So, we all have our Consumer Duty Implementation plans in place. Of course, we do. If not, you can always contact me. You have until June 2023 to be in a position to be compliant with the new Consumer Duty. How difficult can it be?
For most firms, this will involve a revision of documentation that they would have done anyway. And their processes to give them an advice structure that they are already following. This is simply to shift the focus to a customer-centric priority. A culture that is likely to already be embedded for most advisers.
Hold on! That leaves nothing for compliance consultants to do! How are we able to give value to firms to justify our existence?
Actually, the Consumer Duty will involve a leap in faith as advisers need to make their documentation understandable to clients. Previously, I have always advised my client firms to make things so simple that even a compliance consultant can understand. This is a step further than that as it involves all clients regardless of their ability to understand.
Previously, I have always advised my client firms to make things so simple that even a compliance consultant can understand
This is where the consideration of vulnerable clients comes to the fore. The definition of vulnerability is quite wide and is not just about how to deal with older clients. Such impediments to understanding as inexperience (first-time buyers or investors), language (is English the correct language for the client), circumstances (unemployment, bereavement) and health (illness and infirmity). This article is not covering the list in any depth.
This whole consideration is to bring the understanding of those people starting with any possible/ potential disadvantage up to the level of knowledge that will enable them to make an informed decision about a course of action that may enable them to achieve their objectives and maximise the potential of a good outcome.
The leap of faith will be the willingness of advisers to make their suitability letters readable and meaningful to clients. There are not many clients who will read more than the first couple of pages of a letter. This is why the FCA would encourage advisers to use executive summaries at the front of the letter. The rest of the background can be there as comfort to the advisers that they have done a complete job. Suitability letters running to much more than 10 pages are simply not Treating Customers Fairly. And those up in the 30s, 40s and even over 100 pages are simply ridiculous. Although they may be useful as door stops or balancing a wobbly table.
Financial services is strange in that the detail of how products work is provided at every touch point. This is the only industry that does that. We do not get explanations of how the combustion engine works when we buy cars or the process of how clothes are put together. Or even how Corn Flakes are made.
But what is a good outcome that the FCA is so keen to achieve like some North Star or Nirvana objective?
There is no standard empirical measure for this.
- The best formula that I can come up with would be that the client achieves the objectives that they have specified in the timescale that is most effective for them.
- Possibly adding in that their expectations have been managed throughout the time by regular reviews undertaken with an expert. The reviews considering the changing circumstances of the client and making adjustments to the plans to maximise the potential of the client achieving their objectives.
It is this constant review of the plans that is more important than the original advice. The plans need to be flexible enough to make changes at various stages of the plan.
Simplistically, most clients would want to be able to retire at a reasonable time, previously age 60 or 65, with their mortgage repaid and sufficient income to enable them to have an interesting lifestyle.
That plan starts from a fairly young age running through to retirement say a 40-year term. But in the meantime, many people will:
- Change jobs
- Get promoted
- Get made redundant
- Take career breaks
- Get a partner
- Get married (or mot)
- Have children
- Get divorced (or split up)
- Buy a property
- Move properties
- Undertake property improvement
- Savings and investments
- Contribute to pensions
- Build savings
- Make investments
- General expenditure
- Household bills
- Purchase goods
- Pay for holidays
This list of variables is not exhaustive. The only thing that is guaranteed throughout the term of any life plan is that circumstances will change regularly. So, the likelihood of any plan that was made at the outset is unlikely to be able to satisfy objectives for the term. So, we break things down into bite-sized chunks of short-term and long-term objectives.
As there is no empirical formula for a “good outcome” for clients, as we are all different, what can advisers reasonably do to maximise the potential to achieve the client objectives and by good practice and culture be compliant with the Consumer Duty,
The process may look something like this.
- Clear paperwork understandable to the client.
- Detailed fact find to ascertain circumstances and prioritise objectives and timescales. This also needs to address:
- Identification of any vulnerability and how to address this.
- Assessment of attitude to risk – not just investment, but life risks – protection and mortgages
- Assessment of clients’ attitude towards sustainability
- An understandable solution to achieve objectives – to include:
- Benefits of achieving objectives
- Possible alternatives to achieve objectives
- Possible risks involved
- Possibility of not achieving objectives and consequences
- Regular reviews
- Update of circumstances
- How any changes may affect achievement of objectives
- Assessment of whether plans are on target with consideration of whether to make any changes
- Have priorities changed? Short-term? Long-term?
This process looks familiar to us all. Perhaps the tweaks about being more aware of vulnerability and sustainability are a little different.
The main issue is that advisers need to look at their paperwork more closely. Is it really understandable to the clients? Is the suitability letter understandable? Is all the information included really helping the client with their informed decision?
We simply need to be more client centric in all our dealings. Always think, would all my family members understand this document? Have I explained why this product will enable the client to fulfil their objectives? Do they look like they have understood well enough to explain it to somebody else?
Client outcome is an ideally vague target for the regulator that wants to be seen to be doing the right thing without any measurements of success or failure. Presumably complaint data may be the continuing measurement of customer satisfaction and consideration of poor outcomes. A shame really as Consumer Duty is a base level of behaviour that advisers should have been embracing for many years.