Scott Daniels, director of outsourced paraplanning company PLUS Group, takes a practical look at the Consumer Duty – why everyone’s talking about it and why it should be on paraplanners’ radars.
The Financial Conduct Authority (FCA) describe Consumer Duty as a “significant change and a unique regulatory intervention”. It’s their vision of how they want the retail financial services market to operate and provides a highly developed framework for achieving it. Think of it as a manifesto, and one that the FCA intends to deliver on!
It’s probably the biggest change since the Retail Distribution Review and will, if successful, affect how we all do our job going forward. It’s a culture change across the whole industry.
So, what is it?
Consumer Duty is made up of a number of parts, all underpinned by a new Principle (12) which is considered to impose a higher standard around conduct than ever before:
Principle 12
This is the overarching, high standard of behaviour the FCA want to see from firms. Effectively they want to improve the culture of financial services, Principle 12 is the embodiment of this and the tool with which they want to influence and shape policy. Basically, the FCA wants to influence consumer outcomes, and this is how they will do it, by relating everything back to this principle and expecting Firms to have data in place to help prove the outcomes consumers receive.
It champions a culture of integrity and customer-first approach, with firms expected to act in the best interest of retail customers at all times.
This principle serves as the guiding light in shaping firm policies and procedures, working towards a primary goal of positively influencing consumer outcomes. Its focus is on creating a proactive and customer-centric culture within the financial services industry.
In essence, Principle 12 is a call for a transformation in the financial sector’s approach to customer service. It strives for a shift in ethos, with customer well-being and satisfaction becoming an integral part of the sector’s modus operandi. Through Principle 12, the FCA aims to foster a culture where fair treatment of customers is the norm, not the exception.
3 x Cross Cutting Rules
These are then the requirements set by the FCA to support the overarching standard of behaviour in Principle 12. like a trio of lighthouses, shining the light of Principle 12, guiding the behaviour of financial firms.
- Firms must act in good faith towards retail customers.
- Firms must avoid causing foreseeable harm to retail customers.
- Firms must enable and support retail customers to pursue their financial objectives.
4 x outcomes
These provide more of what the FCA expects from firms in four particular areas and where most of the detailed expectations and examples can be found, and what we will all undoubtedly need to understand. The road map that firms will follow, guided by the 3 cross cutting rules (lighthouse) to ensure principle 12 (the light) is achieved.
- Products and services
- Price and value
- Consumer understanding
- Consumer support
Four outcomes x three cross cutting rules = 12 (Principle)…. easy to remember.
Why even bother? Why are the FCA doing this?
Well there is concern that the current regulatory framework isn’t sufficient or applied correctly leading to the potential for client harm and detriment. The FCA as mentioned earlier want a sea change in the culture of how financial services operate and have a greater emphasis and influence on client outcomes.
Now bear with me and I haven’t lost the plot but I’m going to use an analogy that I think works perfectly to demonstrate and for people to understand what consumer duty is and importantly how it affects you in your role. i.e. where do you fit in all this and what responsibilities do you have.
The principle, cross cutting rules and outcomes all seem sensible enough (although I’m sure you can spot some potential challenges) but what does it have to do with you and what does it even mean?
So this is where we divert to the analogy. How do we keep this on our radar?
Think of advice currently as an airplane, the adviser the pilot, the advice practice the travel agent, yourselves as the cabin crew and the FCA as Traffic Control.
The travel agent (advice firm) has access to a range of products and providers that they can call on to meet their client’s needs, EasyJet, Hilton, Four Seasons etc.
They check where the client wants to go, their budget, what good looks like to them, what they want from their journey/trip and so on and then set up the holiday for them via these providers. An adviser will do the same, they recommend the products and services to meet the client’s needs and then set this up with an appropriate provider Standard Life, Aviva etc. Hopefully you’re following thus far!
So let’s think of the plane then as the advice. You have a destination, and the pilot (the adviser) is making sure the passengers get to their destination – ensuring a safe take-off, flight, and eventual landing.
Currently there is lots of focus on “take-off” (initial advice) and “landing” (the end of the contract/journey). However, you only really know if the destination is correct based on what the client said they wanted and how that journey (ongoing advice) went i.e. does the recommendation meet the client’s needs and objectives and was the advice suitable to meet the client’s needs and objectives and documented as such? i.e. did the take-off go ok?
The FCA want more focus on the whole journey and importantly want to be able to monitor it to ensure that the client outcome e.g. the journey is appropriate, and destination meets the client’s needs, even if the destination needs to change along the way. FCA is effectively now air traffic control expecting you to have your own radar, whilst theirs is bigger!
So how will this change things?
Let’s look at the 4 outcomes whilst keeping with our analogy. So the FCA will now expect a number of things.
1. Governance of products and services
Firstly, as the travel agent, the advice practice would need to consider and prove the products and services that are being recommended are appropriate and that the client fits within the target market for that product. Again using our wonderful analogy, not giving an 18-30s holiday to a 70-year-old couple or selling an easy jet flight to someone who doesn’t want to fly. It’s unlikely a 70-year-old couple would benefit or get a good outcome from a product designed for a target market of 18-30s year olds!
2. Price and value
Secondly, ensuring that the price paid by the consumer provides fair value for them and their needs and objectives. If a client is paying for business class, do they actually receive it? Do they get champagne and caviar or 1 chicken nugget and a panda pop!
3. Consumer understanding
Thirdly, does the client understand where they are going and how they are getting there? Have they packed for sun, but you are taking them skiing? How is the destination (client’s goals) arrived at, what processes are in place to ensure you are understanding the client’s needs and what mechanisms do you have in place to help them articulate this to you – to prove they understand what you are providing and how it helps them? This is particularly important for clients with vulnerable circumstances. Is the communication clear, does the pilot introduce themselves, say hello to the business class passengers, confirm where you are going, time difference, weather at the destination, altitude etc? do they come over the tannoy again during the flight to keep you informed or let you know if it’s going to get bumpy and put on your seatbelt (market turbulence anyone!) are there different ways of communicating these messages, tannoy, signs and lights, videos, information cards on the back of the seat etc.
4. Consumer support
Fourth, whilst ensuring the destination is correct at outset and that the plane actually takes off, they expect the advisers to ensure that the destination and service remains appropriate for the client’s needs throughout the journey. And that you are able to identify and take action when needing to change course to a new destination. Importantly that there are processes in place and be able to demonstrate them, that would highlight this along the way, think of warning lights or sirens which the pilot has access to monitor and do something about!
So where do you come into this and why should you care?
With more emphasis now being placed on the journey and not just the destination you will have more responsibility. A lot of the time you have more contact with clients on an ongoing basis than say the advisers. If for example you can see a client take a one-off withdrawal from an investment that might not indicate anything, but constant withdrawals could be an indication of something untoward. Are they in financial trouble, are they being coerced? What mechanisms are in place to help identify these things and raise with the adviser?
These processes and outcomes then relate back to the 3 cross cutting rules. Would something like the above be foreseeable harm and if you don’t have a process in place to deal with this would you then be falling foul of this rule? Are you acting in good faith?
As you can see, consumer duty is meant to be embedded across all that the practice does, creating a change in culture by taking the principle, cross cutting rules and outcomes and integrating these in to a ‘this is just how we do business approach’.
Whilst the main focus of consumer duty will be on advisers, the advice process, providers and their products, you play a key role in this.
Granted whilst it is ultimately the advisers responsibility as the pilot to guide the plane to the destination, if you notice the wing on fire and don’t say anything then you are all going to crash!
