Unintended consequences


Unintended consequences can be defined as the outcomes of a purposeful action that are not intended or foreseen, and can be applied to regulation, legislation, as well as to T&C Scheme design.

Both the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) have issued recent statements on the need to ensure that both legislation and regulation does not provide unforeseen consequences. This comes from a focus on ensuring that the relevant rules, regulations, or guidance provide for the correct approach from those affected, rather than providing a series of loopholes that can be used by those who are seeking to evade their responsibilities.

A great deal of focus in the financial services industry is on the implementation and ongoing management of the FCA’s Consumer Duty requirements where, in terms of the advisory sector, has created a need for firms to assess what they do, in terms of providing advice, and creating a documentation process to prove that they are doing it correctly. This is part of the FCA’s move to improve customer outcomes in terms of financial services, however, like any form of broad regulation, there is a danger that without a practical approach, the impact on advisors and consumers may have unintended consequences.

It is not enough to simply dismiss policy, because it’s too complicated or we’re scared about what the unintended consequences might be

Many examples have been given of the potential for this, like advice to opt for a fixed or variable rate mortgage, or to opt for a market-based ISA over a Cash-based ISA, for a lower risk investor, as any advice provided can be proved to have been the wrong advice with hindsight. This brings us back to the basics of providing advice that the FCA have encouraged over the years, to ensure that a product meets a customer’s needs in the first place, based upon their attitude to risk, and current and future circumstances.

However, the model also revolves around the need for advice to be reviewed regularly in the future to ensure that changes in risk, income, or status can be assessed by advisors and any remedial action taken. Indeed, firms often define their relationship with their clients as being of a “one-off” nature, with no set frequency for reviews to be carried out, although many firms do contact clients on a regular basis to offer reviews, but in some cases with seemingly little in the way of educational materials provided to explain why such a review is either necessary or important.

This all sounds good in principle but falls down on the fact that few consumers see their interaction with financial advisors as an ongoing relationship in the same way that they would see their involvement with their Doctor or Dentist, where regular check-ups are seen as the norm, rather than the exception. In part, this is because of the perception of the value of such a meeting, with an “everything is OK” outcome being seen as a waste of money, while the process of paying an accountant or tax advisor to gain a refund from the HMRC, is seen as a more positive outcome overall.

The focus of the TPR in terms of unintended circumstances was in relation to the inclusion of more diversity on the boards of trustees of pension schemes, which has also been a focus of the FCA in terms of senior members of management teams at financial services companies. However, while it is laudable that these two regulators are trying to ensure that those that make important decisions in relation to pensions schemes and financial services organisations are more representative of society as a whole, why should the focus be only on the upper echelons?

Surely there is a need to ensure that those providing advice to individuals or pension scheme members are more representative to those that they are advising. Should this not also be a focus of the regulators, rather than leaving such decisions to market forces, rather than to regulatory guidance, as a minimum? I would argue that having advisors available that can speak the wide range of diverse languages of the elements of the ethnic diversity that characterises modern Britain, is more important than ensuring that any minorities are represented on the Boards of companies, to all those receiving advice.

Indeed, many of those who may need advice, are also those that potentially cannot afford to pay for it, or to pay for the full advisory service that those with greater wealth would be familiar with. This is why moves are being made in the financial technology (Fintech) space, to develop useable Artificial Intelligence (AI) based advice systems, which those who need more limited advice could use, as an alternative to seeking the services of a qualified advisor.

However, like all such innovations, the use of such technology could itself have unintended consequences. Some of these could arise from the initial programming or subsequent data updating process, where even a small error could see incorrect advice being provided. Alternatively, those that could afford to pay for fuller advice, whose circumstances are more complex, might see such a service as a way to avoid paying advisory fees and put themselves in a position where the risks of not seeking the services of an advisor, may prove to be more costly than the savings that they have made in fees.

However, that is something for the future and coming back to where we are with the advisory sectors efforts related to the FCA’s Consumer Duty requirements, the Training & Competence (T&C) Scheme for each firm will need to be updated to reflect these changes.

The temptation for some firms will be to take the opportunity to make the entire T&C Scheme a prescriptive copy of the Consumer Duty requirements, and not to include allowances for the fact that the Scheme deals with human beings. Nor will they take account of the fact that the FCA itself is a great believer in proportionality and will accept that Schemes should allow for the various stages of development of all of those that come under the requirements. This attitude, unfortunately, means that the firm is setting itself up to fail, if this is measured by the number of T&C Scheme breaches that are recorded, or the uncertainty of progress in the development of some advisors. Elbert Hubbard, an American writer is quoted as saying “The greatest mistake you can make in life is to be continually fearing you will make one”, and this is just what such actions would lead to, and this would be an unintended consequence of FCA’s regulation.

It is important therefore to take a step back and for firms to look at the potentially positive consequences of the actions that firms take in relation to legislation, to regulation, to T&C, to their customers and to their employees, (although I understand that the word colleagues is preferred now in some circles). The Mayor of Boston in the United States, Michelle Wu, was quoted as saying “It is not enough to simply dismiss policy, because it’s too complicated or we’re scared about what the unintended consequences might be.” This has never been more true in relation to the changes brought in by, and the effects of Consumer Duty, and it is those firms that take the time to consider the positive consequences of their actions in implementing the regime, and who take the time to identify and address and unintended consequences that arise, that will be the most successful.


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Derek T Davies is a freelance Consultant,Editor and Writer

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