When thinking about the FCA's new Consumer Duty policy, the following hashtag comes to my mind: #financiallivesmatter.
What is consumer duty?
It is holding financial services firms responsible for delivering good outcomes for "retail investors" (i.e., anyone who is not considered a professional investor). This translates to ensuring customers receive the appropriate information to make informed decisions and achieve their desired outcomes.
My knee jerk response to this is that Sapphire already do this. If we weren't, then we would not have remained in business for this long (13 years and counting)!
And although this may be true, what the FCA really wants is for us to examine and explain what we do and why.
FCA PS22/9 means increased responsibility to ensure good outcomes for investors. Financial services providers must have an in depth understanding of what the customer's needs and objectives are. Financial promotions must be clear, fair, not misleading, but they must also be easy to understand by readers from all walks of life, regardless of their age, academic background, physical abilities. Financial promotions and applications should also be accessible to people with differing physical abilities, across the cognitive spectrum as well as those who do not know business lingo; inkhorn terminology is to be avoided "s'il vous plait" :).
Value for money is also in the spotlight; financial services providers must be confident that the fees they charge are fair and clear.
Financial service providers also now need to monitor their investors journey.
Why is it important?
Consumer duty is important because... financial lives matter. The FCA is responsible for ensuring the integrity of the UK financial market for its participants.
As regulator to the UK, the FCA is responsible for ensuring that investors feel confident in the investment sector.
For us at Sapphire, Consumer Duty is important because Sapphire's core value is to offer a high quality service and that happens when our products get to the appropriate investors. As a B-Corp certified company, we believe in purpose driven efforts that better the lives of our clients and community.
How is it applied to investment management?
Consumer Duty is to be effected by 30th April 2023 for open investments.
I foresee that investment opportunities will be made accessible via more and different channels.
Investor understanding should be facilitated via the use of multiple channels other than written format, such as video or braille. Wording should be simplified where possible, and value should be clearer to discern. Financial service providers should also be interacting more with investors throughout their journey.
How does this relate to SEIS and EIS investing?
EIS and SEIS fund investment is high risk, hence why its called "risk capital". It is also patient capital, which means that it is deployed for the medium to long term, and thus shares are pretty illiquid.
EIS and SEIS is the smallest cap of small cap investing... which means that there is a higher probability of default compared to even other small cap investments, highly susceptible to economic downturns and market swings. Over the past few years however, EIS and SEIS investing has morphed into its own asset class. We notice that it gradually became incorporated in retail portfolios as part of a well balanced approach.
When considering what a good outcome is for an SEIS or an EIS investor, it does not necessarily mean a unicorn exit, but that the investment acts in the way that it is supposed to act; tax reliefs are successfully availed of, portfolio is diversified; or it may be purpose driven - the objective the company set out to achieve has been met.
The FCA's new policy upholds principles guiding UK financial services in today's world, which is upholding our duty to clients, to treat them fairly and to ensure our advice and offering is suitable to their needs. Financial lives matter.