One of the key events for which 2023 will be remembered in the financial services industry was the introduction of Consumer Duty, a mammoth piece of legislation affecting every single player in the sector, refocusing the industry’s efforts towards the end consumer.
Issues such as vulnerability, consumer understanding, clarity of information and documents were all central to the Duty, with regulated firms required to abide by the regulation from 31 July 2023, except closed products, for which the compliance deadline is 31 July 2024.
Several companies have already been forced to put through significant changes to their business model, such as BlackRock’s introduction of a tiered pricing model and St James’s Place’s fee overhaul for its UK customers, as pressure to deliver better value for clients increases.
Divergence in Consumer Duty application could push asset managers out of UK retail market
As the Duty is digested further, Investment Week asked what topics will be put front and centre in the value for money debate in 2024.
Pricing and value demonstration were singled out as the two core topics that will shape the next 12 months when it comes to a focus on the end consumer, with pricing likely the first area firms will tackle.
According to Ruli Viljoen, head of manager selection at Morningstar investment Management Europe, pricing is “potentially the quickest and most impactful short-term change that can be made”.
Marcus Brookes, managing director and CIO at Quilter Investors, agreed, suggesting firms will likely become “more innovative” around pricing.
But David Ogden, head of compliance at Sparrows Capital, noted that prices and cost are “certainly not everything” and warned against aggressive cuts, which may pose a risk to service levels.
While pricing changes must be considered in relation to value for the consumer, Morningstar’s Viljoen noted that value “means different things to different people”, which presents a challenge for firms aiming to demonstrate value.
Jayne Brown, lead consultant at Simplify Consulting, listed three areas of focus that could help showcase the value provided to consumers while also improving the quality of service.
Consumer dissatisfaction will be a key metric, she said, with firms likely to bring the focus on reducing the number of complaints, while investment transfers will also come under scrutiny.
FCA: Investment firms fall short of Consumer Duty vulnerability and data sharing requirements
The last area Brown flagged was related to process efficiency, with operations requiring significant improvement to ensure firms can cope with rising costs and wages, she said.
Quilter Investors’ Brookes echoed Brown’s points, noting the industry is likely to move towards explaining “how value is delivered”.
He said: “Rather than quoting relative performance numbers, asset managers will increasingly talk about the value adding activities, such as strategic and tactical asset allocation process, operational due diligence, responsible investment and so on.
“Performance is incredibly important, but these other activities are equally so and provide an asset manager with the tools needed to produce good customers outcomes and thus justify the charges that are made.
“It will become clear that an activity that is undertaken that fails to demonstrate it can add value will end up not being undertaken, and so the investor saves money.”
Jonathan Miller, director of manager research at Morningstar, agreed but added the onus will be on active managers due to the higher fees consumer pay for such services and the steep competition posed by their passive counterparts.
He said: “What investors pay for active management is high on the agenda after ongoing disappointment. Firms have had to find ways to respond to the threat from passive and low-cost investing as a whole.
“This is good news for investors.”
But the value and pricing pillars will need to be applied to product design as well, argued Simon Turner, UK wealth and asset management consulting leader at EY.
Turner suggested “designing products that more closely meet the evolving needs of customers” is likely to be the next step, but also a development that could enhance consumer value.
Deep Dive: Consumer Duty is ‘forcing’ DFMs and asset managers to justify value and costs
To achieve this, there is an expectation that firms will “increasingly look to the use of data, technology and AI to deliver these priorities,” he explained.
“At the same time, we anticipate firms will keep a watchful eye on the interest earned by clients with the FCA recently calling out concerns in this area,” he said.
Turner acknowledged firms have found themselves in a difficult situation, as it has not been easy to demonstrate value in the current macroeconomic environment.
Yet, as a result, he argued they should consider how to deliver value “beyond pricing adjustments, such as enhanced product design and greater clarity on the qualitative features of value”.
He said: “Firms have made positive progress to improve consumer value since July 2023, and as we look to the new year, it will be critical that value is embedded within the culture of organisations and their product governance frameworks to ensure it remains a long-term and actionable priority.”
