Matthew Connell reveals the regulatory challenge advisers face from the FCA’s retail investment review
Much of the focus on the Financial Conduct Authority’s (FCA) latest Consumer Duty proposals (CP21/36) has been on monitoring and reporting on consumer outcomes, which could be tricky to fulfil. But the sting in the tail is the introduction of a new cross-cutting rule “to avoid causing foreseeable harm to retail customers” and this has received less attention, so let’s unpack what that new rule might mean.
The FCA is clear that the Consumer Duty rules represent a significant strengthening of consumer protection and regulatory expectations, saying:
“The Consumer Duty sets a higher standard of care and expectation beyond our current set of Principles and rules. (§2.31)”
And this is echoed by Rory Percival, former regulator and now regulatory consultant, who said:
“In my opinion, the Consumer Duty rules will be the biggest regulatory issue for advisory firms in the next five to 10 years. It builds on previous rules and principles to require firms to focus much more clearly, formally and genuinely on their clients”.
Add to this the proposed implementation date of 30 April 2023 and firms will need to take this seriously and make a lot of changes by then.
Foreseeable harm
The proposed new cross-cutting rule would require firms to avoid causing foreseeable harm to customers. The FCA says this is not intended to create a new open-ended duty but, rather, to require firms to consider reasonably foreseeable harms and take steps to mitigate them.
The obvious question is: what is foreseeable? What is a clear outcome from one person’s point of view may come as a surprise to another – it is not a matter of intelligence but a person’s outlook on life.
However, there are obvious (and long-standing) things like financial security, costs and service capability which could present a ‘harm’ to clients. But to “avoid causing foreseeable harm” opens up a whole new range of considerations.
In the context of investment business, the services provided by discretionary managers and platform providers are services (not products), so identifying foreseeable harms will involve looking at constituent elements of the service and considering what might go wrong. Fortunately, we don’t have to be experts in the running of investment companies as the FCA has itself identified potential harms, such as:
- Fraud/scams
- Not delivering “best execution”
- Poor governance
- Technology and operational resilience
These are in addition to a wide range of other matters highlighted in multiple Dear CEO Letters and other statements (see the side panel).
Effective due diligence – and, importantly, evidencing that process – will be critical in demonstrating that a firm has taken steps to avoid foreseeable harm, but due diligence tools are now available to help advisers with this, gathering the information they need in a single, online service with reporting and monitoring tools.
To find out more, or to download a free copy of Choosing a platform or discretionary manager – An advisers’ guide to research and due diligence, visit www.ddhub.co.uk
Chris F Jones is a director of DD Hub
