Richard Cooper, business development manager at the London Institute of Banking & Finance considers the implications of the new Consumer Duty and in particular, the impact on paraplanning.
The Financial Conduct Authority (FCA) has carried out extensive consultation on their proposals to raise the standard of consumer protection in retail financial markets. The final response to their updated consultation paper CP21/36 on the new Consumer Duty is imminent. And we may see updated rules being implemented by 31 July 2022.
The consultation paper was a significant document which included a draft handbook and non-handbook guidance. Whilst the consultation period has now closed and we await the final publication of the new rules, many compliance experts are not expecting significant changes.
However, we can be sure that the new Consumer Duty will lead to a significant shift in the culture and behaviour of firms. Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said as much last December when he predicted, “The new duty will drive a change in culture at firms.”
So, we know that regulated advice firms will have to consider the new measures at every stage of their processes and every level of their organisational structures.
The new rules will apply to all firms involved in the production and distribution of consumer communications – regardless of whether the firm has a direct relationship with a retail customer. That means any paraplanner, whether in-house or in an outsourced company, will need to be aware of the new Consumer Duty and understand the potential impact of the third of four new outcomes – ‘consumer understanding’.
The new ‘consumer understanding’ outcome means that, as a paraplanner, you need consider:
- how you communicate with customers
- ensure your communications can be understood
- monitor how effective your communications are.
Customer communications
The FCA recognises that there are other legislative and regulatory requirements that set out what, when and how firms should communicate information to consumers. Firms should continue to follow these requirements as they’re necessary to achieve specific outcomes, such as demonstrating suitability or enabling consumers to compare products across a market.
But, under the Consumer Duty, firms should take a step back and think more widely about how their communications promote understanding, help customers avoid foreseeable harm and enable them to pursue their financial objectives – throughout the life of products and services.
The new rules build on, and go further than, the existing Principle 7. They require firms to support their customers’ understanding by ensuring that communications:
- give customers the information they need
- are likely to be understood by the average customer who receives them, and
- help customers make good decisions that are “effective, timely and properly informed”.
Customer understanding
Firms must ensure they communicate information clearly, fairly, and without misleading, and that information is accurate, relevant, and provided on a timely basis. And they must tailor communications for customers, “taking into account the characteristics of the customers intended to receive the communication”. Importantly, this includes any “characteristics of vulnerability”.
Firms have a duty to check that the customer understands the information, where appropriate, when a firm is interacting directly with a customer on a one-to-one basis. They’re also required to test, monitor and adapt communications to support understanding and good outcomes for customers.
By adopting good practices that generally enhance the clarity of communications, the FCA believes, firms will be better able to help customers select products that help them pursue their financial objectives.
According to the non-handbook guidance, communications can be more effective when they are:
- layered, that is, key information is provided upfront with cross-references or links to further detail, which can be particularly useful for explaining complex planning solutions
- engaging, to encourage consumers to pay attention to them
- relevant, with an appropriate level of detail – taking into account what consumers need to know, what the target audience is considering and where confusion could arise
- simple, presenting information in a logical manner, avoiding jargon and technical terms where possible, and explaining them in plain language when they’re unavoidable.
The non-handbook guidance is detailed and gives helpful and specific examples of good and bad practices.
Monitoring communications
In the non-handbook guidance, you’ll find a whole chapter setting out the FCA’s expectation on monitoring communications. Firms will be required to:
- consider the impact they expect their communications to have
- monitor whether this is the case in practice, and
- carry out further investigation where this is not the case and then identify and put right any issues.
To do this they will need to:
- demonstrate they have a system or process for monitoring communications
- understand and evidence the outcomes their customers are experiencing as a result of their communications.
Next steps
The new Consumer Duty is a major change which will have a big impact on the content of customer communications going forward.
You will need to monitor the effectiveness of your communications and be able to demonstrate their impact as and when required. You should also be prepared to adapt and change your communication content if it’s not working as you expected.
At the very least, if you haven’t yet, it’s worth taking an hour to read sections seven and nine of the FCA’s non-handbook guidance and start thinking about how the new rules are likely to affect your role – and your firm – going forward.
[Main image: product-school-phlc0v-lcvw-unsplash]
