We are a few months beyond the July 31 2023 deadline for compliance with consumer duty, but it is important to remember that date was not the end of the road; it was the start of an ongoing requirement to meet the specific and cross-cutting rules, and ultimately fulfil the principle of acting to deliver good outcomes for consumers.
So what do financial advisers need to do to ensure ongoing compliance with consumer duty? The rules apply to a wide range of issues in finance, covering all types of products and services for consumers.
I am going to focus here specifically on financial planning and ensuring consumers can make the right financial decisions with the support of their adviser.
Let. us look at each of the areas of consumer duty in turn in the context of financial planning for clients. Here goes:
Act to deliver good outcomes for consumers
With financial planning, good outcomes are about meeting clients’ goals and objectives in a way that will suit them. This means being forward-looking, and anything you do needs to be focused on regularly checking if what the client is actually looking for will be realistic.
Looking backwards is not an outcomes-focused way of working. What the client might achieve is the right question, not what they would have achieved if they had started a while back.
So for financial planning, this is all about first understanding what good outcomes look like, and then checking that these can be achieved.
Simple objectives are easier to assess, but in the context of all finances, holistic cash flow planning is the sensible way to check that everything works together, and not just an individual objective that could be attained at the expense of another.
For example, a good outcome would be one where immediate needs are being met while setting up savings for the future, such as for retirement or future expenditure.
Act in good faith
To provide the best solution, we must ensure that the planning methodology and process are robust and realistic and meet the needs of the client’s objectives.
There is a difference between being able to explain something simply to a client, and realistically assessing their position both now and in the future.
For example, setting expectations using a straight-line deterministic model would ignore the sequencing risk of taking income in retirement, a key risk that could mean money runs out much quicker than expected.
Acting in good faith would therefore require the advice to be based on something that is suitable for the client’s actual situation.
Assessing potential returns over a longer period for someone many years from retirement does not necessarily need the sequencing risk built in, as there are other ways to mitigate risk such as retiring later, so the way the planning is carried out needs to be proportionate to the risks involved.
On the other hand, given that most advised clients are either close to or in retirement, the use of the right forecasting method is an important way to ensure you are acting in good faith. Stochastic (that is, realistic) modelling with variations in economic scenarios comes into play here.
