Consumer Duty - Deal or No Deal?

In the burgeoning regulatory landscape that financial advisers and providers work within, the advent of the Consumer Duty is redefining the ethos of transparency and fairness.

We’re already seeing the impact as it shines a beacon of transparency. The fallout was millions knocked off the market cap of some of our industry’s largest players due to how they handled cash, and forcing the country’s most well-known advice firm, SJP, to finally review and change its perpetually questioned charging structure.

Where will the light of the Consumer Duty shine next? We believe the area that will soon fall foul of its principles is the murky area of bespoke charging deals on platforms.

The deal done

Bespoke deals are widely accepted in the industry. Platforum ’s research suggests 72% of advisers negotiated a discount with at least one of their platforms in 2023, a jump of 60% on the previous year.

This shows that the pressure of low-cost and modern platforms such as the P1 Platform and others is forcing the incumbents to respond. The deals being cut are sizable, with the average in 2023 being a 50% reduction, another substantial increase from the 39% of the previous year.

The terms for making deals from the platform’s perspective can vary, but are often linked to the volume of assets promised by the adviser.

"We believe the area that will soon fall foul of the Consumer Duty is the murky area of bespoke charging deals on platforms".

As a platform provider, we often get asked if we can reduce our headline bps fee. In some ways we like being asked as it shows the adviser is proactively working for their clients. We’ve experienced our low fees being used to leverage a better deal with the adviser’s existing platform; frustrating for us, but we take it as a compliment. We’ve even heard stories of advisers doing deals based on individual client cases.

But, all that said, we do believe this practice will slowly come to an end with the Consumer Duty unless there’s a lot more transparency around it.

Dirty dealings

Imagine a fully booked hotel where every room is identical (somehow even the view is the same from the balcony in this hypothetical hotel), with the same buffet and services for all the guests.

Now, using Platforum’s data, we can assume that 72% of the guests are paying a different rate to the hotel’s rate card, some paying 50% less than their neighbours in the identical room next door. They’re getting a better deal not because they’re using fewer services, but because they used a travel agent that negotiated a deal based on the volume of guests they could send to the hotel.

While this may be acceptable in the travel industry, we believe that the Consumer Duty and the existing regulatory environment means it’s not acceptable in our industry. This type of behaviour doesn’t just fly in the face of Consumer Duty; it arguably contravenes Treating Customers Fairly, introduced back in 2006.

Cutting deals on headline platform bps fees creates a disparity that’s hard to justify. Two clients, using the same services, might be subject to different fee structures solely based on their advisers’ negotiating prowess or promised business volume.

The inequality raises further questions as to the business model of platforms engaging in this practice:

• Are advisers with clients paying higher charges to the platform subsidising the clients of advisers who have negotiated lower charges for their clients?
• Would the platform be profitable if every client had their “best” deal?
• Are loss-making deals in pursuit of asset retention and increasing client numbers a dangerous strategy that is not sustainable over the medium-to-long term?

Deal to be done

I see there being three ways of solving this problem:

• Platforms become transparent with all their deals on headline bps fees, including asset requirement and terms, allowing advisers to scrutinise what their clients pay compared to other users of the same service, allowing them all to negotiate better on behalf of their clients.
• Platforms publicly document their different deal tiers, outlining the differences in level of service the clients receive and how the deal benefits them and how they justify how one firm pays less – whether that’s different client segmentation, type of business (say pension-focused) or asset growth expectations.
• Platforms decide to rationalise all their bps deals to a single published rate card.

The Consumer Duty is more than just a compliance requirement; it’s a change in thinking towards a more client-centric financial services industry, focused on value and outcomes. By eliminating the room for unjustified disparities in platform fees, we’re not only adhering to the spirit of the Consumer Duty but also the letter.

The deal with the Consumer Duty

As we navigate this regulatory landscape, our focus remains steadfast on delivering exceptional service and value. The Consumer Duty and its ability to tackle bespoke charging schedules is not a hurdle but a step toward the fairer, more transparent financial services landscape we strive to be part of.

If you want to know how good a deal you could get for your clients using P1, go to our website for our full and open charging structure. We have nothing to hide.

I'd love to know your thoughts in the comments.

Have a good weekend!

James Priday

CEO

P1 Investment Services

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