The UK's Personal Investment Management and Financial Advice Association held its first face-to-face compliance conference since 2019 last week in London at the offices of Herbert Smith Freehills.

A new "consumer duty" for private banks and other retail firms and practitioners was among the key issues put under the microscope at a recent wealth management industry conference in London. Other topics included appointed representatives, the Financial Services Compensation Scheme and the Harlequin Ponzi scheme.

The Financial Conduct Authority plans to impose this "duty" on private banks, asset managers and advisors. This will, in due course, require firms to provide retail customers with good outcomes. So-called cross-cutting rules are going to require firms to (i) act in good faith towards retail customers, (ii) avoid foreseeable harm to retail customers and (iii) enable retail customers to pursue their financial objectives.

The regulator published its "final" rules and guidelines on the subject on 27 July. Firms are scheduled to submit implementation plans on 31 October. Manufacturers of financial products must complete “reviews to meet the outcome rules” by 30 April next year. On 31 July of that year, rules start to operate for 'open' products and services. Lastly, on 31 July 2024, rules start to operate for 'closed' products and services. At no point in Policy Statement 22/9, which contains the final rules, is there a formal explanation of the terms 'open product' or 'closed product,' although both are mentioned. One delegate, however, described the former as “a new or existing product that is available to buy or renew.”

An objective test 
The consumer duty, when imposed, will be a more onerous version of the standard of care that firms already give customers. It will engender a significant shift in both culture and behaviour at many firms because they will have to focus consistently on 'consumer outcomes' and put every customer in a position where he/she can make effective decisions.

One delegate told the hall: "One question that all firms can ask themselves is whether they are applying the same standards and capabilities to delivering good customer outcomes as they are to generating sales and revenue in comparable areas.

"What is outcomes-based regulation? We've seen a move to principles-based regulation in the last 20 years. Outcomes-based regulation takes that a step further. Processes will determine the outcomes in many cases still, but they are not the be-all-and-end-all; they are not so important now.

“The duty is underpinned by the concept of reasonableness. This is an objective test and means that the rule must be interpreted in line with the standard that could reasonably be expected of a prudent firm carrying on the same activity in relation to the same product or service, and with the necessary understanding of the needs and characteristics of the customer."

To tell or not to tell   
PS 22/9 says that the FCA has introduced a rule that will, when it comes into force, require every firm to notify it if it realises that another firm in the distribution chain is not complying with the duty. It has also introduced a rule that will require a firm to notify other firms in the distribution chain if it thinks that they have caused, or have contributed to, harm to retail customers.

An expert explained: “This is a new departure! Except in the field of money laundering, firms are not expected to do this. The FCA has set a very low threshold here and it cuts both ways. You might ‘inform’ on one firm, another might inform on you. It requires a mindset shift compared with adhering to other regulations.”

Fair value  
When customers pay fair prices and receive a fair quality of service, the FCA says that they are receiving ‘fair value.’ Product manufacturers (firms that create, develop, design, issue, operate or underwrite products or services) have to assess value to see if this-or-that product helps customers. Each of them has to do an initial assessment before any marketing activity after 31 July 2023. Distributors (firms that offer, sell, recommend, advise on, propose or provide products or services) must then take that information from manufacturers and satisfy themselves that their customers will obtain fair value.

Rigid or porous deadlines?  
A mild kerfuffle broke out over the plasticity of the FCA’s deadlines. Some thought that they were flexible; others did not. One delegate recalled: “The FCA said that we should take the consultation as the final rules and start working on implementation now. Now it realises that more time is needed. There is still not much time. I don't think it's a case of dotting all the Is and crossing all the Ts, but you should identify who's accountable for what.”

Two other delegates noted that the larger private client firms were farther down the road towards full implementation than the smaller, although all had far to go. They also thought that the regulators had hardened their attitude in recent weeks and now thought of the effective dates as rigid, absolute and fully enforceable. Time will tell who is right.

Appointed representatives   
An appointed representative (AR) is someone who carries out a regulated activity on behalf of a firm authorised by the FCA (that firm being known as a 'principal'). In appointing an AR, the principal firm assumes total responsibility for his/her – or its – activities. The audience heard that the FCA believed that 'increasing harm' was arising from the AR model. Indeed, the regulator is detecting 50 per cent more complaints coming from this area than come from the average firm. It is therefore trying to make firms keep their ARs under better control. They must ensure that they are competent, financially stable and “delivering good outcomes.” In December of this year, it will ask firms to impose additional safeguards and give them 60 days to submit data as part of a one-off exercise. From December 2023 onwards, firms will have to disclose more information about their ARs to the regulator. One delegate made an extraordinary statement: "Please hear this, if you hear nothing else. This is a pivotal moment in how the FCA supervises you."

The FSCS levy – every firm's bugbear 
In the aftermath of the financial crisis that began in 2008-09, the regulator obliged every financial firm to draw up plans for its orderly demise in the event of such a calamity. When these 'wind-downs' fail, retail consumers of financial services, including HNWs, go to the Financial Services Compensation Scheme for redress.

Someone close to the process told the conference that the scheme is, at present, having to pay out a good deal of money in respect of pension mis-selling schemes. Firms that operate SIPPs or Self-Invested Personal Pensions have also been failing. The same is true of firms that help customers swap their defined-benefit (salary-related) pensions for more esoteric investments – an area in which fraud is rampant.

The real problem that private client managers have with the scheme, however, is the sheer scale of the levy on firms that is needed to support it. Another well-informed delegate told the audience that "we don't think the levy will come down any time soon." About 78 per cent of all claims relate to advice. Although private client firms have to pay the levy along with the rest, only a small proportion of payouts from the scheme go to HNW investors.

Harlequin   
One thing that the FSCS is doing to reduce the levy is to pursue damages from fraudulent firms. It recovered just about £300 million in the previous decade from failed firms. Last month it helped to bring about the conviction of David Ames, 70, the man behind a £226-million fraud involving celebrity-endorsed luxury resorts in the Caribbean. Ames deceived more than 8,000 British investors in the Harlequin Group, the hotel and the resorts development venture that orchestrated it.

The group never operated as promised. Each investor paid a 30 per cent deposit to purchase an unbuilt villa or hotel room on the understanding that the building would receive further funding by external financial backing. With no additional source of funding, three properties needed to be purchased to finance just one of the luxury accommodation units. This led to the exponential expansion of the scheme, the diversion of investors’ money between resorts and, ultimately, a funding shortfall of more than £1.2 billion by 2012, seven years after Ames began the scheme. It became, in the words of a delegate, “a giant Ponzi scheme.” The FSCS has paid out £5-6 million in compensation to the investors over the last five years or so.

Strategic considerations   
In recent years the FCA has been focusing on the suitability of advice, but it is now turning to retirement income strategies for rich and poor alike. The regulator has also refreshed its portfolio strategy for advisors recently and will be sending out a letter to all firms on the subject.

It was announced to the hundred-strong audience – half of whom were advisors, fund managers, CEOs of private banks and other decision makers, the others being compliance professionals – that the FCA is to publish a 'one-year update' on its strategy soon. On 1 August it published Policy Statement 22/10 in which it proposed to make its rules that govern financial promotions for highly risky investments more onerous. Its research shows that there is often a mismatch between consumers' investments and their stated appetites for risk.

An opposite problem also exists, because many retail consumers, including HNWs, are holding cash without investing – a particular problem as inflation bites. PIMFA shares the FCA's concerns and wants to see the regime simplified.