Financial Advisers: Consumer Duty - Understanding the Regulatory Focus (part two)

Join us as Chris Davies, Executive Director at Howden, sits down with Keith Richards, Chief Executive Officer of the Consumer Duty Alliance, for part two of our deep dive into consumer duty.

Resilience is key for regulated advice firms, and we'll uncover actionable insights on how they can safeguard against unintended financial pitfalls. Explore the crucial role of professional indemnity insurance and the responsibilities brokers have in keeping firms informed about policy changes. We’ll also delve into high-profile cases like the British Steel review and cover the impact of Brexit on regulatory initiatives.

For information on Howden's Financial and Risk Advisers team please visit our website and find out more about the Consumer Duty Alliance here. 

Transcript

Speaker 1: 0:05

Welcome to Howden's podcast Fortune Favors the Brave. We all take risks in our everyday life, and business is no different. In this podcast, we're speaking to the experts about a topical challenge or issue and what business leaders can do to overcome it.

Speaker 2: 0:19

Welcome back to episode two from our series of talking to Keith Richards, chief Executive of the Consumer Duty Alliance. Welcome back, keith, and picking up from where we left off last time. I think there's a number of issues we spoke about, but what I'd like to do is maybe take you into another question. I think I've probably said this myself that RDR, ultimately was probably the best thing that happened for financial advisors in general. I know, you know, I know, I was there, I was running building a business at that point and the worry and the you know the anxiety. We lost a few, as you say. We didn't lose any many, as many as people predicted, which was brilliant. But I think, looking back on it now, that the shapes of those businesses, the you know, the way they're able to base a fee structure there's no need to consider recommending or policies change. If they don't need to change, they can be altered inside a platform and all that kind of stuff. So huge, huge, huge benefits.

Speaker 2: 1:14

Quite recently there's been a lot of press, a lot of regulatory concern about the fact that it seems, at least for a number of firms, and work's been undertaken. I know to see how deep this goes across the industry, but clearly the regulator has a nervousness, having seen some firms that although the client has been paying for an annual review, either the annual review may not have taken place or wasn't documented kind of probably amounts to the same thing in the regulator's mind. But you know, it could be quite different as far as the advisor feels about whether they did it or didn't record it. And bearing in mind I suppose that it's a bit of a loaded question but there's, it's not a lot to do, is it to record the fact that you met with a client or you spoke to them on the phone or Teams and you had a little look through what they were doing and there were no changes and everything's good to go as was last year? Are you downhearted by the fact that we haven't even got that right?

Speaker 3: 2:14

Yeah, of course you know whenever you hit points like this, I mean this has the potential to cause detriment to the wider market. The potential to cause detriment to the wider market. So you know one of the biggest profile advice firms that has been in the press an awful lot has attracted an awful lot of claims management companies claiming to be able to get compensation, not just against that organisation but for anyone who's been under regulated advice, suggesting that almost certainly you wouldn't have received the service that you paid for. So it is really disappointing when firms can't evidence it, but I think it's really important to put it into perspective. The largest firm out there that went public first was based on an amount of money of 426 million cited as being put aside for a potential redress was based on not being able to evidence 2% of their customers. In other words, what the headline should have been is that they're able to evidence that 98% received the service that they paid for, but 2% they weren't and as a result of that, they're now going to take remedial action to potentially strengthen up their processes and make compensation.

Speaker 3: 3:30

I think every firm may have been slightly vulnerable, so certainly we've had one or two others come out and accept it. But even small firms, in fairness, if they have to, if they think about it, they may have booked an appointment for the annual review. The client may have rang up and said, said look, there's nothing really changed for us, so you know we can leave it for now. You know, if the client's happy, you're happy. You know you're on call. But, frankly, if you are charging them for an annual review and you didn't do the review, then you need a refund process in place. Now what I know will happen is most small firms will say, oh well, well, in that case I'll make sure the meeting goes ahead and it's documented, so some of it may just be in time. We've become, you know, we've just become a little bit complacent, you know. I mean being content without everything's going could be another word for complacency occasionally. So I think what this is doing is it's sharpening up again.

Speaker 3: 4:24

I mean, let me just point out that every regulatory reform and you'll you'll know this was going to be the armageddon rdr was definitely quoted as the armageddon of all armageddons, so it was really going to happen. Under rdr, the average earnings of a financial advisor at the point, vardiyar, was circa 56,000 pounds per annum. Today it's over 100,000. So this abolition of commission, that was going to be the end of 60% of the market. It's just not materialized.

Speaker 3: 4:58

And it comes back to when we're forced to do something different. Up to that point we can only quantify the impact on us, but past that point we just didn't see what we were going to do different. That makes a difference. So I am disheartened but at the same time I'm quite heartened by the fact that the regulator keeps telling us that actually they're seeing positive evidence of of how consumer duty is working in the favor of the consumer. I don't think we've had that that much in past regulatory reform. It's fair to say that they were pleased, probably two years after rdr, that there hadn't been mass attrition and they were also pleased that they were seeing some evidence of advice firms grappling with being able to express the true value of advice and consumers not running away from it. So it has forced us to to, I think, actually understand the true value of what we do.

Speaker 3: 5:47

When we were just taking commission and no one paid attention, we probably didn't articulate just how much value consumer was getting outside of arranging a product. You know, some ifas have actually saved their clients thousands and thousands of pounds in tax, but forget to actually include that in part, the value of their professional advice. Yeah, you know, they tend to think because when it was, certainly when it was all paid by commission. So I think there's lots of things you know you mentioned earlier. Uh, yeah, there's lots of financial advisors that do offer some free advice to family members of valued clients. So there is some pro bono going on.

Speaker 3: 6:24

But I do think you know, by and large, the challenges we're facing, you could argue would have happened without regulation. You know that switch from people being paid weekly in the hand to monthly by a direct debit would have ultimately impacted the man from the pro because there would be no need to go around collecting premiums after a period of time. So you know we're seeing change occur that was probably, is it's evolutionary and I think we've all accepted was occasionally accelerated by regulators coming in and enforcing new rules. I I think we're now at a different time where I think the sector is so mature that if we really do genuinely embrace the principles of delivering and evidencing against outcomes-based regulation, there will be no need for future prescription and then we can all really get focused on protecting the public from scammers, the amount of financial crime that's going on, the abuse, and then we can obviously engage the young unengaged who do need help with thinking about their protection and savings needs well cheers.

Speaker 2: 7:37

Thank you, let's hope it happens. One of the other things that has come about recently and again, I know that you and I have discussed this in some depth, I think, but it seems to be a little bit under the radar, I feel, apart from with us, because it kind of paraphrase is. It's basically trying to say look, the regulator is concerned about the amount, the size of the sums that are falling on the FSCS. They conclude that really quite a large proportion of the FSCS redress bill stems from a fairly small percentage of advice firms, but nonetheless they want to talk about whether firms should make additional financial provisions if they believe there is a possibility that either they've been involved in an activity or there might be a deficiency, perhaps in their file review, point something out, or they have a complaint and that, and that you know, makes them worry that they could have more circumstances that would be similar. So, again from the consumer duty angle, if you're worried that that might be the case, then you go and investigate and you deal with it up front. You don't wait for something to come at you.

Speaker 2: 8:59

Now a couple of things with this, I suppose, in terms of professional indemnity insurance. One is that most insurance policies work on what we call a claims-made basis, which means there needs to be a claim generally for the policy to respond. And that in itself means that if the firm thinks there might be an issue but it hasn't really identified the probability of it being really there or not, it's starting in that early phase. But the paper itself says that broadly, the second that a firm thinks there may be an issue, it should make a calculation on the possible maximum worst-case scenario of the redress and think about allocating a proportion of that. The figure they came up with was 28%. It's all subject to change, I know, because it's a CP, but again it's quite a change.

Speaker 2: 9:48

Keith, when I read that and again, given the kind of numbers about how many firms it was that gave rise to the large, you know, the huge proportion of redress payments, I'm just wondering how you know are you hearing anything about this in the round? Because to my way of thinking, professional indemnity insurance is part of the regulator's armory to protect the consumer and that's where I think it plays into consumer duty, if you see what I mean. It probably always has in a way. But given that the consumer's right at the front and you know, avoiding harm and all that kind of thing that we've talked about all very important, but are you hearing any more about this at the moment? I know you talk to the regulator a lot and the Treasury. Are you hearing anything else about it?

Speaker 3: 10:32

Yeah, I think.

Speaker 3: 10:33

I mean I know you've spoken to the FCA about this as well, Chris and given them some guidance from an expert PIA perspective, from an expert PII perspective.

Speaker 3: 10:49

I mean, I think what they're trying to do when we speak to them is, of course, trying to. Our concern is about making sure that they avoid the unintended consequence. So by addressing something as straightforward as making sure the sector is more robust, so their argument would be what they really are trying to do, given that there's just under 6 000 regulated advice firms across the sector and 80 over 80 percent of them are deemed to be small, so five people or less it's their financial, the impact of an unexpected claim against the firm that could actually force them into administration. Now, it's not just that one case that could then fall on the FSCS, but all of the advice they've ever given in their existence now sits in the FSCS and possibly they're not there to defend it, so it gets paid out more freely, which actually raises the FSCS bill and puts more burden on the rest, actually raises the fscs bill and and puts more burden on the rest. So I think where the regulator is is taking some responsibility is.

Speaker 3: 11:49

I mean, you'll know this what the big firm will do is always assess. It's got its its finance director assessing what, what potential liabilities could come along, and then they provision for it and then they have the process that if that risk doesn't materialize, they release that money back into the business and maybe that's a happy year because it adds to the profits.

Speaker 3: 12:10

But I think what we're talking to the regulator about is to avoid some of the unintended consequences that I think you're highlighting from this.

Speaker 3: 12:18

They are listening, but it's meeting them somewhere in the middle, I think, with recognising that what they're really trying to do is help firms become more resilient and robust, which ultimately protects the interests of the firm, its employees and, of course, ultimately its customers or clients.

Speaker 3: 12:36

So you know, I'm a bit torn in the conversation because it's quite a compelling argument when you say we're trying to help firms be more resilient so that actually they don't fail and they don't fall into the fscs, and then we can catch anyone who's deliberately trying to Phoenix and deliberately offload their liabilities, whereas in the past it's always been a tough one for the regulator because genuine. I mean, I've known some small firms who good firms, well intended, and just got caught by a per claimant basis that wasn't covered for an advisor that they used to employ five years previously had long gone and they'd got rid of, but unfortunately, as the principal firm they had to sure take the hit. So I think, you know, I've seen some good firms have to fold and I'd hate I'd have hated it if someone had stopped them from continuing to earn money from their profession just because they weren't resilient. And I think that's the bit that the conversation seems to come. It's how do we make sure firms are resilient for the future and we avoid those?

Speaker 2: 13:42

And I think there are some examples in recent times for example, you know, the Section 404 review, british Steel We've certainly seen some insurers take stances that you know make us raise an eyebrow. You know we won't necessarily use those firms because of the actions that they took. It seems at times probably a frustration on our part. I'm probably voicing something that's just, you know, probably just gets under my skin a little bit if I'm being truthful. But given this is protecting the consumer if nobody from the regulator seems to really interrogate the terms and conditions of the policy that the advisor's bought, and and we see things and it's. This isn't the fault of the advisor, it's the you know it's if their broker hasn't said to them by the way, do you realize that you should be covering this thing, whatever this thing is? And this policy used to maybe do that last year, but the insurers decided they don't want to do that this year and now you're left with an exposure. That thing often doesn't get picked up in that way, you know it. It's just a case of oh, good news, my terms have been renewed. And we see clients coming to us at times and we say well, do you know that your policy, does, you know, exclude things? I mean it can be basic things, fraud, for example. We've seen inner limits when the British Steel review was going on where, arbitrarily, the insurer decided not to give them the full limit. Take it down to maybe half a million, which, if that blows, yeah, then the firm's got to pick, you know, got to pick up the bill, everything above and some of the sums we were talking about at the time. Fortune didn't come to pass, but there were some big chunky numbers in in that, even with two, three or four yeah, potential, but just still cases.

Speaker 2: 15:21

Do you think consumer duty is going to expand its scope into all of these ancillary areas, keith, where people will have to be more accountable for how they protect the consumer? Because, as I said in my mind, that's really what professional indemnity insurance is. Yeah, it's. If we make a mistake, even with the best. You know, I've made mistakes, firms that I've been involved with, we've mistakes. Some of them has been my fault, some of those genuine mistakes. It happens, yeah, but in and around all of that, if you then haven't taken out the right level of cover and you left that, that mistake gets exposed, it's just just seems to me to be a bit of an own goal really, I think, in terms of how we're how we're seeing things, because the consumer is the one that'll be uh, you know detrimented, or it lands on the FSCS, as you said earlier.

Speaker 3: 16:06

Yeah, I mean I think as a sector we've got to tackle that. So I mean the first thing you know I can't tell you how many times I've told small firms. I mean I've helped multiple IFA set up businesses and I've always stressed how important it is for them to invest a bit of time on making sure they've got the right level of cover. It's the same thing with you know from our years of training on my early days that it was never always about price. If something was cheaper it's usually because the cover is different. So make sure you're comparing apples with apples rather than just price with price. Now I think the sector is guilty of not paying attention to things that, as experts, they should. So I do think there's a collective there somewhere across the alliance where we need to work together about how do we educate, first of all, firms that are taking out PI to take responsibility to insure and hold their insurer to account or shop around or use brokers you know brokers to get the right terms.

Speaker 3: 17:07

I think policymakers have been complacent, candidly, I think, the fact that small firms could not have the right level of cover and go bust. They're kind of reasonably comfortable that at least there's a backstop called the FSCS, so all the rest will have to put their hands in their pocket. You know I think that reality is coming home now that that's not the right answer. So there is an opportunity, I think, under consumer duty, you know. I mean we've had a chat before about cyber risk and I think too many advice firms haven't quite caught up to realise just how exposed they are to that risk and how exposed they're leaving their clients' data to that risk. So things like that.

Speaker 3: 17:50

I think we've got to work on a dual purpose. We've got to get the regulator to pay attention. I think it's fair to say at one stage without naming the senior regulator, who was in the press about talking about looking at minimum standards of cover for PI, of course hit the buffers at the point at which the insurance sector told him that actually it was a commercial consideration and if you force certain levels then that might forced the cost of PI up. So I think the regulator then realised that they were dabbling in something that probably might cause unintended consequences. So they backed off and suggested that everything was fine.

Speaker 2: 18:31

Yeah, and I think for me there's something of a and I get that and I understand it, Whether that was real or it was definitely intimated. I understand that. I don't mean to make it sound as though I didn't believe what you say. I do totally. What I meant was would they have backed out or would they have gone? Okay, well, you know you've called out bluff, we'll provide whatever wording or whatever. But if you've got regulated businesses, insurers providing insurances to regulated firms, and that those terms and conditions aren't meeting the regulator's criteria, it just seems to me that some way, shape or form, somebody should be closing a loop on that and just going well, at least you know you might not have some, you know rinky dinks, and you might have some fancy wordings or whatever, that's fine. But like there are a number of you know, descriptive rules the regulator has about PI, and if you're a regulated insurer offering insurances to a regulated market, everybody's got consumer duty floating around in there Can't we at least make sure that the few standards that there are are actually ticked off?

Speaker 3: 19:30

Well, why don't we have a go? Yeah, absolutely. Why don't we have a go at that? Because I think you know the FCA definitely are in listening mode. They are really keen to see a stable and more vibrant sector. They don't want to continually be accused of the ones causing the problem, which is why, to some extent, they've rather intelligently given us the ownership of consumer duty rather than it being prescriptive regulators' rules. So I think maybe it needs us to go and have that chat, because at the time I think it became like all these things with policymakers it's what's the most burning issue, and so it's not that PI didn't continue to be a concern to them or making sure the firms had the right level of cover. It's just at the time.

Speaker 3: 20:23

It's a bit like the Retail Distribution Review was making, the Financial Advice Market Review was making some really great progress. 22 different work streams flew straight out. Treasury were absolutely brilliant at most of the workshops and then Brexit occurred Absolutely dropped it. You know, within two weeks, every member of the treasury team was off off the case and onto something else. So I think we've if, if we can own it, and one of the advantages I think of the alliance is that you know we have got a voice across the sector um doing the right thing protecting the interests of advice firms, their staff, their clients.

Speaker 2: 21:04

I don't think anyone will resist that kind of interaction I'm happy to do that and, as I say, it doesn't have to be reinventing the wheel, even if we can make sure that but the regulators, current minimum standards are seen through. Even that, I think, would be a significant improvement too, because advisors, unfortunately it's not their job day to day and I think if they feel it's like a license to trade and somebody's offering them a bit cheaper, um, you know, to your point, you know, and firms are under pressure, aren't they? You know? So I can understand why that plays a part too. So so I'm not not naive to that, but I think, in the end, if the, if the person that's going to really benefit if something goes wrong, as a consumer, then we probably at least have an obligation to make sure that we're meeting the regulator's rules on how that policy is structured, even without any changes or any improvements, just as they are now.

Speaker 3: 21:50

Yeah, no, definitely. And you know I mean it sort of comes back to your point about why the regulator was proposing provisioning against a potential claim that may or may not occur is because that's the principle of insurance You're not insuring against something you know is definitely going to happen. It's something that may or may not happen, but if it does and you're not covered for it, it could be devastating for the people you leave behind. So I think, in a similar way it's joining those dots up there has to be a responsibility we can accept. Consumers don't understand and they they are at the mercy of wanting to go to an expert who guides them, which is why consumer duty is so important to make sure that you embrace that responsibility.

Speaker 3: 22:42

Think actually, as professionals. You know, when you're running a business you're duty-bound to make sure that you pay attention to the level of cover you've got or the the level of risk or exposure that that you're leaving your firm and your clients, uh, exposed to. So maybe that's the education bit on the sharing of good practice. I don't come across in my you know, my career. I go back, you know, to setting up small businesses. I can't genuinely think of too many advisors who did say it's price over quality or I don't really care about the cover. Actually, most would have said I do care about the cover. I think the truth is we're all often sometimes too busy with our day job to pay attention and just assume that it must be okay yeah, and I'm sure you know, I'm sure that's, I'm sure that's right.

Speaker 2: 23:26

My thoughts are always that you, you can get away with buying the cheapest life cover because that's one single event and it's quite. It's quite straightforward, yes or no, yeah, but you probably want the most expensive critical illness cover. In a sense, you know that you can afford, you know, not that, not that it's not affordable, but as long as it's affordable. Um keith, I think I'll just kind of close One. I'd like to thank you obviously for your time, but what I would like to do is I'd like to give you the opportunity, if we can prepare this podcast so that it can go out in time ahead of the deadline for the end of July. Just really, if you like, just to use this opportunity to remind people I know you're out and you're talking to anybody who will listen about making sure what they do by the end of July, but do you want to just spend a minute or so just to give us a wrap up on what everybody has to get done before the end of July deadline?

Speaker 3: 24:10

I mean I think most people are now getting it, but please go on and look at there's lots of support available so it might be the support service organisation that you buy your current support services from. Go on to the Consumer Duty Alliance website. If you're not a member, please join up. It's free to do that. It's as simple as clicking on consumerdutyorg. There's lots of resources available that will help you have an open mind. We own this.

Speaker 3: 24:40

Many of the things that you already do, you're probably complying. It's just understanding how you evidence that compliance. Of the things that you already do, you're probably complying. It's just understanding how you evidence that compliance.

Speaker 3: 24:49

Two key things that are coming up for the 31st of July not just, obviously, the first anniversary of the first year of consumer duty, but there is also the board reporting requirements. We did a webinar recently on that, chris, and frankly, the most amount of questions that came in were from small firms wanting to understand what proportionality would be applied to a small firm. You know, for example, a sole trader with two administrators doesn't have a board of directors, doesn't have a regular board. So what does all this mean? So it is much simpler. So what does all this mean? So it is much simpler than it implies. So, please, again, there's a free guide available, and the other deadline on the 31st of July is surrounding closed books or closed products. So if you are involved in any of those, then you need to make sure that you've embraced all of the principles of consumer duty into those products or services by the 31st of July.

Speaker 2: 25:48

Brilliant, keith. I've thoroughly enjoyed our conversation and I'd just like to thank you for the time you've put in. I'd like to thank you really on behalf of the industry. I know you don't say it, but I'm going to say it. You don't take any remuneration for the work that you do and I don't know anybody else who would do that, keith, so I'm going to say it. You don't take any remuneration for the work that you do, and you know I don't know anybody else who would do that, keith. So I'm glad you're doing it and hats off to you and I hope you have a. You know the Consumer Duty Alliance goes from strength to strength. Certainly, we're delighted to be involved and we would be delighted to help in a small way getting it off the foundation affiliate. It's really appreciated.

Speaker 1: 26:26

You're very welcome thank you for listening to this episode of fortune favors the brave from howden. To hear more episodes and subscribe to our channel search fortune favors the brave on your favorite podcast app.