How to ensure you comply with the consumer duty

As with most regulation, however, it might not be quite that simple.

Recently the Financial Conduct Authority has been quite clear that the consumer duty provides a “new lens” through which to look at your investment proposition.

The consumer duty regulation is clear, and advisers will need to understand exactly what that means for their propositions and how they can ensure that they meet the new requirements.  

The good news is there is practical guidance advisers can lean on to ensure that you meet the new requirements. The consumer duty has been built around three “cross-cutting rules” and four outcomes.

So, one approach you could take might be to consider each of the four outcomes and how you might meet them in relation to your investment proposition.

Outcome 1: The governance of products and services

The aim of this outcome is for you to provide evidence that your investment proposition is appropriate for your target market. You may want to consider these areas:

• Build a target market statement if you have not already done so, taking into account factors like age, investment term, objectives or level of financial sophistication.
• You may have more than one target market – for example, if you provide advice to families, you may find different generations have different needs and preferences. In this case, consider a statement for each target market. 
• Speak to the investment manager(s) you use about their own target market information – that is, who their fund(s) or portfolio have been designed for. This is clearly more complex if you create portfolios of funds, as opposed to a single outsourced solution, but nonetheless it should be addressed. 
• Ensure the investment managers’ target market matches your own.
• Review your investment proposition regularly to ensure it remains appropriate.

Outcome 2: Price and value

This outcome requires you to demonstrate that investments represent good value. In considering this, focus on what the client is paying for. A cheap but poorly diversified income solution is equally likely to fail the value test as a more expensive active solution.

• Assess what your clients receive in relation to what they pay (index exposures, manager skill, diversified strategic asset allocation, tactical asset allocation, breadth of investment universe, operational and investment due diligence, fund selection, cost/quality of investment componentry etc).
• Are your clients' investments delivering on their stated objectives? Where you consider performance, are you measuring it against an appropriate comparator or benchmark? What is the total cost of ownership, that is platform plus investment plus advice fee? Consider hidden benefits/costs such as the value of pre-funding when dealing or the need to maintain cash to fund fees (rather than stay invested). Is the client getting value from all of these areas? It is not just the underlying investments you need to consider here

Outcome 3: Consumer understanding

The information you provide to clients should be effective, timely and properly understood.

• Provide regular ongoing investment reporting covering what clients need to know – that is, performance reporting against a relevant comparator, costs information and (if appropriate) environmental, social and governance updates 
• Put yourself in your clients’ shoes – will they understand the information that is being sent to them? If you are unsure, test your proposed communications with someone of a similar level of financial education to the intended recipients. 
• Address client preconceptions wherever possible. Clients of fixed asset allocation strategies, for example, may expect activity that is not part of the product design. 
• At outset and ongoing, you may also wish to explore a means to explain the potential effects of poor investment returns to your clients. Recent market returns have provided the opportunity to test this process.

Outcome 4: Consumer support

Provide support that meets your clients’ needs.

• Consider the ongoing support you are providing in relation to your investment advice. Typically, this will be regular communications, updates and suitability reviews. 
• The regulator has stated that it expects clients to be able to make informed decisions with the onus on the service provider to make sure relevant information is provided in a manner clients are able to consume.
• Client support must be part of any service clients are paying for – so, think about the suite of support you provide and the information it conveys, monitor clients’ reactions to the support you provide and use feedback to continually enhance the understanding.
• Consider vulnerable clients who may require additional levels of support

Looking at these outcomes, you may conclude that you are already meeting the new requirements, and that you do not need to conduct a major overhaul of your advice process. You are probably right, but there are some specific areas you may need to act on to ensure you meet the new rules. 

The unresponsive client

Let us look at an example of where you may want to take some action.

There are investment propositions that require clients to accept regular, ongoing recommendations to change the shape of their investments.

For example, some advisers run advisory portfolios with a regular rebalance, perhaps every quarter, or every six months.

That is a great way to demonstrate value (outcome two – price and value) and a good process for ensuring clients are in your latest selection of funds (outcome one – products and services). 

The challenge is a result of clients being required to accept a rebalance instruction (ideally in writing) before any changes can be made. Clients who respond are fine, but those who have not responded to rebalance advice are a problem.

Over time, this can create a group of clients who are sitting in old versions of advisory portfolios.

Your investment platforms should be able to provide technology that gives excellent visibility on what you are facing and exactly which 'old portfolios' your clients may still be exposed to.