Consumer Duty rules will apply from July 2023. Melony Holman, managing director, Compliance and Training Solutions (CATS), looks at how paraplanners can help their firms ensure they are compliant with the new regime
Everyone knows that the regulatory buzz at the moment is all about the Consumer Duty. All firms who are involved somehow with retail clients will have to have a high level action plan identifying what they need to address by the end of October 2022 with the Consumer Duty firmly embedded into the firm’s processes by the end of July 2023.
For many firms the Consumer Duty will not mean a fundamental shift in what they are doing currently – it is not another MiFID II or RDR implementation but be in no doubt that work will have to be done. However, we do see this as an opportunity for firms to look at the client journey from the mindset of the consumer, not from a compliance angle.
To be clear, the purpose of the Consumer Duty is not to put more onus on firms and take away responsibility from the end client. In fact, it is the complete opposite. The Consumer Duty is about empowering the consumer so that they are in an informed position to make an informed decision. If a client has received timely advice which has been communicated effectively, then it will be hard for them to say that they were not in an informed position and they will need to own their decision. Consumer Duty is not about removing risk from the client, but it is about ensuring that the client understands the risks they will be taking on.
There will be a new principle of business practice of ‘A firm must act to deliver good outcomes for retail customers’. This is important as there has been no change to the principles since they were first published when regulation came into effect. This principle is then supported with three cross cutting rules which are that firms must:-
- Act in good faith toward retail customers
- Avoid foreseeable harm to retail customers
- Enable and support retail customers to pursue their financial objectives.
These are further fleshed out with four outcomes that firms must be able to demonstrate they are meeting which are:-
- Products and services
- Price and value
- Consumer understanding
- Consumer support
Isn’t this all just TCF? You could be forgiven for thinking so, but this is more than dusting off the original TCF gap analysis and using that as your plan. The Consumer Duty is far more reaching than TCF and is supported by specific rules under PRIN 2, which TCF is not. Furthermore, underpinning all of this the handbook is saying that firms must be especially mindful of all of these requirements when working with a vulnerable clients.
Suitability reports
For anyone who will be involved in the Consumer Duty preparations, then you really need to read FG22/5 Final non Handbook Guidance for firms on the Consumer Duty. This sets out what the FCA is expecting to see from firms – it sets the tone.
A key area for firms to get to grips with will be the Consumer Understanding outcome. The FCA states that ‘We want customers to be given the information they need, at the right time, and presented in a way they can understand’. This is a great opportunity for firms to really look at how they are communicating with their clients.
It’s the opportunity to be looking at the templates used for suitability reports, for example, and breaking them down. Are they engaging, relevant and simple to understand? Firms often tell us that clients don’t read the reports that are sent to them. This is the time to ask clients why aren’t they reading the reports? What can the firm do to encourage them to read the report? Client feedback is going to be a big part of the Consumer Duty preparations. I am sure that many of you have already heard of Melissa Kidd from Motem (see Melissa’s article here – Ed). She teaches how to use the written word more effectively with clients – to make the reports more personal to them. Of course, one quick win is to make sure that the client objectives are actually bespoke to them using, as much as possible, the client’s own words. This shows that the planner has listened to the client. It also helps to demonstrate that the firm is meeting the cross-cutting rule of enabling and supporting clients to pursue their financial objectives.
Another question to ask is: Are we overwhelming clients with too much reading material and documentation? Could this be done more effectively and efficiently whilst being compliant? This is the type of thing that firms need to have on their action plan with the aim of spending some proper time focusing on this area.
For firms who send out the suitability reports after the application form has been signed/submitted, consideration should be given to switching to pre-sale reports, so that the firm can show they are equipping the consumer with timely communications.
Firms will be expected to test their communications and client understanding. We would suggest that some time is spent in this area so that everyone is on board with the approach being taken. To be clear, a statement to the effect that ‘I have read and understood this report’ which the client signs is unlikely to hold much weight especially with the Financial Ombudsman Service. However, if the client is asked to confirm at the end of the report in their own words their understanding of the recommendation, how it meets their objectives and what the risks are, this will have far more of an impact. This requires educating clients to complete this part of the form; but for firms who master this, it works really well. Another way of checking and evidencing the client’s understanding of the report is for the planner to check verbally with the client their understanding of the report with the planner writing down the client’s own words and keeping this on file.
Moving on from this, the firm should track client’s responses – do the clients understand the recommendations or is the planner having to talk through the recommendation again with the client? Is this specific to one planner or the whole team? Is training required?
Firms may also want to re-visit their disclosure documents – can they be made more engaging whilst keeping all the relevant compliance bits and pieces? Can they be re-written to use more engaging language? Can/should the documents include graphics for example?
The Consumer Duty is going to be a large project, but these areas are where paraplanners can show their expertise and have the opportunity to show their flair for client engagement.
