Long ReadSep 15 2022

Where could foreseeable harm exist within advice? 

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Where could foreseeable harm exist within advice? 
The new consumer duty regulations have placed a firm emphasis on avoiding foreseeable harm. (Bloomberg)

The new consumer duty regulations have placed a firm emphasis on businesses regardless of size to act in good faith, enable and support customers in the pursuit of financial objectives, and avoid causing foreseeable harm.

The latter of these cross-cutting rules is going to be vital for adviser businesses up and down the country to ensure they comply with the new regulations and also produce those good customer outcomes the regulator expects to see.

Now, this rule will truly place the onus on providers to clearly explain the limitations to their products and solutions as well as their value. However, advisers will need to identify where the potential risks are within their businesses, and how they plan on mitigating them to avoid any harm being done to their loyal customer base.

Cheap does not equate quality or value, and by going down this road advisers could be introducing further risks.

There is not long until the consumer duty needs to be implemented by businesses and as such this identification process needs to begin in earnest. We believe there are going to be four key areas advisers will want to look at first and foremost and think carefully about the actions they subsequently take.

Products or platforms that lack functionality for the near future 

Too much emphasis around consumer duty has been placed on cost and ensuring this element of a customer’s journey is minimised. However, cheap does not equate quality or value, and by going down this road advisers could be introducing further risks.

For example, transferring a client to a low-cost pension wrapper with limited income options just before retirement could be viewed as being at odds with the client’s clear intent to take an income in the most tax-efficient manner, at a time that suits them.

Taking a binary view that replacement business must be at a lower fee may leave adviser businesses open to challenge.

Advisers will need to think about the potential for having to execute a further switch as this could be considered a foreseeable harm as a result of incurring further advice costs or time out of the market. Recommending the most suitable product with the benefits it brings the client based on the lifecycle will be key, not at the point in time.

Every decision has to be weighed carefully and this will require compliance officers taking a balanced view. Taking a binary view that replacement business must be at a lower fee may leave adviser businesses open to challenge as to whether they are causing foreseeable harm.

Assets being held on platforms going through technology revamps

There are numerous examples of challenges occurring as a result of technology projects and asset migrations, often continuing for many months. History has shown us that the service disruption caused by these errors could result in serious foreseeable harm. 

The Financial Conduct Authority is clear on this and says: “Firms should avoid causing harm to customers by making sure their customer support does not impose unreasonable extra costs, including exit fees or other charges, delays, distress or inconvenience.”

These migrations can be fraught with serious difficulties.

Ultimately a customer could ask for a withdrawal at any time and as such advisers will need to think carefully about any issues with accessing assets. However, these migrations can be fraught with serious difficulties and result in an inability to report incorrect information to clients and consequently see a material drop in service levels. 

Now this does not mean a platform switch is necessarily the answer, however as a minimum, advisers will need to evidence their consideration of foreseeable harm and demonstrate alternative options have been considered.

Legacy assets with sub-optimal investment solutions 

Legacy assets can sometimes be more difficult to service, but the FCA will expect these to produce similarly good outcomes as those assets that are more actively serviced. 

Failing to align these assets to an adviser’s core centralised investment proposition, except where there are clear barriers to doing so, could cause the FCA to determine an adviser is prioritising the interests of new customers over existing ones. The question is what represents a clear barrier.

With the FCA keen to facilitate competition and asset transfers, it seems unlikely that the effort of having to move between platforms will be sufficient. Many adviser businesses may decide that now is the time to move clients from legacy platforms.

The sooner this can be done, the sooner advisers can put their laser focus back on building strong, long-lasting relationships.

All advisers should make sure they can identify these clients and have documented the reasoning for them not being offered the core CIP solution.

This also drives at platform selection. To avoid groups of clients being disadvantaged, adviser businesses should choose a platform provider that offers the breadth that will allow the maximum number of client needs to be successfully met while benefitting from their core CIP. 

Long tail client books

Assessment of value, the cost of living crisis and an increased number of and focus on vulnerable customers may mean that there are customers that are no longer cost-effective to service.

Just as they need to make sure they know what investment solution they are in, advisers need to be going through their client book and reflecting on whether there are some who are paying fees but not receiving sufficient service to justify them. 

Advisers would be doing well to shine the spotlight on their filing cabinets as they could be filled with risks they previously did not know about.

It is likely that the regulator is going to be hot on this going forward, so the sooner this can be done, the sooner advisers can put their laser focus back on building strong, long-lasting relationships.

David Tiller is commercial and propositions director at Quilter