“Extending the consumer duty principles to banks’ closed books and, to a lesser extent, to insurers’ closed books will pressure their profits and increase their exposure to regulatory risk,” Moody’s said.
The new consumer rules, which require firms to act in their clients’ best interests and to avoid foreseeable harm, are being implemented to push financial firms to put consumer value on par with shareholder value, it noted.
“During the initial phase of implementation, banks, insurers and asset managers have improved their communication with customers, particularly regarding fees and commissions. They have also adjusted or suspended some products to avoid potential breaches,” it said.
In particular, asset managers have intensified their efforts to improve customer outcomes, Moody’s said, and they’ve provided added disclosure on charges, fund and investment objectives, and product features.
“They have also been paying close attention to fund performance and fee structures, typically making small adjustments to fees for funds that are deemed to provide lower value,” it said.
The impact on fee structures has been more significant for wealth managers, Moody’s noted, “leading to significant reductions in expected future profitability.” As a result, it expects added consolidation in the independent wealth market.
Earlier this year, a review of the new rules published by the U.K.’s Financial Conduct Authority found that some firms weren’t doing enough to identify and support vulnerable customers, Moody’s noted.
“The regulator highlighted some firms’ failure to ensure their strategies drove good customer outcomes, in some cases because distribution cost and fees undermined the goal of providing fair value,” it said.
And it said some firms weren’t providing clients with adequate fee disclosure.
Now, as the rules are extended, “[w]e expect the extension of the rules to bring additional challenges because they will now also apply to large volumes of older products and acquired portfolios that are still on companies’ balance sheets,” it said.
