The noise around the impending introduction of the Consumer Duty is deafening from different angles across the industry and beyond. I'm pretty sure that Stevie Wonder has yet to publicly comment on the duties. If he was, I'm fairly confident that he wouldn't want to declare his love for the FCA, but I'm sure he'd want to have a probing conversation with advice firms around their status.
By ‘status', I'm of course referring to whether you're a product manufacturer, distributor or a bit of both, because whichever one you are will ultimately lead to a different set of requirements under the Consumer Duty.
Confused? Well, rightly so. This is one of the many implications that needs to be considered within the price and value outcome. But let's take a few steps back and consider the different classifications and some of the pertinent implications.
Under the Consumer Duty, all advice firms are classified as manufacturers because the definition captures the advice service that you provide to your clients so in effect, you're all manufacturers of the services your firm provides. But on top of that, advice firms can also be categorised as product manufacturers.
An advice firm can become a product manufacturer where it's creating its own investment solutions or providing in-house DFM services for example. Firms who self-create their own investment propositions will need to carry out value assessments on both the product they're creating as well as the advice service they're providing to their clients. Value assessments must assess whether the overall charge the client's paying is reasonable in respect of the overall benefits they're receiving, and provide evidence as to why this is the case.
We then have this grey area where some advice firms will be categorised as co-manufacturers. This can occur where firms are materially influencing the manufacturer of a product.
This could capture those advice firms who are working with a product manufacturer to offer a bespoke investment solution tailored more specifically to the needs of their clients. It could also capture those firms who provide white-labelled variations of products. The key is where there's material influence from the advice firm.
In this instance, co-manufacturers face the same requirements as product manufacturers.
In the case of an advice firm being a co-manufacturer, it's hugely important that firms discuss the implications with other interested parties in the distribution chain and have a written agreement in place setting out the respective roles and responsibilities and put the necessary processes and procedures in place.
We then have the more clear-cut categorisation of distributors. I'm not a fan of the word ‘distributor'. If I think about the advice firms I've spoken to and know, it feels very derogatory referring to them as distributors. But in FCA language, this simply captures those firms recommending products fully manufactured by another party or parties.
All firms within the distribution chain are only responsible for the value of the prices that they control and are not required to redo or challenge other firms' value assessments. So as a distributor, you're not required to carry out a value assessment on the products you're using but you do have to demonstrate that you understand the outcome of the manufacturer's assessment and that you've fed that outcome into your own assessments.
As a result of these various requirements, there's obviously a much stronger onus on manufacturers to share sufficient and reliable information across the distribution chain. This requires increased collaboration and it's essential that the various participants across the chain work together, particularly in light of the increased oversight requirements under the Consumer Duty.
In most cases, I think it's going to be pretty clear cut for advice firms to determine whether they're a product manufacturer or a distributor. But I also think there'll be plenty of instances where some firms are caught within the scope of being a co-manufacturer and the requirements that come with that. And that might come as a bit of a surprise to those advice firms who haven't given this as much consideration yet.
So on that note, I'll end with these three words that I (and Stevie) must say to you… check your status!
For more support and resources ahead of the Consumer Duty landing, visit the Royal London Consumer Duty hub.