The unintended consequences of consumer protection

The UK Financial Conduct Authority's (FCA) new Consumer Duty Rules—due to take effect in July 2023—are a set of well-intentioned requirements targeting financial services firms that provide products and services to retail clients.

RBC Investor & Treasury Services, working in partnership with Protiviti Global Business Consulting, recently hosted an event in London to discuss this timely topic. Although the new rules are designed to safeguard the interests of retail investors, Shirish Tiwari, Director of Client Coverage at RBC Investor & Treasury Services, discusses mounting industry concerns that the proposals could have unintended consequences.

Value assessments spark concern among firms

The overriding purpose of the Consumer Duty Rules is to ensure that financial services firms deliver good outcomes for retail clients. In order to facilitate this objective, the FCA is introducing provisions to ensure that “products and services provide fair value with a reasonable relationship between the price consumers pay and the benefit they receive."1 If a financial product is unable to justify fair value, firms will be required to consider changes to distribution costs, among other things. Otherwise, the product risks being withdrawn from distribution altogether.

As part of the new rules, firms will need to assess the value of the services they deliver to retail clients. However, these value assessments could cause problems for certain organizations. While the FCA accepts that differentiated pricing for some customers may be appropriate under certain circumstances, there is a level of concern about what this means in practice.

Some providers could struggle to satisfy the fair value obligations due to a lack of clarity

For instance, international law firm Skadden warns that some providers could struggle to satisfy the fair value obligations. This is because there is still a lack of clarity among impacted institutions as to whether prices should be assessed by benchmarking them against other firms or measuring them against the revenue and profit margins that are generated off the back of their own products.2

The playing field may not be level

Boutique providers—many of which offer investors highly bespoke or discretionary services—have repeatedly expressed concern that their products could appear unduly expensive in value assessments, compared to larger firms that may benefit from economies of scale. The potential for significant price differentials between specialist boutiques and larger firms could be off-putting for some consumers, potentially discouraging them from investing in innovative products.

Boutique providers have repeatedly expressed concern that their products might appear expensive

Certain firms are also likely to be more prepared than others for the new Consumer Duty Rules. Insurance companies and authorized fund managers, for example, already complete their own value assessments, and have done so for some time now.3 Such organizations can replicate the majority of this work and apply it across other products where they exist.

Distributors face unique challenges

The Consumer Duty Rules stipulate that distribution platforms must include arrangements that enable distributors to understand the value assessments being carried out by manufacturers. The rules also require distributors to ensure that any additional fees accrued in the distribution chain do not affect the “fair value” of a product or service.4

Distributors and manufacturers have flagged several potential issues that may arise with the new provisions. For instance, some firms distribute thousands of products, arguing that the performance of value assessments on each product is not viable. Others warn that duplication and inefficiencies could emerge, as distributors and manufacturers find themselves carrying out value assessments on the same products.5

Duplication and inefficiencies could emerge

The absence of open communication channels between certain distributors and manufacturers has perhaps been one of the most pressing issues facing the industry ahead of the introduction of these rules. The FCA had requested manufacturers to inform distributors about the results of their value assessments by the end of April. However, there is still lingering uncertainty about terminology, especially as it relates to the counterparties that are considered to be distributors.

The new rules have the potential to reduce investor choice

As mentioned, the Consumer Duty Rules are likely to disproportionately impact smaller firms at a time when their margins are being eroded elsewhere by increased regulation and rising operational costs, together with the challenging market environment. In some instances, the regulation could lead to the removal of boutique firms from distribution platforms, if they do not have the bandwidth to commit resources that ensure compliance. Such an outcome could ultimately deprive investors of the ability to make investment choices.

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