By Bordier UK

The FCA has now published its final Consumer Duty rules, with a definitive implementation date set for July 2023.

There is now no excuse for adviser firms to have not begun their preparations, especially given that a firm’s board (or equivalent) must have agreed and signed off on their Consumer Duty implementation plans by 31 October 2022.

The FCA’s new outcomes-based approach focuses on ensuring adviser firms always put good consumer outcomes at the centre of their business and that they focus on the diverse needs of their customers at every stage. Included in the new rules is a new consumer principle, which is underpinned by four expected outcomes:

  1. Products and services: ‘Fit for purpose’ – Advisers should be recommending products and services that are clearly designed to meet the needs of the customer and their known objectives.
  2. Price and value: ‘Fair value’ – Advisers should ensure customers are paying an appropriate fee for the service provided and that they are getting value for money.
  3. Consumer understanding: Customers must be enabled to make informed decisions about products and services. This includes the timing of information, and how it is delivered.
  4. Consumer support: Customers are supported by the firm to realise their financial objectives and realise the benefits of products they buy. The support should be delivered by channels that the customer wants, not what the firm chooses.

‘Fit for purpose’

Whilst many advisers should now be aware of the incoming principle, they may not necessarily appreciate the greater governance requirements for ensuring the products and services they offer their clients meet the needs of the target market and, most importantly, work as expected.

Throughout the FCA’s review, they highlighted several areas of poor practice where customers could receive a poor outcome. One particular area was the recommendation of ‘products and services that are not fit for purpose in delivering the benefits that consumers reasonably expect, or are not appropriate for the consumers they are being targeted at and sold to’.

The higher expectations for adviser firms regarding ongoing suitability and expected client outcomes has shined a greater light on an adviser’s chosen investment solutions and whether those propositions truly support clients in achieving their financial objectives, particularly with regard to clients in drawdown.

Centralised propositions and Consumer Duty

The introduction of Consumer Duty has signalled just how important it is for a firm to have a robust governance process, documented in a clear and concise PROD document, demonstrating client segmentation and how the chosen investment propositions meet the needs and characteristics of their target market.

It is evident that a substantial proportion of adviser firms (just under 78% based on research from Aegon) have an established centralised investment proposition (CIP) for clients accumulating wealth. It may come as no surprise that many advisers are confident that their current CIPs meet many of the product governance requirements of the incoming Consumer Duty through existing processes as a result of PROD.

However, with over 60% of adviser assets on average linked to clients receiving retirement advice (according to research from NextWealth), it is surprising that only around 50% of firms have implemented a centralised retirement proposition (CRP). This begs the question as to whether an adviser’s current investment solution for clients in or nearing retirement is suitable and provides the right outcomes for clients drawing a regular income.

This is often reflected in adviser investment propositions, with at times minor variation between an adviser’s CIP and their solutions for clients in retirement – the same risk profile often kept for both, which may be appropriate but could have some short comings depending on the adviser’s chosen investment solution.

What the new consumer principle brings into focus is whether those accumulation strategies and the maintenance of a client’s risk profile, are now providing the right outcomes for clients who need to preserve capital and manage their stock market risk whilst taking a regular income.

A different approach needed

Creating a CRP can be challenging – as clients move from accumulation into decumulation, advisers have to deal with much more complicated decisions and associated risks. Drawdown is complex and there are many challenges of managing clients who are drawing a regular income, in particular, the management of sequencing risk.

These added complexities have been masked by a decade of strong market performance; as a result, some advisers have maintained a more traditional accumulation approach to clients in drawdown. This often entails retaining a client’s existing risk profile on reaching retirement, which may not be the best approach to meet the client’s required outcome.

The conversation around the risks in drawdown (sequencing risk included) needs to be reframed. Advisers should shift their focus from growth-driven accumulation to investment strategies that put capital preservation first for clients in retirement, who need to ensure their retirement provisions can meet their income needs throughout their retirement with reduced market volatility and without the timing of their withdrawals significantly impacting the size of their pot.

Sequencing risk remains one of the biggest dangers facing client portfolios in drawdown and recent market volatility should focus the minds of advisers on the impact it has on investments. Greater focus should, therefore, be placed on managing risk within the client’s portfolio to reduce the fluctuations in its value to ensure the impact of withdrawals is minimised. This can be achieved by assessing risk on a monthly basis (as opposed to an annual one) against specific ‘value at risk’ boundaries, a more forward-looking measure, to help assess potential max drawdowns.

A client’s investment objective in retirement is also likely to be fundamentally different – many switch their focus from investment returns, to maintaining a regular income and a smooth investment journey. This aspirational change could in turn alter the underlying asset allocation, expected return profile and the management of risk within their portfolio and should, therefore, be reflected accordingly.

Adopting an active risk management approach in decumulation, to ensure the level of risk within a client’s portfolio is not only appropriate but also proactively managed to help provide a smoother retirement journey for clients, is an ideal solution.

This dovetails with the consumer principle and is a prime example of meeting the needs of the client. This approach can also assist and provide assurance for advisers with their ongoing client suitability.

Not long left

Now that the final rules have been published, and with the new consumer principle due to come into practice next year, adviser firms should be looking at their investment propositions to identify any gaps in their existing processes and ensure that they are delivering good outcomes for their client – those in accumulation as well as decumulation.

 

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