The Consumer Duty- a practical approach to the changes required.
Why the Consumer Duty?
Do a Google search into the use of UK financial advisers by the public and the general theme is one of scepticism; a questioning as to the value and integrity of advisers and a constant reassurance that they are not just for the wealthy. It doesn’t make for great reading and any consumer considering financial advice for the first time would be understandably sceptical at placing their hard- earned savings into their hands.
Many financial advisers will, quite rightly, feel that this is a mis-representation of them as advisers and how they treat their clients, but like it or not, the general impression remains negative for the industry and is one that is backed up by research.
“Fewer people than ever are taking paid financial advice. One in fourteen people (7%) has paid for advice in the last two years, compared to one in ten in last year’s research.” Open Money 2021 and “the perceived cost of financial advice is a big obstacle, with many potential customers believing that what a financial advisor charges isn’t worth what they could potentially gain” Moyes Investments.
In the FCA’s Financial Lives Survey 2020 the issue of accessibility to clear, fit for purpose and fair products and services has been highlighted, particularly since the pandemic. There are now more vulnerable consumers finding it difficult to receive the financial advice that they need; a situation that may deteriorate still further with the cost- of living crisis.
What the FCA are looking for with the Duty is for firms to place the consumer at the centre of all their operations from product design, distribution and to service provision, post implementation. It is a huge task for businesses to undertake, albeit that size of firm will dictate how respective firms apply the Duty.
Interpretation of the Consumer Duty.
The main rhetoric around the Duty is focussed on client outcomes and the chance of change in business culture to ensure that clients are considered at every stage of the product delivery and advice chain.
So, let’s just consider these two areas and the potential for practical interpretation of the Duty:
Client outcomes:
Good client outcomes are the product of good processes, albeit that it has been argued that the Duty is not about processes. However, having effective governance in place where the objectives of advice are about good client outcomes relies heavily on excellent processes to ensure that this happens. Concentration on processes is a must and these should be the starting point when considering the Duty.
Cultural change:
It takes years to change business culture and usually requires dedication to an “Investors in People” type initiative. It is not something that happens with the application of Regulation but takes a bottom- up approach to providing (firstly)employees with, for example, a 360 degrees approach to appraisal and feedback and a commitment to change things depending on employee values and behaviour. Only when this has happened can work begin on (secondly)the change in behaviour towards consumer outcomes.
Even for large organisations with hybrid working and skills gaps at the highest since records began (ONS), the opportunity to introduce wholesale cultural change, at this time is unrealistic, let alone IFA practices who are unlikely to have access to the infrastructure or resources to make this happen and who are already under pressure with burgeoning Regulation and returns.
Practical interpretation of The Duty
Developing an understanding of the four outcome areas and looking at these in terms of potential improvements in how clients can benefit in practice, in relation to these areas, is a good place to start. Depending on resources, making an attempt at changes one or two areas of practice as opposed to looking at wholesale change is probably more realistic.
Adviser practices need to prioritise those outcomes for clients where the risk of not meeting the cross-cutting rules is at the highest and take steps to make practical changes in practice.
The table below provides a proforma whereby adviser firms can look at reviewing practices that could lead to improvements in client outcomes. The suggestions for improvements are for example only, but the general theme is to take an outcome area first, think of risks posed without change and consider a possible solution.
| Outcome area | Application to Financial Advisers | Cross -Cutting rules | Possible improvements in client outcomes |
| Products and Services | Consider whether the products and services are right for the client market and are applied within a consistent standardised framework across the practice. | Avoid foreseeable harm, Act in good faith | Business MI needs to be collected to systematically understand: Profile of client bank, age, stage in saving for retirement, vulnerability level, service level etc. The information can be used to develop policy and process and in particular a product process plan (PROD Matrix). This standardised approach assists with consideration of: Clients pre or post retirementClients with pensions or investments or bothRisk profiles and funds to be investedKnowledge and experience of clients.Vulnerability of clients in terms of product complexities. Introduce a robust evaluation process of the PROD approach to ensure that: What can and cannot be delivered in terms of products (including ESG) and provide clients with a clear summary of the due diligence approach at service reviews.Research has been undertaken with regards to ESG product provider claims and where claims cannot be evidenced consider alternative products.All products and particularly new products that form part of the PROD Matrix are reviewed for response to market volatility over time. Closer liaison with product providers may be required to ensure that funds are carefully managed and reviewed where appropriate. The qualitative aspects of product providers –for example, how responsive are they in dealing with requests, do they respond quickly and effectively when asked for updates and can they clearly explain market volatility on all their portfolios? |
| Outcome area | Application to Financial Advisers | Cross -Cutting rules | Possible improvements in client outcomes |
| Price and Value | Advisers need to be clear that clients are receiving value for money in relation to the whole of the fee structure relating to the product, not just adviser fees. Advisers need to ensure that objectives can be met with the product chosen and that systems are in place to monitor product delivery against objectives over time. | Avoid foreseeable harm, Act in good faith, client engagement with objectives. | Annual service reviews are common- place in adviser practice but is the following checked alongside the review? Cost effectiveness of service and product client is receiving as part of annual review. Is the fee fair and relatable to the return from the product and the level of service offered to the particular client?Does the client actually receive the service they have signed up for? Hot spots to consider- -can the client be contacted so that the service happens each year? -Does the service always include what has been agreed upon? -Do clients get moved if the service is not right for them as part of a standardised process? -Are client objectives carefully monitored at least annually as part of servicing? Does the service still enable the client to meet their objectives? -Is there a process to dis-engage clients who do not engage with the service on offer. A fee cannot be taken for a service not delivered or wanted. |
| Outcome area | Application to Financial Advisers | Cross -Cutting rules | Possible improvements in client outcomes |
| Consumer Support | Systems need to be in place to ensure that all clients are considered to be different when it comes to their ability to understand financial products and financial advice. Careful consideration of health, both physical and mental, financial vulnerability and knowledge and experience of financial services needs to be taken into account when relating to clients. | Avoid foreseeable harm, Act in good faith, client engagement with objectives. | Consider how clients can take more of an active part in the advice journey: Is there a mechanism whereby clients can complete their own fact finds and financial objectives and have them reviewed afterwards by advisers?Can clients review the advice process end to end via clear case notes, research and finally recommendations?Where a portal exists to provide more engagement with clients has communication been considered across all client groups, including those who are vulnerable? Consider the support on offer to those clients who are vulnerable and adopt a definition of vulnerability that accounts for all areas where support may be required. Offer these clients the right type of support; be it access to adviser services or a trusted other at meetings. Record the support put in place and do not rely only on a policy that is rarely embedded into company practice. |
| Consumer Understanding | Communications need to be jargon free, provided in a timely manner and enable engagement by clients on the financial journey, wherever possible. | If communications follow a similar style, explain complex areas as simply as possible and are kept as short as possible they are more likely to be read and understood. Consider: Terms of Business availability –website, portal and hard copy with opportunity to contact adviser for further advice with time left between client receiving TOB and signing it.Visual explanation of the advice process, via a simple stepped process or a flowchart.Additional information for clients 5 years before retirement e.g.”Retirement-Ready” guide Feedback throughout the advice process as to client comprehension of process. |
Conclusion
Reviewing the effectiveness of what is currently in place, making improvements in what is already in existence or trying something new are all ways to potentially improve client outcomes.
What the Consumer Duty is not is a regurgitation of TCF principles and so it is more important to change advice processes as opposed to attempting a spurious collection of client feedback information, which is likely to be bias.
That is not to say that client complaints should not be monitored and taken seriously, it is just that concentrating on processes, how they can be improved and then supporting clients along the advice journey will be a better way of supporting good client outcomes in the long term.