: having higher levels of consumer protection and better client outcomes must always be something, as an industry, in collaboration with our regulator, we continue to work on and strive for.

However, I cannot help thinking that a more targeted approach may have been more appropriate, for the regulator to find ways of addressing the specific ills that result in poor outcomes, rather than producing another version of previous regulations.

Unless, of course, the regulator's answer to addressing specific ills is to give them a bigger stick with which to beat transgressors. In which case, be in no doubt, Principle 12 gives them just that.

All that being said, does it matter? After all, the regulations will come in, even if delayed from the original April 2023 deadline, and directors and senior managers will produce a high-level plan that they can commit to, then analyse the gaps that exist, address them and evidence compliance: I am paraphrasing for the sake of brevity and not to repeat what you have read many times over.

Advisers will review the products and services they offer their clients, gather the value statements from providers, embed a consumer-focussed culture in every aspect of their operation and produce evidence of the aforementioned.

In other words, they will do what they need to do. They will make the best of it. They will continue to do a good job for their clients while meeting their increasing regulatory responsibilities. But yes, it does matter.

What's the cost?

The initial implementation costs, highlighted above are substantial alongside the ongoing annual costs, estimated at £170m - £250m. This comes at a time of continued focus on fees levied to consumers, compounded by the time and effort it will take for advisers to document numerous processes and procedures to demonstrate compliance with the three cross-cutting rules and the four consumer outcomes.

The impact on costs alone will do little to further the cause of financial inclusion, contrary to the view of Sheldon Mills, FCA executive director, in his speech on the 31 May 2022 that Consumer Duty outcomes "… go to the heart of financial inclusion."

The other real reason it matters are the unintended consequences. If we accept the similarity between RDR and Consumer Duty, it is only logical to consider who truly benefited from RDR because, as sure as eggs are eggs, they will be the same this time round.

Self-evidently, despite their best intentions, we know the FCA doesn't believe this was consumers. When you look back at the analysis papers and surveys produced post-RDR looking at the organisations which benefited most, they were invariably the networks.

The reason they were probably considered the biggest beneficiaries were the number of adviser firms, IFAs in particular, that joined these networks as a direct result. IFAs realised almost en-masse that they could no longer operate, due to the costs, complexities and additional resources required, without a ‘parent' organisation taking responsibility for much of the additional burden.

Now we have Consumer Duty and whether you accept the similarity with RDR or not, there can be no doubt, given what will be required of them, that adviser costs will increase, for no additional compensation.

So, we have almost the exact scenario that benefited the networks before, who along, now with consolidators, may be rubbing their hands in joyful anticipation.

Now, while this may appear strange coming from someone in SJP, the reality is that the sector is stronger when diverse: it can meet the needs of a broader sector of clients and just reach more people with different financial requirements that need assistance whether complex or simple.

This is why it really matters, because the dilution of the IFA sector cannot be in the interests of the financial sector, it's not good for client outcomes and it's not good for consumer protection.