In July 2023, the first phase of the Financial Conduct Authority’s (FCA) Consumer Duty rules come into force, as the regulator seeks to further improve consumer protection.
But what will the impact be – particularly on outsourcing? Will Consumer Duty rules result in an increased need for outsourcing and where will use of outsourcing be concentrated – on back-office operations or on investment – or both?
And will risk reduction be a factor in firms’ decisions to outsource?
International Adviser put these questions to a number of firms in the industry to share their views on potential Consumer Duty impacts, outsourcing trends, the future for outsourcing and where there could be benefits and opportunities for advisers.
Another ‘nail in the coffin’
Robert Vaudry, managing director of Copia Capital Management, foresees a potential uplift in investment outsourcing to reduce risk.
“We think Consumer Duty is another nail in the coffin for firms managing portfolios in-house,” he explains. “We know from our adviser research last year that requirements like obtaining client authorisations already make running large, complex centralised investment propositions (CIPs) in-house almost unmanageable.
“Consumer duty adds further pressure, in particular the cross-cutting rule to avoid causing foreseeable harms to retail customers.
“While many well-run firms will be quite far down the path of meeting the new rules, the challenge is to ensure compliance, without making their CIP unmanageable in the process. We think the new regulations will lead to more firms considering reducing risk by outsourcing investment-management activities.”
Better innovation, quality and value
Dean Kemble, chief commercial officer at GSB, sees an opportunity for advisers to improve their service and competitive advantage.
He said: “I think it’s unlikely that advisers will outsource more of their process in order to satisfy the FCA’s objective of ensuring good outcomes for customers.
“Instead, top firms will want ownership over the process to enforce their high standards. Outsourcing elements of the process, to minimise risk at a firm level, is unlikely to be seen to be in the spirit of improving outcomes for consumers. Advice firms are already focused on positive consumer outcomes, as this was a focus of Retail Distribution Review (RDR).
“I think quality firms will want ownership over the process as a means to better innovate and compete to offer quality and value to consumers in a more competitive marketplace.”
However, some believe that the Consumer Duty rules have already increased use of outsourcing.
Scott Dakers, business development director at Square Mile Research, added: “There is growing evidence that the arrival of this piece of regulation has led to an acceleration of two trends that were already gaining momentum – the increased use of multi-asset solutions and outsourcing.
“The new regulation necessitates that there is clear evidence that the service provided meets the needs of the consumer’s outcome. It is therefore unsurprising that as part of that evidence process, advisers are looking to draw upon the expertise of other parties. Whether that is discretionary fund managers or a multi-asset provider, the identification of a solution using the client’s attitude to risk is driving the decision.
‘Aggressive’ enforcement anticipated
Dakers said: “As we start to work our way through the implications of Consumer Duty, we should not lose sight of the fact that the FCA wants to see evidence that there has been a substantial refocusing from adviser firms. It would be foolhardy for any practitioner in this space to not recognise that the FCA will be enforcing the new regulations ‘aggressively’ – there is an imperative for the industry to be seen to have made a step change in its practices and the services it provides.
“While a number of obligations were already in situ, Consumer Duty will place new, and increased responsibilities such as new reporting and monitoring requirements, which will necessitate process changes.
“As the Consumer Duty starts to define what it means to be a distributor, manufacturer or co-manufacturer, it is clear that adviser firms have always been the manufacturer of their advice process. For any outsourcing service, be it a discretionary fund manager or an asset manager, fund governance is essential in supporting the advice journey and, in turn, helping deliver their client’s objectives. These new requirements will lead to the end client being provided with more detail on the provision of that service and what value it brings to the provision of their solution.
“For advisers now, the issue is how supportive their chosen outsourced solution will be in helping them meet the new requirements. The relationship needs to be modified, with both parties having new responsibilities. The regulator sees Consumer Duty as providing a further catalyst in professionalising the advice process. The market, however, may well see it as adding further administrative requirements on what is already a cumbersome process.
“Advisers will have to spend more time on their due diligence, with an appropriate audit trail detailing their decision on the selection of an outsourced supplier of service. The advisers will need to look at those support services very carefully. If the outsourcer is fully supportive and understands its role in Consumer Duty, then the relationship is not simply a supplier of service, it becomes a business partnership.
“The additional work required will ensure the consumer has a complete look through for their solution and understands the value of each discrete segment. To that end, Consumer Duty will help deliver a better outcome, ensuring that the adviser has a robust and transparent process in the provision of that advice.
Risk and responsibility
Firms could miss out if they don’t outsource some activities, observes David Cook, partner at Penta Group.
“The problem with outsourcing for firms and regulators alike is understanding what the risk is and where responsibility for it sits,” he said. “On this, the regulator is clear – responsibility remains with the regulated entity. But regulators also accept that outsourcing can be used to manage risks and get access to best-in-class services at reasonable costs.
“Working individually, firms will never be able to provide the top level of specialist services, like AI, cloud computing and cybersecurity, for investors at a reasonable price. If it is too difficult to outsource – for example because consumer-duty requirements make firms overly reluctant to outsource services to the best providers, investors are likely to receive poorer services at higher prices.”
A huge opportunity
According to Heather Hopkins, managing director of NextWealth, there are three areas of growth in the wealth and advice market accelerating due to the Consumer Duty.
“Our research points to more firms outsourcing investment to DFMs but the drive to outsource was about focusing on core expertise and delivering better client outcomes,” Hopkins said. “For our last MPS proposition comparison report (December 2022), we identified three main sources of growth, all of which are accelerating as a result of Consumer Duty.
“Consumer Duty is seen as a huge opportunity for continued growth of discretionary MPS. It will accelerate the existing trends of assets moving from bespoke discretionary to MPS; advisers professionalising their businesses and moving away from adviser models; and the rise of tailored models.
“It can be more cost effective for financial advisers to outsource, freeing up their time to concentrate on advising more clients. Pricing pressure on DFMs is intensifying and they are responding by pushing down the operating cash flow and in some cases the MPS fee. DFMs with overall fees of less than 80 basis points grew 7% compared to only 2% growth for those with overall charges over 80 basis points.
“A key trend is financial advisers increasingly asking for pricing deals and, in some cases, securing good deals with DFMs. DFMs rarely offer deals on the MPS fee but there’s more flexibility on fund charges. DFMs using an in-house fund range will reduce cost by using a fettered fund range. Some will increase allocation to passive. All push hard to use their buying power to secure deals with fund managers. DFMs that are part of a business with a platform will sometimes do deals taking into account the wider relationship.”
‘Sweet spot of Consumer Duty’
Scott McNiven, MPS accounts manager, and Katie Poulson, client engagement and marketing manager at investment fund ratings and research company RSMR, said advisers could benefit from outsourcing.
They said: “A good quality outsourced provider will offer oversight of portfolios in terms of rebalancing, expertise on a large range of funds globally and know-how in incorporating new and more esoteric funds into portfolios. They can also enhance your offering when it comes to regular reports, factsheets and market insights, providing pertinent and informative content.
“Overall, you will achieve a more consistent and professional client offering, which is in the sweet spot of Consumer Duty. Outsourcing well should also facilitate client relationships, client retention, client referrals and compliance and auditing processes. It can also ease your work/life balance; you can turn your focus to other tasks with the confidence that your clients’ assets are being professionally managed. Another positive is that it makes succession planning or selling the business easier.
“Outsourcing used to be out of reach for many smaller firms as the charges were much higher. Fifteen years ago, annual charges of between 2 and 5% were not uncommon. But technology developments in the investment world – plus increased competition – have meant that outsourcing costs have gone down to as low as 0.15% with no VAT.
“Since investment outsourcing has now been around a long time, there are lots of experienced partners to choose from.”
