In an era marked by rapid advancements and changes in consumer expectations, the need for a comprehensive framework that balances consumer rights and economic growth has taken centre stage.
The introduction of the Consumer Duty represents a significant stride in this direction, bringing about a paradigm shift in how consumers are protected and empowered.
With its recent implementation at the end of July this year, the Consumer Duty's first pillar, focused on products and services, has gained prominence for its potential to reshape the consumer landscape; yet there are still pitfalls that the industry needs to avoid when navigating the fledgling framework.
Aiming for informed decision-making
The first outcome of the Consumer Duty underscores the pivotal role that firms play in ensuring consumers have access to accurate and relevant information when making decisions about products and services.
This outcome reflects a commitment to empowering consumers to make timely, well-informed choices that align with their needs and preferences.
Consumer Duty recognises the importance of personalised and transparent interactions between consumers and service providers.
Tailoring financial advice to individual needs
In the financial services sector, the first outcome prompts a fundamental shift in the way financial advisers approach their clients' needs. Advisers are now tasked with delving deep into the unique circumstances, aspirations, and risk tolerances of each client. The use of technology aids this process by enabling clients to input their information and explore potential financial scenarios, thus fostering a more personalised advisory experience.
Furthermore, effective financial planning involves not only helping clients understand their current financial standing but also illuminating potential future changes and their implications. This is achieved using compelling cashflow plans that provide clients with a clear visualisation of how different strategies could impact their financial trajectory.
Solid research and ethical investment strategies
In the realm of investments, the Consumer Duty introduces an imperative for rigorous research and transparent decision-making.
Advisers are now mandated to build an airtight audit trail that showcases the careful consideration, comparison, and analysis that underpin investment recommendations. This approach ensures that clients receive advice that aligns with their goals and circumstances, reducing the risk of conflicts of interest.
However, a potential challenge arises in the context of sustainable investments. While promoting sustainability is commendable, an exclusive focus on "sustainable" funds could inadvertently limit the investable universe, potentially increasing risk.
The Consumer Duty demands that advisers consider the concept of foreseeable harm, requiring them to avoid recommendations that may cause harm to clients at some time in the future.
Balancing sustainability and risk
One of the intriguing conundrums within the Consumer Duty's first pillar pertains to sustainable investments. By narrowing down investment options exclusively to "sustainable" funds, advisers may unknowingly subject clients to increased risk due to a limited scope.
In addition to this, the introduction of the Sustainable Disclosure Regulation (SDR) consultation adds an extra layer of complexity. The proposal to disclose "unexpected investments" within sustainable funds presents advisers with the challenge of ensuring clients are aware of all underlying components of their investments.
Moving beyond performance metrics
An essential shift required by the Consumer Duty is moving beyond the narrow focus on performance metrics, particularly in the sustainable investments domain.
Instead of being fixated on short-term performance comparisons between sustainable and non-sustainable funds, advisers must emphasise the investment objectives, strategies and risk profile of each fund.
This shift facilitates a more meaningful conversation with clients, focusing on how investments help them achieve their long-term financial aspirations.
The Consumer Duty's first pillar marks a significant milestone in reshaping consumer interactions and responsibilities. By placing the onus on firms to empower consumers with relevant information and ethical decision-making, the framework has the potential to elevate consumer trust in the marketplace.
However, challenges arise in the context of sustainable investments, where a careful balance between sustainability goals and risk mitigation must be struck. As industries and advisers navigate these intricacies, the progress made in addressing the first pillar of the Consumer Duty signifies a step towards a more transparent, informed, and responsible consumer landscape.
---
Stephen Mitchell, Head of Adviser Product Strategy, FE fundinfo
This article first appeared in Professional Adviser on 11 September 2023
