Consumer Duty a look into the future, part one

Before I give you my personal account of the future, let me start storytelling by looking at the past, in 2016, as CEO of an Australian financial planning licensee with 77 practices across Australia and Tasmania, ?I implemented a radical change strategy.

At the time lots of questions were being asked about financial advice businesses in Australia with a raft of legislation, education and regulatory reforms about to hit financial services.

Instead of being reactionary, we implemented a proactive review of our advice business focusing on delivering fair value for our clients by making sure that we had frameworks and processes in place that validated every aspect of our ongoing service agreements which we realised were different for each self-employed IFA business across the group.

Over a period of 12 months we reviewed every business and made sure that every ongoing service agreement was validated, we simplified our agreements and harmonised them across the group so we could centralise our governance oversight using Xplan and on-site governance reviews to ensure our advisers fully complied with our requirements?

Roll the clock forward two years to 2018 and a Royal commission in Australia legislated 76 recommendations of which a few are worth mentioning.

One of the recommendations, best interest duty and ensuring that your advice was in the best interests of your client was wide ranging in its capture all scope, ensuring that advisers delivered value to their clients with significant penalties for breaches of this duty.

One of the other significant recommendations centred around ongoing service agreements and the pun Fee for No Service where advisers were taking fees from clients, however, not providing the contracted services detailed in the ongoing service agreements?

When the regulator started biting instead of barking and the headlines hit the papers on look back exercises, enforceable undertakings, and significant financial redress for the big banks and large licensees, I remember our adviser panel calling an emergency meeting with the leadership team and asking me what we were going to do about this, given the regulator was asking advisers and licensees to pay back any fees taken day they stopped providing an ongoing or part of an ongoing review which could have gone back years with bank base rate plus five percent as the interest.

Imagine their reaction when we told them we had been reviewing this as part of our proactive governance oversight for the last two years and they had nothing to worry?about.

I also remember a regulatory meeting with licensees, regulators and both sets of corporate ?lawyers interpreting the provisions of an ongoing service agreement and contractural law which in simplistic terms is the terms and provisions of a contract are sacrosanct, so not delivering any aspect of this contract in the regulators eyes is a breach of contract and best interest duty causing client detriment, hence the simplification of ongoing service agreements by licensees to ensure they could deliver all the services that their advisers were contracted to deliver.

In Australia Fee for no service has now hit close to $5 billion dollars in remediation charges and shows no sign of stopping.

Why would this concern the UK?

Well on 23rd March 2016 ASIC forged a cooperation agreement with the FCA to share regulatory supervision information and in December 2019 forged another cooperation agreement to share regulatory supervision information.?

Ask any Australian governance specialist to look over the consumer duty legislation and they will tell you it looks and smells like best interest duty and more recent tweaks to regulation in Australia to ensure consumers obtain fair value.

Given that consumer duty legislation has already kicked in since August 1st anyone that hasn’t harmonised their ongoing service agreements across their business and implemented robust monitoring oversight frameworks run the risk of significant remediation provisions.

In Australia, the acquisition landscape changed to a risk based multiple that took into account the quality of ongoing advice books with retention amounts built into contracts for any breaches identified and remediated during reviews by the new advisers following purchase by the acquirer.

Given the scale of remediation in Australia, ?advisers started reviewing their minimum cost to serve the client, significantly increasing or letting go clients who were below the threshold and realising it was just not financially viable to give financial advice unless there was a minimum fee for doing this to cover costs, often turning down the one off advice or life insurance advice because of the commission involved.

As a result the advice gap has grown significantly and advice fees went up on average by 16%

Lots of small business owners joined large self licence groups or national businesses that have the capability and resources in place to provide compliance and governance oversight given the extra levels of administration and monitoring that was required?

Yes the reforms were substantial, however, provided the value that regulators, consumer groups, and importantly the clients were looking for which can only be good for financial services.

Licensees and advisers that are ahead of the curve and have already put in place proactive provisions for harmonising and monitoring of consumer duty will grow significantly as opposed to the increased remediation provisions for those that take a reactive approach to consumer duty legislation?

Part two the impact and consequences of consumer duty

Part three, what your organisation can do to proactively align with consumer duty