Written by Andrew Storey, Proposition Director, EV
The clock is ticking; the countdown to Consumer Duty has begun. All firms involved in creating and distributing retail investments should now have their Consumer Duty plans in place and be starting to implement them to comply with the rules coming into force at the end of July 2023.
The FCA expects firms to demonstrate how they are going to deliver good outcomes for clients, focusing their attention on four key areas – products and services, communications, customer service and price and value. In addition, they must ‘act in good faith towards retail customers’, ‘avoid causing foreseeable harm to retail customers’, and ‘enable and support retail customers to pursue their financial objectives’.
Managing risk in an ever-changing world
Good advisers have always focussed on doing their best to increase the value of the client’s investment over the long term, delivering financial plans that are suitable to each client’s circumstances and meet their individual objectives.
Unfortunately, firms don’t have a crystal ball and nothing is guaranteed. Who could have foreseen a few years ago what was on the horizon? Brexit, a global pandemic, the invasion of Ukraine, the cost-of-living crisis, the energy crisis, the possibility of winter power blackouts and warnings from the Bank of England of a ‘material risk’ to the UK’s financial stability.
All of this uncertainty makes for a worrying time for investors. But regardless of the economic climate, the key question for any retail investor is: How can I make the most of my money to ensure I have enough when I need it?
In an ever-changing world where the only constant is that nothing stays the same, how can advisers ‘avoid causing foreseeable harm to retail customers’? What is the best approach to take to deliver the best outcomes for clients?
It’s clear that predicting what will actually happen to investments is impossible to do. And while it’s interesting to know what you would have experienced in the past, it may not give a good indication of what the future might be. To properly deliver suitable advice, advisers need to understand what their clients could experience in terms of risk.
While risk profiling has become an integral part of the client journey, the Consumer Duty rules require an intense focus on good client outcomes and minimising harm to retail investors, taking risk seriously will be more important than ever.
Firms need to apply a uniform approach to risk from the initial attitude to risk questionnaire through the asset allocation and investment solution. By using a consistent forward risk-rating methodology throughout the entire investment process, advisers can deliver a robust and realistic stochastic forecast to measure the risk of customer outcomes being achieved.
Using technology to do the hard work
The good news for advice firms is that technology can do much of the hard work here. Using software with inbuilt rate risk-rating methodology, advisers and paraplanners can create rationally based forecasts of investment performance and a consistent approach to risk throughout the client journey to help deliver good client outcomes.
The clear audit trail produced will also, importantly, demonstrates compliance with Consumer Duty.
Taking a more consistent approach to risk is key to ensuring suitability and avoiding ‘foreseeable harm’ and a major step in the right direction towards compliance with Consumer Duty.
Don’t forget, the countdown has already started…