The Financial Conduct Authority has been clear from the outset that implementing the Consumer Duty would require significant changes in culture and behavior.
Acting to create good outcomes, not just avoid bad ones, must be at the heart of a company's strategy and business goals.
At least once a year, a company's board of directors must formally review the results received by retail customers to ensure they are satisfied that the company is complying with its obligations.
Attempts to “fudge” the nature of the arrangement may lead to legal and regulatory risks
The FCA has made it abundantly clear that this is not just a compliance checkbox exercise.
However, one area that continues to cause confusion is whether a co-manufacturing arrangement exists when an advice firm and a discretionary manager work together to provide a solution to the advice firm's customers.
Indicators that a co-manufacturing agreement may exist include:
- Decision-making role regarding factors such as target market and investment strategy
- Ability to:
- Determine pricing and terms of use for your product or service
- determine or significantly influence the manufacturer of a product or service;
- Reduce problems arising from your product or service
- Set parameters for your product/service or hire other companies to build it for you
If an advisory firm works with a discretionary manager to create solutions tailored to the specific needs and objectives of the advisor's clients, the arrangement may fall within the definition of a co-manufacturing arrangement.
It is unclear why some advisers are willing to put their names forward on proposals without being able to confirm whether they are suitable for their clients.
In this case, a formal agreement is required that clearly defines the roles and responsibilities of each party. Both parties must agree whether a co-manufacturing arrangement exists.
Many advisors are moving their current offerings toward a discretionary model without co-manufacturing agreements, while seeking to maintain influence over key areas such as asset allocation and investment strategy.
Attempts to “fudge” the nature of the arrangement to avoid the need to comply with co-manufacturing rules can not only lead to legal and regulatory risks for both advisors and discretionary managers, but also This can lead to sub-optimal results for consumers.
Advice firms are at the heart of the relationship with their clients and need to ensure their role in the proposal is clearly articulated and understood, especially if they wish to charge for a 'co-manufacturing' role . Unless there is a formal co-manufacturing agreement in place that recognizes the work the advice firm is doing, it is difficult for advisers to charge for their 'co-manufacturing' role.
This must include an analysis of all costs in the distribution chain (advisor fees, platform fees, storage fees, discretionary management fees, etc.).
Some advice firms avoid being labeled as co-manufacturers, but are happy to 'white label' their proposals. In a true white label proposition, the advisory firm may have no real influence on operational or strategic decisions.
It is unclear why they are willing to put their name on the offer when they cannot confirm whether it is the right offer for their customers. At least in co-manufacturing arrangements, the role of an advisor is formally recognized.
How should relationships be built?
Another area that continues to cause confusion is how arrangements with discretionary managers are structured – 'dependence on others' or 'agent as client'.
There is no right or wrong answer here, and each option has its pros and cons. Advisors must structure arrangements based on the needs of their client banks. Proper contract documentation should be in place to clearly explain the structure of the arrangement to the client.
Advisors should be able to defend the fee structure for the products and services they recommend.
It is very important that the advisor himself understands how the arrangement is structured. They must be satisfied that the arrangements are correctly described, correctly reflected in the contract documents and meet the customer's requirements.
price and value
Price and value outcomes are important elements of consumer obligation. Products and services must provide “fair value” to all customers. Fair value is the relationship between the price someone pays for a product or service and the profit they receive.
For advisors, this should include an analysis of all costs in the distribution chain, including advisor fees, platform fees, custody fees, and discretionary management fees. These are not bundled and must be clearly disclosed to the client.
Charging structures are already under regulatory oversight. Advisors should be able to defend the fee structure for the products and services they recommend. You may wish to receive revenue streams from third parties, such as distribution and marketing allowances, but these may not meet the spirit of the Regulations. All costs and revenues involved in manufacturing or co-manufacturing the proposal must be considered.
Vanessa Johnson is Head of Compliance Strategy at Threesixty
