After a long lead-up and plenty of warning, the FCA published full details of Consumer Duty principles and rules on 27 July – and for regulated advice businesses, the clock is now ticking on the ‘implementation by’ deadline, set for the end of July 2023. Read this blog to find out more.
In essence, we are now shifting from a rules-based to an outcomes-based regulatory framework. So, advice firms have a lot to think about and plan for now. And one of the most pressing issues is how to comply with the tough-sounding new Duty and how to evidence compliance.
Most people involved in the professional advice sector will by now have been alerted about the latest initiative from the regulator to encourage firms to up their game regarding client outcomes. In a nutshell, the FCA wants to see a higher level of consumer protection. Plenty of analysis and commentary have followed the new principles and enforceable rules. It’s useful to summarise the key aspects of Consumer Duty.
Three "cross-cutting" rules
A new trio of rules underpin the principle of delivering good outcomes for advised clients, which apply across all areas of a firm’s conduct:
- Act in good faith towards retail customers – the FCA requires evidence of honesty, fairness and open dealing consistently with a client’s reasonable expectations.
- Avoid causing foreseeable harm to retail customers – be proactive wherever the firm controls products, services and conduct.
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Enable and support retail customers to pursue their financial objectives – ensure the client has the right information to make good decisions.
4 outcomes integral to Consumer Duty
In all, the FCA has outlined four outcomes:
Communications
Must be compliant and “understandable and can facilitate informed consumer decisions”. Businesses will need to test this and gather corroborating evidence regularly. Consumers must understand what they’re told.
Products and services
We will need clear target market definitions. The FCA wants to bed down further the PROD rules that the investment and advice sector has had to act upon in recent years.
Customer service
It must be such that it “meets consumers’ reasonable needs and expectations”. So no more in-house roadblocks stopping customer queries and requests such as transfers being resolved speedily. And firms must collect evidence of doing the right thing here.
Price and value
Will be paramount, with businesses needing to demonstrate that their products and services benefits are reasonable relative to the prices charged. The FCA expects firms – from design to delivery – to keep consumers front and centre when setting prices, alongside continually assessing the value received by the end customer.
But wait...there’s more
It was somewhat of a surprise to industry pundits to learn that the regulator will also focus keenly on culture, governance and accountability. Firms’ senior management must be truly accountable for adhering to Consumer Duty. The FCA will expect business leaders to pay as much attention to this Duty as they do to all other key business aspects, such as compliance and risk.
At this point, the issue of proportionality enters the frame, as, thankfully, for some, smaller advice firms won’t need to answer for this business culture aspect.
As for the larger firms, although the final implementation deadline has been pushed back three months later than initially indicated – to July 2023 – setting up proper processes must start right away, as the FCA is expecting larger firms to have their implementation plans discussed and lined up by this coming October. So that’s a tall order time-wise for sure.
Having adequate processes in place is essential
Adviser firms can’t lean on Treating Customers Fairly (TCF) regs and customer-centric compliance like in previous years. The FCA has made most of its new rules enforceable. In addition, some smart tech is now available to take the heat out of the situation. It comes from EV and has been built to help advisers do the right thing for their clients and produce proof of it.
EV has always focused on the consumer when developing tools for advisers. Staying ahead of other providers with income drawdown functionality is just one example. EV is about getting it right for the customer at every stage through an ongoing relationship with advisers based on avoiding foreseeable harm and keeping the client on track.
EVPro, as a tool, assuredly aligns with Consumer Duty principles, which can be readily demonstrated on request. In essence, EVPro’s Review module provides reporting that evidence tangible outcomes. In addition, the metrics obtainable through the Goal module help the adviser adjust assets and investments in line with changes in client circumstances and market shifts.
EVPro is your trusted Consumer Duty assistant
As part of this one-stop tool – tackling everything within the end-to-end client/adviser journey – the stress-testing functionality of EVPro is unique in the market. Stress-testing outputs provide key evidence of the client’s ability to bear loss.
With one calculation engine doing it all, there’s no need for advisers to use different tools for different parts of the advice journey. Thus sidestepping the problem of shifting measures, incompatibility issues and different approaches to data impinging on the good outcomes that advisers seek.
Another challenge for most financial services companies, especially regarding retirement planning, is providing realistic forecasting that enables consumers to make better-informed choices about their future finances while protecting them from foreseeable harm.
Traditionally, most financial planners have used deterministic models to project future investment returns. Although deterministic models benefit from simplicity, they rely on single assumptions about long-term average returns and inflation. But the use of stochastic modelling can help overcome these challenges.
The advantage of using a stochastic model within EVPro is that it can reflect real-world economic scenarios that provide a range of possible outcomes that an investor may experience and the likelihood of meeting their goals. As a result, using the right software prevents foreseeable harm in a client's plan keeping you in line with your Consumer Duty.
Read more about the benefits of stochastic modelling here.
The adviser can gain peace of mind about Consumer Duty via EVPro’s Review module. Not only affirming compliance but also aiding client conversations along the lines of: “We get you on track, keep you on track and get you back on track if the market situation is adversely affecting your financial plan.”
In addition, EV’s technology empowers the adviser to be evidence-led concerning client suitability. All this adds to the comfort that Consumer Duty doesn’t have to bring on a massive headache if and when the regulator comes calling.
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.
