It is almost two years since 31 July 2023 when the UK introduced the Consumer Duty, a regulatory principle that requires financial firms to act to generate good outcomes for retail customers, including HNWs.

The UK's Financial Conduct Authority states that there are four overarching 'outcomes' (principles) that firms must pursue when fulfilling the Consumer Duty.

-- There is a 'products and services outcome,' which states that products ought to be designed to meet the needs, characteristics and objectives of a target group of customers and must be distributed appropriately.

-- There is a 'price and value outcome.' The Consumer Duty does not prevent firms from charging different groups of consumers different prices, nor does it prevent cross-subsidies between different products or services, but firms must show the regulators that all groups of customers get fair value from their products. They must be particularly assiduous in stopping cross-subsidies from disadvantaging vulnerable customers. They should back up any assertions that they make in fair-value assessments about the costs and benefits of their products and services with good evidence.

-- There is a 'consumer understanding outcome,' which effectively asks firms to put themselves in their clients’ shoes when considering whether their communications equip clients with the right information, at the right time, to understand the product or service in question, to make effective decisions and to take appropriate action. The wealth management firm in question must identify the main information needs of its clients, make sure that they receive the information at the right time, ensure that they can understand it and, where appropriate, test their understanding.

-- Lastly, there is a 'consumer support outcome.' Rule PRIN 2A.6.4G says that a firm is unlikely to meet its obligations to support its retail customers if: (1) it prioritises prospective customers over existing ones; (2) makes unreasonable delays when retail customers try to talk to it, e.g. forcing them to wait longer on the phone to cancel or modify an existing product than they would if they were waiting to buy a new product; or (3) unreasonably delays any agreed payments due to them, or unreasonably delays any request for necessary information or evidence from them, or takes too long to process information or evidence that they have sent it. As in so many FCA rules, value-judgment words predominate.

Cross-cutting rules clarify the FCA's expectations in respect of the duty and help firms interpret the four outcomes. These rules require firms to act in good faith, avoid causing foreseeable harm and enable retail customers to pursue their financial objectives. Firms had to review 'closed' (semi-obsolete) products and services against all aspects of the Consumer Duty before 31 July last year; they are now obliged to do so continually.

Let us imagine that a wealth manager used to offer a mass-affluent managed-portfolio service alongside a separate high net worth (HNW) service with different terms and conditions, but began to concentrate solely on HNW investors sometime before the duty came into force on 31 July 2023. Its continuing management of the portfolios of those existing mass-affluent customers would qualify as a closed service.

Regulatory relief on the way?   
In July last year, after the new Labour Government assumed office with its stated aim of 'growing the economy,' the FCA expressed its desire "to consider whether we could help firms and support innovation by removing detailed and prescriptive requirements that cover similar issues to the Duty, and where similar customer outcomes could be achieved with greater flexibility."

It had already prefigured this in October 2023 when it stated that "we have a secondary objective to facilitate the international competitiveness of the economy of the UK and its growth in the medium to long term."

Not only did it propose to remove outdated requirements or unnecessary complexities; it wanted to "give firms more flexibility in how they apply our requirements, so that our regime is more outcomes-focused, reducing unnecessary administrative burdens." It also wanted to "remove or review outdated requirements."

UK-based firms that provide customers who are based outside the UK with products or services often have to abide by the FCA's rules as well as those of the customers’ jurisdictions. This is sometimes known as super-equivalence. The FCA is now thinking of changing this in respect of the Consumer Duty, starting with a review in the insurance sector.

Action on the front line     
By the time of the deadline for closed products and services on 31 July last year, the Consumer Duty was in force throughout the retail financial services sector in the UK. By then, according to the FCA itself, it was already having a tangible effect on 'consumer outcomes.'

In cash savings, firms were acting more quickly than before to increase interest rates in line with base-rate increases. In May, the FCA let several firms recommence their sales of Guaranteed Asset Protection (GAP) insurance, having taken action against them in February to improve fair value. It expected this to have beneficial knock-on effects throughout the industry. In December 2023 it had written to a few dozen platform investment providers about the way they were dealing with interest earned on customers’ cash balances, citing the 'fair value outcome' and questioning their good faith; the vast majority of them then stopped ‘double dipping,’ i.e. making returns on interest retention while also charging customers for custody of cash.

The bumpy road To compliance         
It seems that the duty is not being observed well in all parts of the wealth management market. MorganAsh, a customer vulnerability specialist firm, stated in December that it had seen some financial firms using the General Data Protection Regulation (an EU law that the UK has been ‘retained’ since the great rift) as a reason to not comply with the Consumer Duty. Some firms, in other words, are refraining from collecting and storing data about vulnerable customers because they say that to do so would be to contravene the GDPR, arguing that fines and sanctions from the FCA will be far less than those from the Information Commissioner's Office.

This appears to be folly. The ICO itself – with the FCA – said in a recent press release that the Consumer Duty does not require firms to act in a way that is ‘incompatible’ with any regulatory requirements, including data protection law.

MorganAsh stated: "The Consumer Duty requires firms to monitor consumer vulnerability over the life-time of the product – and use this data to compare to outcome data, as well as mitigating any potential harms. GDPR requires firms to keep the data accurately and securely, to be able to produce it and delete it if the consumer requests this. Firms need dedicated IT systems to store this data."

By no means has the Consumer Duty gone down well in all corners of the HNW advice market. Every February, the Lang Cat (an integrated publicity and research company based in sunny Leith) publishes its State of the Advice Nation (SOTAN) study. This year's figures, some of them released in advance in December, state that more than one-third of advisors' efforts to fulfil the Consumer Duty have come to nothing in their estimations. Respondents were quoted as saying that the Consumer Duty was a waste of time and 'nothing has changed.' 55 per cent said that there was more work to be done. More than one-third said that the advent of the duty had inspired them to change their fee models in a plethora of inventive ways.

Mike Barratt, a consulting director at the Lang Cat, took a more sanguine view when he spoke to WealthBriefing about the Consumer Duty.

“The duty was always aimed at all of retail financial services, covering banking, savings, insurance, wealth management too and financial advice. Investing is a relatively small part of that (compared with the impact that banks and building societies can have on the wider population). We saw that on Day One. Literally on launch day they took action to ensure that banks and building societies were paying out fair rates of interest on your savings.

“The recent impact statement [FS25/2] looks at rules they are going to evolve and the vast majority of those are aimed at more mainstream, day-to-day financial services, improving the process for mortgages and remortgaging etc.

“When you get to our sector of wealth management and financial advice, it is fairly low down on their list of priorities for taking regulatory action. Only about 10 per cent of the population pay for advice. There's less impact to the wider population than a bank doing bad things and I think they're also quite happy with the outcomes when they look at the wealth management sector. They tend to be doing the right things by their customers anyway.”

This, in itself, is good news for the wealth management sector. Barratt added that people who pay for advice linked to wealth management tend to be very happy with the value that they are receiving as well. He thought that the FCA would have to notice systemic problems in the advice or wealth management sector before it ‘really starts to get stuck in.’ No such systemic problems were evident as far as he was concerned.

FS25/2, however, says that the FCA will ask interested parties in the wealth management sector to comment on its proposals to limit the need for firms to apply the Consumer Duty, plus various other things, outside the UK.

Profitability and the Consumer Duty    
Has the Consumer Duty dented the profit margins of wealth managers and advisors? On the actual day of the rule’s launch, research from Quilter found that 44 per cent of financial advisors expected their profitability to decrease because of it. Only five per cent expected it to increase, while just 46 per cent expected it to stay the same.

Quilter’s analysis, gathered by the researchers at Boring Money, also found that 24 per cent of financial advisors expected their turnover to decrease, with 63 per cent expecting it to stay the same. Just 8 per cent expected it to increase.

No subsequent survey appears to have looked into the effect of the Consumer Duty on profits in the industry. Barratt, however, looked on the bright side by noting one way in which the duty might have made firms more profitable.

“In the process of becoming compliant, one of the stages that all firms had to go through was to clearly document their target market, the customers they are going to be serving and the services that they want to offer them. Do they meet their needs and do they represent fair value? Whether you are St James's Place or a [product] provider or an advice firm, you had to go through that exercise. I think, as good practice, we would also encourage the firms we work with to have a negative target market as well.

“What we saw among the advice firms (and we have done a couple of years of research on this, and I'm literally writing the third year's research) was that this was a catalyst for them to refocus their propositions and to ensure that they were targeting the services at the right clients and at the clients who were going to be commercially attractive.

“I remember that when I was a consultant we used to say to firms: ‘step back from your business and think about who you're targeting your services for.’ That's a terrible consulting phrase for something that nobody in the real world had time to do. But the Consumer Duty created that catalyst to do that particular work.”

Armed with this information, advice firms have tailored their clientèles accordingly. Barratt thought that this was a positive thing for the sector.

“It's reinvigorated advice firms in terms of them being very clear on who they want to target their services at – and that is increasingly relatively wealthy individuals in their fifties, starting to transition into later life towards retirement. We've seen the average age of new customers going into advice firms narrowing very much into that age range of 50 to 60. Also, the average figure for investable assets is creeping up towards half a million [pounds]. The need for advice is greatest at that point in life. The downside is that we've seen advice firms 'sacking' clients outside that 50 to 60 bracket – perhaps younger, less wealthy clients who are no longer economic to service. We saw through our research last year that just under half of advice firms were going through that exercise.

£500,000 might appear to be a low figure, but many HNWs have several millions tied up in property and therefore cannot classify those monies as investable assets.

“When you're talking about investable assets you're talking about cash. Most advice firms these days have a well-defined minimum, so if you don't have a quarter of million or whatever that is, it's not in their interests to serve you. The demand for their advice from wealthy clients is outstripping their ability to supply.”

The Advice Gap
The 'advice gap' refers to the distance between the number of people in the UK who can (and do) pay for financial advice and the portion of the population who cannot and do not. Barratt did not think that the Consumer Duty was doing anything to alleviate it, even though the Government always claims that it wants to do so.

“It's widening the advice gap. Our research – albeit only one year's worth – saw that there are fewer people paying for advice and half the advice firms in our survey had got rid of some clients. This can be ascribed to that.”

Advised platforms       
On the Consumer Duty’s significance for platforms, i.e. web-based services that help advisors manage their clients' wealth with a wide choice of products, tools and features, Barratt saw no glaring changes.

“This is the one area where advisors we speak to about the duty are ambivalent, broadly. They usually think of it as a positive. Advisors want to see the regulators taking action against poor [platform] providers with poor service reputations. I think there's a view from the advice profession that the repeat offenders here, the poor service providers, had those reputations before the consumer duty and not a lot has changed.

“There's a few platforms out there...it goes across all providers really, so it's a tricky one for us to fully research and track because service is very subjective and inconsistent and financial advisors are quite often trying to deal with some pretty unpleasant life events on behalf of their clients, which racks the pressure up a little bit.”

In the years before Covid-19 the Lang Cat was fond of prognosticating the ‘death of platforms,’ but Barratt now seemed optimistic about their future.

“Platforms are still growing, they're successful. I think their role has stayed the way it always is. In a lot of cases it depends on the preferences of the financial advisor and the selection process that he goes through on behalf of the clients. Some advisors prefer platforms that sit in the background and do what they're supposed to be doing. In some cases the clients may not remember who the platform is that they're working with. The client will say ‘I'm a client of Mike Barratt’s advice firm and my advisor has put me on a platform.’ Other advisors will deliberately select a platform that actually has a big brand and is recognised by the end-customer. So we see the likes of Quilter (which was top of the charts for sales in 2024) and Aviva as providers of platforms.”

Their actual performance leaves something to be desired, however. In November last year, the Lang Cat collaborated with Parmenion, the platform giant that looks after £9 billion of investments for more than 1,500 British advisory firms, to produce a report entitled The Impact of Poor Platform Service. This found that 95 per cent of the advice profession in the survey had had to apologise to clients because of poor platform service, while 82 per cent of advisors said that poor platform service had had a significant impact on their day-to-day working lives. These figures were only slightly better than those of the previous year.