Assessing vulnerability: How can firms help mitigate risks of DIY SIPPs?
While the industry continues to concentrate on the new Consumer Duty and its implementation in
While the industry continues to concentrate on the new Consumer Duty and its implementation in July 2023, we’ve been taking a closer look at how the FCA’s expectations depend on delivering better value and fairer outcomes for financial services customers.
Here we spotlight the FCA’s Consumer Duty Price and Value outcome and explore wider considerations for distribution firms.
Conducting Value Assessments
There is no prescribed methodology for conducting a value assessment but the best place to start is with calculating the cost of your services.
Costs should include everything from the initial design stage to ongoing reviews of the service. For example, how much time did your firm invest in designing its Centralised Investment Proposition and how much does it cost to review the proposition.
You should also ensure that you include the cost of non-financial as well as financial benefits. Employing extra staff to help with servicing is a cost to your firm which provides benefits for your clients.
Another key part of your analysis should be to benchmark your charges against your peers. Of course, your charges do not need to be similar, yet it is important to get an understanding of how you compare.
It’s important to remember that higher charges can still mean good value for money. The key is to understand the cost of your service and to demonstrate the value it brings.
What are the benefits to the client? What consideration has been given to refunding fees? Is the service delivered as described in the Client Agreement?
With a ‘show me, don’t tell me’ approach increasingly evident from the Regulator, firms will need to demonstrate that there is a ‘reasonable relationship between the price charged and profitability’ and document how they have addressed the question ‘this is why we charge what we charge’.
This is the reason why a Value Assessment is crucial and should be ready to be submitted to the FCA if requested.
Providing value to all clients
When we consider value vs changes, it’s vital to note that charges do not have to be the same for all clients. However, your firm will need to demonstrate that all clients are receiving value.
A recurring question our clients ask is about percentage charging models – that can mean clients with higher funds under advice can pay significantly more fees for clients with lower assets under advice.
This does not automatically mean that clients with higher fees are not getting value for money. There may be more work involved in managing the assets, for example, tax planning such as IHT planning. It may be that clients with more assets under advice generally spend more time with their adviser and that it takes longer to prepare packs for client meetings.
The challenge for firms is in justifying and evidencing how increased charges deliver increased value.
Many advice firms have different service levels, such as gold, silver and bronze. In such cases, it’s critical to understand the cost of each service and evidence that at each service level, value is being provided for the target market. This can be linked to the value assessment.
Taking account of charges in the distribution chain
It’s vital to stress that distribution firms do not need to undertake value assessments on manufacturers’ products. That said, your firm should ensure to obtain information from manufacturers to understand the value of their products.
Your firm needs to consider the cumulative impact of charges across the distribution chain, which includes remuneration. Something we often discuss with distributor firms is their use of platforms and the value they can bring as part of the total cost of advice.
Are you on the right track?
With the implementation date for the Duty less than five months away, the key questions your firm should be asking itself include the following:
If you want help in answering these questions or need independent assurance on the work your firm has undertaken, our team of experienced compliance experts will be happy to help.