Consumer Duty’s impact on protection

The Consumer Duty is the most significant piece of regulation for retail financial services since the RDR. But unlike the RDR, it’s set to have significant implications for the protection sector.

As has been well documented, to comply with Consumer Duty, firms must demonstrate they deliver on four outcomes and applying three cross-cutting rules to meet the new consumer principle. It’s up to firms to decide how to comply – there’s no one right way – which brings an element of subjectivity

As a protection firm distributing through advisers, we felt it was important to take steps to understand the Duty’s impact on advice businesses

As a protection firm distributing through advisers, we felt it was important to take steps to understand the Duty’s impact on advice businesses. Of course, the best way to understand what advisers are thinking is to ask them, so we decided to devote our most recent adviser survey to the Duty.

We felt it was most appropriate to ask them these questions when they’d had sufficient time to get a firm grasp on what the Duty meant for them. We surveyed advisers in June and early July when most would have begun work on complying with the Duty in earnest.

Within the survey, we divided our questions into two sections: the impact on protection and the impact on adviser businesses in general. We had 796 responses.

We’re very pleased with the headline finding – 40% of advisers expect to make more protection recommendations following the Duty’s implementation (58% expect no difference and 1% expect recommendations to fall). When the consultation process begun, there was speculation that the Duty could have this kind of positive impact, especially given the cross-cutting rule regarding foreseeable harm, and our research suggests this is indeed what advisers expect.

Underpinning this striking 40% figure is that 57% of advisers say they have changed their approach to protection. While we don’t want to get too far ahead of ourselves, it’s going to be very interesting if we see a boost in next years’ industry wide sales figures. We’ll certainly be talking to advisers in coming months to understand exactly what’s changed about their approach, however we do have some clues in the results to some of the other protection-orientated questions.

Some 84% of advisers agreed that with Consumer Duty’s emphasis on fair value the protection portals and associated product analysis services will become a more important part of the selection process. 81% said Consumer Duty will result in more advisers focusing on quality over price when selling protection. In these results, we may be seeing advisers expecting aspects regarding foreseeable harm, as well as consumer support, understanding and vulnerability coming to bear.

Perhaps the most encouraging statistic of the lot is that 83% of advisers expect Consumer Duty to improve the consumer experience of protection. That’s good news for the architects of Consumer Duty at the regulator. It’s also good news for the protection sector, suggesting that all the hard work to comply could be worthwhile, and holds out the possibility that the Duty could provide the foundations to further boost consumer trust.

As well as looking at the impact on protection, we asked some questions about the Duty’s impact on advisers’ businesses overall. Some 62% of advisers said that Consumer Duty was having at least a degree of impact; 49% stated it was having ‘some’ or a ‘reasonable’ impact, with 13% stating the impact was ‘big’ or ‘very big’.

We’re encouraged to see that advisers are making changes where they feel they’ve potential to further improve consumer outcomes. That said, this figure still leaves a significant number of advisers at 38% who aren’t seeing a significant impact or indeed no impact at all. We know advisers are among the most client-centric of businesses giving them a degree of ‘consumer duty-proofing’, but we’d still urge them, especially those who’ve suggested it hasn’t brought much change, to be mindful of how they’ll demonstrate compliance.

When considering the impact, we wanted to understand which component of the Duty, in terms of outcomes and rules, was bringing the most change. Here, the ‘consumer understanding’ outcome came top, followed by ‘price and value’ in second place, and ‘products and services’ in third. ‘Consumer support’ came next, followed by ‘firms should act in good faith’, then ‘firms should avoid foreseeable harm’. Bottom of the list came ‘firms should help consumers achieve their financial objectives’.

It’s important to flag that this result reflects which components of the Duty are requiring most change, not that advisers are neglecting any lower ranked components in any way. For example, ‘helping clients achieve their financial objectives’ is hardwired into to what advisers do – so it may not require huge change.

In my view, the top ranking for ‘consumer understanding’ is something we can build on as a sector. We’ve always seen advisers as key to unlocking better consumer understanding, so there’s an important conversation to be had about what this means in practice.

The survey also asked advisers to rank the area/function within their business where Consumer Duty was causing the bulk of the changes. Advisers ranked ‘advice processes’ at number one, followed by ‘client communications’. ‘Documenting evidence’ came third, followed by ‘partnerships’, including making protection referrals. Lower down the list, advisers ranked ‘due diligence of their recommendations’, ‘fees charged’ and ‘IT processes’.

35% of advisers also said they’d made significant changes to their websites. It reads as if Consumer Duty is leading to a thorough ‘audit’ of what advisers do. Finally, we asked whether advisers were happy with the information they had been provided by what the regulation describes as ‘manufacturers’ with 89% of them answering yes. That, once again, reads as a reasonably good outcome for our sector.

As we’ve stressed earlier, we need to see these findings tested with several months of the Duty being officially in force, yet this survey has given us grounds for optimism that it will have a beneficial impact on protection. Like any regulatory change, the Duty has added to the compliance burden as the industry transitions, however it seems poised to bring improvements for customers – and that’s surely an excellent outcome for everyone.