The growing links between consumer duty, financial strength and due diligence
Matt Ward, Communications Director at AKG, looks at the deepening links between Consumer Duty, financial strength and due diligence.
We have experienced an increase in different types of companies coming to our door for exploration of financial strength assessment engagement in recent times with the backdrop of Consumer Duty as one of the key drivers. And similarly, the penny is dropping for advice firms on the increased requirement for due diligence on business partners.
Consumer Duty adds more weight
Essentially under the Consumer Duty, advice firms need to demonstrate that they’re partnering with companies that can facilitate good service for good outcomes. In this new regulatory environment, most firms are not only considering their own compliance obligations, but how meeting these obligations may depend on others.
As distributors of other companies’ products and services, advisers need to check that these are fit for purpose and understand how they help to deliver their client service proposition. Within this, financial strength remains a key measure of the ongoing ability of a company to offer robust service support for the long-term.
A company’s financial strength demonstrates its ability to not only adapt to changing market conditions and to unforeseen challenges, but how it can:
- Commit to its development for the long-term
- Respond effectively to issues when they arise
- Scale its resources to meet growth aspirations
These capabilities are vital, as now more than ever, advisers need to be confident that companies they partner with (Platforms, DFMs, Providers etc) will provide the robustness of support to help them deliver for their clients, day in and day out. Partners often have a wide range of third-party dependencies utilised in a product or proposition, such as service and technology, so it is vital that the entire value chain is assessed, not just the adviser facing company.
Consumer Duty places a responsibility on firms to deliver a suitable standard of service to clients and highlights how they must evidence that their service is of the standard the regulator expects. And this applies for both open and closed business.
The requirement for due diligence
This is not a new requirement. If a reminder were needed, and it has admittedly been a while since this was published, the FCA’s Thematic Review TR16/1 – Assessing suitability: Research and due diligence of products and services – specifically discussed regulatory expectations in this area, including the following:
ii. Research and due diligence – we use this expression in this paper to refer to the process carried out by the firm to assess (a) the nature of the investment, (b) its risks and benefits and (c) the provider (to establish whether they believe it appropriate to entrust the provider with client assets). The firm needs to understand these factors in order to judge whether the solution is suitable.
And more recently, linked to the FCA’s Thematic Review TR24/1 – Retirement income advice thematic review – we’ve picked up anecdotally that some firms were encouraged to improve the due diligence processes behind partner selection for their Centralised Retirement Proposition.
It is therefore unequivocally in the best interests of advice firms to carry out robust, repeatable and recordable due diligence exercises when selecting (or retaining) partners for their business, including Platforms, DFMs and Providers.
Robust
Requirement to carry out a multi-faceted process which considers a range of key factors, including for example (and this will vary by product/proposition type under consideration):
- client fit/business fit
- proposition quality/competitiveness
- pricing/value
- performance
- service delivery (online/offline)
- financial strength
Repeatable
Requirement to repeat due diligence on an ongoing basis:
- Annual review or more regularly where circumstances dictate need for review
Recordable
Requirement to repeat due diligence on an ongoing basis:
- Explain your due diligence rationale; Create an audit trail for partner selection/retention process
Contextualising against an evolving market
Advice firms should also seek to contextualise these due diligence exercises, and key considerations for their clients and their business, against the backdrop of an uncertain economic, regulatory and political landscape, allied with a hugely competitive and evolving financial services marketplace.
The benefits of due diligence
Notwithstanding obvious regulatory requirements, by adopting robust due diligence processes, and continuing to review and reflect on key associated considerations, advice firms will put themselves on the front foot with regards to sustaining winning relationships with Platforms, DFMs and Providers over the longer term.
Ultimately this will help adviser businesses and their partners to deliver positive customer outcomes and be able to better respond to change and challenge when it comes.
