The Consumer Duty regime in the UK is now up and running, and a brokerage tries to work out what the impact on wealth management will be, taking the recent changes at St James's Place as a discussion point.

The fall in the share price of St James’s Place last week, after the UK wealth manager announced fee cuts prompted by the new Consumer Duty regime, shows how the new rules will affect the sector, stockbroker Peel Hunt says.

London-listed SJP announced in late July that, starting from August, it would introduce an annual product management cap on bond and pension investments for clients who have been invested for 10 years. It charges fees for the advice it gives and products it provides. Annual product management fees for long-term clients of the firm who hold bond and pension investments are being cut from 1 per cent to 0.85 per cent, affecting about 65,000 clients. SJP said that adjustments to its fee structure, caused by regulatory changes, would reduce its net income by £12 million ($15 million) in the second half of 2023.

Shares in SJP fell sharply on the news, and between 2 July and 3 August, shares are down about 18.9 per cent.

“As the recent example of SJP proved, Consumer Duty could potentially have a significant impact on the way companies do business. In SJP’s case, capping pension charges on longstanding clients materially impacted the group’s embedded value, in effect reducing expected future revenues from pension clients,” Peel Hunt said in a note on the sector.  

The SJP fee changes are being encouraged by the Consumer Duty regime, and other firms are likely to follow SJP’s lead, it continued. 

The Consumer Duty regime, introduced by the Financial Conduct Authority, states that firms should provide customers with products and services that meet their needs and offer fair value. Customers should receive communications which they can understand. They should get the customer support they need when they need it.

There are three broad legs to the Duty: A new Principle for Business: The Consumer Principle which requires firms to "act to deliver good outcomes for retail customers"; there is a "Cross-cutting rule" setting out three overarching behavioural expectations that apply across all areas of firm conduct, and third, there are "Four Outcomes," which are rules and guidance setting more detailed expectations for firms. 

As reported here in late July, more than half (55 per cent) of 339 financial planners in the UK surveyed by Quilter, the wealth manager, don't expect to put up fees because of costs associated with the new Consumer Duty regime. However, almost a third (32 per cent) of them do expect to hike fees.

Separately, several firms have told this news service that the Duty could shape the pace and shape of wealth management consolidation and restructuring, given the costs of compliance and the need to integrate businesses smoothly. (See an interview here with Multrees on its view of the Duty.)

Wealth challenge 
Peel Hunt’s note said that while making predictions about the Duty is difficult, it said it sees more “issues for the wealth management sector than asset management, given the more complicated nature of client and advisor relationships, and the additional layers of fees and charges that the end-customer bears.”

Outlining the Duty’s scope, Peel Hunt said that a key area will be the ability of firms to manage data and management information so that they can comply. This task gets more complex when information is flowing between manufacturers and distributors. 

“For example, in the wealth management space, where the advisor introduces clients to the wealth manager, information will have to be shared between the different parties,” the note sent. 

As the note discussed, the Duty comes a decade after the FCA introduced the Retail Distribution Review package of reforms to financial advice, which aimed at giving clients more clarity on services and products; aligning remuneration so that competition increases; raising standards of professionalism and creating a more viable industry so that firms can deliver long-term commitments. In general, Peel Hunt said, the RDR has succeeded on these fronts. One example has been the replacement of trail commissions by fees; another has been consolidation of the sector. 

The UK has, to some extent, been in front of other jurisdictions in professionalising financial advice, although abuses and problems remain. In the US, for example, the Department of Labor’s fiduciary rule was stymied by the Trump administration, although a new “Regulation Best Interest system” has replaced it, to mixed reviews; in Switzerland, FINMA’s regulation of the external asset managers sector kicked in as recently as 2023. In Singapore, trail commissions are still in operation, while some firms charge a fee.

Requirements
The Consumer Duty has a range of requirements of firms: End rip-off charges and fees; make it as easy to switch or cancel products as it is to take them out in the first place; provide helpful and accessible customer support; provide timely and clear information to clients and provide services and clients that are right for customers. 

The recent controversy about the “de-banking” of former UKIP leader Nigel Farage by Coutts/NatWest, closure of accounts of people such as anti-Brexit campaigner Gina Miller, and other episodes, happened with uncanny proximity to the 31 July start date of the Consumer Duty.