How will the regulator’s proposed ‘consumer duty’ rules differ from the ‘treating customers fairly’ regime?
We have yet to see the FCA’s draft proposals, which are expected to come into force next year. But from the consultation it is clear as an industry we have to move from treating customers fairly, to treating them well. Financial services providers will need to prove this by demonstrating that the products and services they offer are delivering good outcomes and results for customers. We are moving from what is fair, to what is good.
What is the scope of this new consumer duty regime?
It will cover all regulated firms, including pensions and investments, protection and general insurance. The proposals set out a framework that will enable firms to measure whether they are delivering good outcomes for members across a number of areas. This includes the quality of their communications, appropriate products, the quality of the service offered and whether support is provided to help customers make financial decisions about their future.
Do these proposals go far enough or could more be done to improve member outcomes?
These proposals should help deliver better products and better service for customers. But we think there is an opportunity to go further and look more broadly at what is meant by ‘member outcomes’. As it stands these proposals don’t cover the expectation that a provider will seek to invest responsibly on their members’ behalf.
Given all the coverage of sustainable investments, climate change and long-term stewardship of assets, this feel conspicuous by its absence.
We would like to see proposals that make it part of a regulated firm’s duty to consider what it means to invest responsibly — be it investing in companies that are tackling climate change, having good governance around voting procedures, thinking about the social impact of any investments made and being an active participant in trying to influence companies to do better.
It is right that pension companies and asset managers focus on good and bad outcomes when they think about long term investments. Investors could be presented with what looks like a great product, but if they are retiring into an environment where there are still huge issues with climate change, with flooding, and with air quality for example, one has to ask whether that is really a good outcome for members. We need to look at outcome both in terms of product and wider environmental and lifestyle impact, and ask the question whether the products we are offering help build a better future for our members.
Regulatory changes have encouraged contract- and trust-based pension schemes to consider ESG factors. Why should these factors be included within these new ‘customer duty’ proposals?
We have seen the introduction of a number of rules and regulations relating to climate change reporting and the disclosure of ESG investment practices. This legislation is often focused on more transparent reporting. The reporting regime around ESG is now far stronger than it was. But it is not baked into the regulations that a provider has a duty to invest responsibly on behalf of their members.
Often there is a perceived conflict between maximising member returns, which is a fiduciary duty of trustees, and investing responsibly. There shouldn’t be a conflict, and these aims should be better aligned. Members need good outcomes: they need good services, the right products and effective support and communications. But they also need pension companies and asset managers to be good stewards of their money and invest sustainably and responsibly to help safeguard their future. This new regulatory environment offers an opportunity to marry up these agendas and put a duty on providers to consider these broader issues.
Are these ESG issues something firms should be looking at, regardless of current and future regulations?
Most of the biggest firms are starting to look far more seriously at these issues, particularly relating to sustainable investments and climate change. This needs to translate into action on pensions, and in particular how default funds are invested. This doesn’t just apply to pension providers. Advisers and consultants need to ask about responsible investment strategies and make this a key part of any discussion or fact find, whether they are talking to corporate clients or individuals. For the most forward-looking firms this is already part of their process, but this needs to be formalised so this becomes a standard part of the advisory process – not just something firms have chosen to focus on.