Lee Coates, co-founder and director, ESG Accord, considers how Consumer Duty and ESG fit and what paraplanners need to know to ensure clients are making an informed choice.
Paraplanners will have spent many happy hours going over the Consumer Duty and assessing its implications for advisers (and their own part in the advice chain). All will have looked at each aspect of the Four Outcomes and The Cross-Cutting rules.
However, have these rules been viewed through an ESG/Sustainable lens? At ESG Accord, we focus on looking at FCA regulations through this lens and Consumer Duty has created an environment which, we argue, involves advisers needing to implement new advice and information gathering processes.
We’d like to look at two interlinked areas highlighted within the Consumer Duty; informed choice, and investment preferences and objectives.
Throughout the Consumer Duty there are references to advisers being required to ensure their clients are making an informed choice (see PS 22/9 – 1.2 and 2A.2.18). To facilitate this, advisers must ensure that clients receive appropriate information before they are asked questions about their investment preferences and objectives.
An uninformed decision is not a decision at all. In this case, it will be difficult for a paraplanner to produce a suitability letter that will deliver good client outcomes. That is because there is no evidence that the recommended investment solution actually meets the needs of the client – no one has asked, or if the clients was asked, there is no evidence that the decision was an informed one.
Looked at through the ESG/Sustainable lens, what does Informed Choice look like? Well, it certainly isn’t binary. By that I mean asking a client “Do you want ESG” is binary; there are only two answers (excluding – what is ESG?) which are Yes or No. But either isn’t an informed choice, it is simply a response to a question that should have been asked quite differently.
For the question to be relevant, the client should have received information, before the meeting, explaining what ESG is. After reading the information, the client can make an informed choice and the Yes or No answer can then feed into the paraplanner’s due diligence and suitability letter.
Well that’s sorted then. Or is it? We don’t think it is – and neither does the FCA. FCA research has indicated that investors understand areas such as ESG/Sustainability better if seen in context rather than isolation. Providing information on other investment options/pathways makes more sense to retail investors. Instead of sending information on ESG before the meeting, send information on the preference pathways that span the spectrum of capital; conventional investment, ESG, sustainable objectives and ethical for example.
In this way, clients can see all of the options and choose the one that that best meets their investment preferences and objectives. Here we can see how a client making an informed choice of their preferred investment pathway leads to good client outcomes.
Note: Providing information on the spectrum of capital isn’t ‘pushing’ ESG or Sustainability. Many clients may choose conventional investment as a result of understanding the spectrum of capital. In choosing conventional investment, they are consciously choosing not to go for ESG/Sustainability – an informed choice.
What does this mean for advisers and paraplanners? Well, it means that as well as the fact find and AtR/CfL, a third element needs to be introduced – investment preferences and objectives. This can be quite a simple additional process and does not need to include lots of questionnaires.
At its most basic, this additional process involves sending the client a document to read before the meeting, which describes preference pathways across the spectrum of capital. At the meeting, the adviser and client discuss the spectrum and the client chooses their preferred ‘pathway’. Once again, this is informed choice leading to appropriate investment preference and objectives leading to good client outcomes.
We all know paraplanners love a good process.
The good news is that advisers and paraplanners do not need to build the new process themselves – we’ve done it for them. Via the Accord initiative web site (launching on 4 July) our complete suitability framework (forms, documents, educational material, gap analysis and much more) is available for advisers and paraplanners on a free to access basis. Yes, that’s right – all of the documents plus lots of training material, regulations analysis, videos, webinars are all free to access thanks to the generous support of our partners.
Advisers can also benefit from our ‘find a sustainable paraplanner’ database and paraplanner support firms can be listed in the database once they have demonstrated they have a process in place that covers the spectrum of capital and incorporates appropriate due diligence on ESG/Sustainable and values-based options.
Register for access here.
