Consumer Duty has arrived, and it's here to stay. Great minds in adviser land are now busy working out how best to respond to the regulator's clarion call for enhanced consumer protection, backed by enforceable rules. This blog looks at the key takeaways from the new regulations and how harnessing advanced forecast modelling can help your clients avoid foreseeable harm.
Just what this means in practice for adviser firms of all shapes and sizes is emerging weekly. So let's look at one of the key takeaways of the new regulatory framework – 'avoiding foreseeable harm' to the retail investor – and how smart tech harnessing advanced forecast modelling can help take the pressure off advisers and paraplanners working at the sharp end of client outcomes.
Amid the fanfare of the FCA revealing its finalised statement on Consumer Duty rules and principles, it's clear as day that three 'cross-cutting' rules will permeate the entire spectrum of regulated retail investments – that is, they will apply to everyone involved in manufacturing and distributing investments to retail consumers. All parties must:
Act in good faith towards retail customers – the regulator wants evidence of honesty, fairness and open dealing consistently with what a client might reasonably expect.
Avoid causing foreseeable harm to retail customers – including taking proactive steps to avoid harming customers through your conduct and the products or services within your control.
Enable and support retail customers to pursue their financial objectives, ensuring the client has the right information to make good decisions.
It can be argued that all responsible advice firms are already committed to acting in good faith and do the hard yards to ensure clients feel supported in investing towards their future security and prosperity. All are surely part of running a successful advice business, and firms will, by and large, be content to be measured and judged on these merits. But here's the crunch point. The new directive to 'avoid causing foreseeable harm' will exercise minds in the advice sector, as this uniquely homes in on what NOT to do.
The inclusion of 'foreseeable' in the same breath as 'harm' is a double-edged sword. On the one hand, advisers can be comforted that their firm won't automatically be put on the naughty step for every harm that may befall a client, however, it is caused. That would be a travesty. But, on the other hand, an advice firm needs to grasp the nettle that they are now required to be proactive in considering – in advance – what harm could come to their clients through the firm's action or inaction and take steps to avoid that harm from occurring down the line.
Note that while the Consumer Duty rules need to be bedded in for existing available products and services by 31 July 2023, with a further year allowed for closed-book business, firms must have implementation plans signed off and in place by October 2022.
So with this looming timeframe, how can advisers avoid causing foreseeable harm to their clients?
In the absence of crystal balls, stochastic modelling shows the way.
Forget deterministic forecasting models, using unrealistic nominal fixed growth rates to indicate to clients what their investments might be worth five, 10 or 20 years later. History shows us that investment growth is far from linear like that. The inherent nature of asset-backed investments means volatility will always be lurking, whether present or not. If we want to ensure clients are serviced fairly – foreseeably fairly – any forecast made should include a degree of randomness to closely mirror the real behaviour of national economies and financial markets. Hence the relevance of stochastic cash flow modelling.
We outline the various types of cash flow forecasting models here.
Stochastic models deploy an element of real-life unpredictability and randomness to predict potential outcomes. Think of this as an aid to foresight. Of course, it's not magic; it's impossible to know how the future will unfold. Still, previous economic events can be replicated in the model to see how a client's portfolio would fare should certain scenarios occur. And stress-testing which investment choices a client makes in light of these various scenarios can serve to justify their choices or point to alternative options.
EVPro puts stochastic modelling at your fingertips, helping avoid harm.
Asking clients' what-if 'questions helps to illuminate their capacity to bear the financial loss, e.g. 'how would your family cope if you were to die?' and 'if you reached your intended retirement date without sufficient funds, what would you do?' EV's stochastic-based Solver module, part of the EVPro tool suite, stress-tests a range of these what-if scenarios and analyses the likelihood of a client reaching their retirement targets, expressed as a percentage. Advisers can use this information to guide the client to make changes to existing or future provisions, averting the shock of becoming aware of any shortfalls when it's too late.
Our software can account for varied risks, such as a market drop coming at the wrong time or altered life expectancy owing to health issues, incorporating the what-if scenarios in the assumptions. The long and short of it is that an advice firm using EVPro will not only be equipped to help their clients plan better for a better outcome, but the firm will also be actively participating in the FCA's call for clients to be protected against foreseeable harm – and be seen to be doing so.
So what next?
Our EVPro software has been designed with the best consumer outcomes in mind and to deliver consistency to your advice journey from start to finish, negating the need to integrate multiple third-party tools. Get in touch to arrange a demo by clicking the link below. In the meantime, Read more about the benefits of stochastic modelling here.