Communication and justification lie at the heart of the FCA’s latest guidance
Since the global financial crisis of 2008, financial institutions such as banks and independent financial advisers (IFAs) have operated in a constantly evolving landscape of regulation and guidelines from the Financial Conduct Authority (FCA).
From the Retail Distribution Review and MiFID to ESG-related guidance stemming from the Paris Accords and UN Climate Change Conferences, financial institutions have had to react swiftly in the face of heightened expectations from regulators both in the UK and overseas.
Earlier this year, the FCA announced plans to implement a new reform, Consumer Duty, with a view to setting higher standards of investor protection and engagement across the industry. This latest set of rules will be gradually integrated over the coming months, with Consumer Duty fully applicable from 31 July 2023.
In our view, Consumer Duty will act as a democratizing force in finance, as it will drive greater personalization of investment advice and services for retail clients, with products, services and communications that are specifically tailored to meet their needs.
In practice, Consumer Duty centres on clear and timely communication, client support and personalized service based on client profiles as well as the ability to demonstrate fair value. It requires financial institutions to identify where, and why, a client may not be receiving a good, or desired, service, and proactively address any risks or issues identified during this process.
As Consumer Duty raises the bar for financial institutions, it will likely lead to greater competition and healthier growth for the industry. To help financial institutions adapt to the new guidelines – and to potentially gain a competitive edge – we have highlighted what we see as the main opportunities for the industry:
Consumer Duty requires financial institutions to have increased oversight on client decisions and advisory activities. This entails a greater understanding of client preferences and expectations – and how they align with the advice and products offered by advisers. To comply with this aspect of Consumer Duty, financial institutions need a robust onboarding process to create an in-depth client profile as well as reliable data on investment products to ensure that they are optimally geared towards achieving clients’ objectives. Importantly, this data must be readily available for the purpose of demonstrating compliance with the regulation, such as compiling regular performance reports.
More informed decision-making through visualization
Financial institutions need to rethink how they present investment recommendations and portfolio composition. When constructing or rebalancing a portfolio, for example, relationship managers can leverage intuitive visualization tools to help explain the relative performance of investments under different circumstances over time and how they align with the investor’s preferences, risk tolerance and desired investment outcomes. In this way, investors can better understand the rationale behind their adviser’s recommendations, which ensures more informed decision-making and builds trust.
Customized client communication
While Consumer Duty does not set out a preferred method of communication, financial institutions should identify and establish the channels that are most convenient for their client base and which foster clearer communication. This means, for example, that where clients wish to use social messaging services, such as WhatsApp, to discuss their finances with their adviser, it will be incumbent on those financial organizations to determine whether and how they can facilitate this in an auditable, secure and compliant environment. This in turn creates new opportunities for financial institutions to offer a seamless digital experience, with the potential to incorporate AI-powered virtual assistants and natural language processing capabilities, so that advisers can respond more quickly and accurately to their clients’ requests.
The FCA Consumer Duty will usher in a major shift in the financial services sector, as requirements on oversight and transparency continue to become more clearly defined. There will be little room for passive client relations from next July, and financial organizations should consider what technology and platforms can ease the administrative burden of complying with this new regulation – and how they can best demonstrate the value of the service they provide.
Beyond compliance, the FCA’s Consumer Duty is an opportunity for financial institutions to improve client engagement and loyalty across all wealth segments through enhanced communication, more tailored investment advice and targeted support.