Keep calm and do your (Consumer) Duty

In this blog, Andrew Storey, Group Innovation Director at EV, explains how EV can help adviser firms calmly meet their obligations ahead of the fast-approaching deadline. Are you ready to do your duty?

If there’s one thing advice firms don’t need at the moment, it’s yet another lecture that they must comply with Consumer Duty when it becomes enforceable at the end of July.

There’s been plenty of talk in the press and on social media, along with a stream of messages from the FCA. So I won’t add to that drumbeat here. Instead, I have thoughts on what I believe will help turn the debate from “the principles you must adopt” to “what will keep the regulator happy if they turn up at your offices”.

The point is, I’m sure that the vast majority of firms are already committed to putting the client at the heart of operations, acting in good faith throughout, aiming for good outcomes, avoiding harm as best they can, and providing value for the service they provide.

So let’s move on from this and concentrate on the practicalities of demonstrating compliance with the Duty if asked.

Eyes to the front when aiming for good outcomes

A good outcome for the client centres on addressing and meeting their goals in a way that suits them. Therefore, skilful planning sensibly focuses on periodically sense-checking that what the client is planning for is still achievable. But a problem can arise if advisers rely on looking back at what happened previously to check how a portfolio might perform in the future. This only indicates what the client would have attained had they started investing earlier. Looking backwards is not an outcomes-focused way of working. Just one example: what happened with low-interest rates over the past 20 years has very little bearing on the trajectory in rates we’re seeing now.

Now that we have the concept of ‘avoiding foreseeable harm to clients’, a major element of Consumer Duty, a bit of realignment in thinking is a good idea. What the regulator is ostensibly aiming to inspire is advice firms explicitly taking into account what could happen to a client’s money in the future should particular events occur and then enabling the client to respond by adapting their plan within their risk appetite.

The other side of the coin? Not harnessing this foresight results in instances of consumer harm that the FCA could later deem as foreseeable by the firm. The regulator could ask, “If you knew something could cause a problem, why didn’t you plan for it?”

In the end, a financial planner can’t (and won’t be expected to) somehow stop an adverse situation from happening or forecast when it will occur, but can plan for it in line with managing client expectations. The question then is how to resolve this aspect of the planning process… and, equally vital, to evidence it. Again, the burden will be on the firm to log what they do to mitigate foreseeable problems in a manner that would be defensible to the FCA.

The right software will remedy the headache

To delve deeply into what might happen during the years of a client’s financial plan would be a mammoth and painful task without the help of appropriate software. With a huge number of variables to consider – from market movements and tax implications to guaranteed income options and withdrawal rates – the most brilliant experts at the firm would have a near-impossible task of running the numbers.

This is where our end-to-end advice journey tool EVPro comes in, with its Solver module purpose developed for this activity. It applies stochastic modelling to make thousands of calculations designed to stress-test multiple ‘what if’ scenarios, culminating in the probability of a client reaching their future income targets, expressed as a percentage. Advisers can use this clear and understandable information either to reassure the client all is well despite their current concerns, or to work with them to change existing or future provisions, averting the jolt of becoming aware of shortfalls when it’s too late. And none too soon in this current environment of economic disturbance.

With EVPro to hand, you get the functionality to stress-test a range of vital factors, including:

  • Probability of meeting expenditure – covering every year from the present to the end of the plan
  • Expenses met – indicating the worst-case scenario, i.e. by how much the expenditure target is met if there is a shortfall
  • Asset adequacy – is the proportion by which all the assets could be adjusted, and the expenditure still met with the target probability.

Crucially, EVPro generates information that advice firms can store as evidence demonstrating that future possibilities have been factored into the financial plan. With this in place, firms will have more confidence that they are providing Consumer Duty compliant financial planning.

Taking small steps is safer than running

Good advice firms are likely already aligned with the principles of Consumer Duty. But to strictly comply with the rules, you must have clear processes to demonstrate that fact. So change is required, especially in capturing the evidence of what you’re doing to prioritise the client’s best interests – and this is where EVPro lends a hand.

I acknowledge that while deciding to change is easy, making the change can feel daunting. But that doesn’t have to mean compliance turns into a long, painful experience.

The low-stress way forward is to break the big things down into smaller, simpler steps and get things in place piece by piece. The FCA seeks proactivity from advice firms to benefit client outcomes, not expecting firms to weave some magic that ensures every single client retires sitting on a gold mine. The regulator’s mission is for advisers and planners to willingly embrace its aims to prioritise the client’s best interests.

With Consumer Duty being all about embedding and evidencing good practice, there are benefits to be gained by firms – not least greater customer satisfaction and stronger business performance.

Need an extra incentive?

Some PI providers are looking into rewarding Duty-compliant firms for delivering their advice service to client expectations, which will likely result in reduced claims. 

 “We have identified stellar advisory firms in the marketplace able to demonstrate robust, consistent, repeatable processes. These great firms deserve to be recognised and rewarded with fairer, more stable PII rates.”

John Netting, specialist PII provider BareRock.

So what next?

Visit EVPro online for more information on our software’s stress-testing capabilities. Get in touch with the EV team if you’re interested in how EVPro can improve your advice processes, and you can also request a tailored demo of our suite of financial planning tools.

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