The introduction of the Retail Distribution Review 10 years ago brought about huge changes in the financial services industry.
This year, we will experience the beginnings of another seismic shift as the consumer duty comes into effect and is embedded into firms’ day-to-day operations.
As with RDR, it will be several years before we truly understand what difference the consumer duty has made, but if the regulator’s aims and ambitions are fully realised, its impact will be even more wide reaching.
Whereas RDR was very prescribed and focused on what advisers could and couldn’t do, the consumer duty is more cerebral and, as the name suggests, focuses on the consumer.
I am sure that the regulator will be taking more notice of the consumer duty’s outcomes than it did with RDR and that means there won’t be any hiding places for ‘sharp’ practices once it is fully embedded.
Core outcomes
Looking at each of the four outcomes in turn, some are likely to have more impact than others.
The first outcome is that products and services are fit for purpose, designed to meet consumers’ needs and targeted at those consumers. This outcome should lead to a simplification of product suites, as manufacturers focus on what is really important to consumers.
In turn, it may lead to a reduction in services within product suites, so that manufacturers aren’t asked to unbundle their services.
This may lead to menu-based pricing where added-value services must be paid for, rather than supplied as ‘free’ services within the product or service suite.
The second outcome is that products and services are sold at a price that reflects their value.
I would like to think that this won’t focus solely on price, but on the fair value of services – by which I mean fair value to the consumer, fair value to the distributor, and fair value to the manufacturer.
The regulator has been clear that this is not a race to the bottom on costs, and that businesses must prove themselves sustainable, not by simply shifting the total cost of ownership to favour one party in the distribution chain.
The concept of value has already raised some questions across the market, and the challenge will be to provide clear material that explains what that ‘fair value’ means to each company, so that we provide solutions to clients that meet their stated ambitions.
The third outcome – consumer understanding – is probably the most difficult one to achieve in the time available. It requires a re-think of pretty much everything the industry does, with a clear view of seeing this through the eyes of the consumer.
