The Consumer Duty: Principles and Foreseeable Harm

Alastair Black, Head of Industry Change at abrdn, takes a closer look at the Consumer Duty’s ‘avoid foreseeable harm’ cross-cutting rule and explains the significance of the principles-based approach behind the regulation.

Until now, the focus for advisers around implementing the Consumer Duty has been on their advice service and how it applies across the four Consumer Duty pillars – products and services; price and value; and consumer understanding and support.

It’s an effective focus as it provides a solid framework to help break down the various elements of the advice service, helping firms to consider all aspects of delivery.

Now that the implementation plan deadline for adviser firms has passed, it’s worth refocusing and considering two broader aspects of the Consumer Duty:

  • why the regulation is principles-based and why this matters
  • what the FCA means by the ‘avoid foreseeable harm’ cross-cutting rule.

Overarching principles to do the right thing

The Consumer Duty is all about the industry doing the right thing. A great example of this is how the industry reacted to the pandemic in early 2020.

No-one in the industry could have predicted the devastating impact of the coronavirus, and how we, as an industry, dealt with the crisis.

The response was clear evidence that most firms took their consumer outcome responsibilities seriously at a ‘principles-based’ level. It also determined what new ‘foreseeable harms’ consumers could be exposed to, and the steps that could be taken to support them.

From the FCA’s perspective, the response underlined the importance of regulation being based on principles, as opposed to being based on rules. It could see that ‘overarching principles’ to do the right thing could drive a cultural shift at the heart of industry organisations to ensure the focus is on the consumer first – and ultimately benefiting the business too through improved reputation and consumer loyalty.

Although the regulator has the evidence that a large part of the industry is doing a good job, a small part is not. It’s the reason why the FCA is introducing the Consumer Duty to raise standards right across financial services. And its principles-based approach means the regulator can not only hold all firms to higher standards but also helps to make sure everyone who works across our industry, including at Board level, are focused on better consumer outcomes.

‘Avoid causing foreseeable harm to customers’

Of the three cross-cutting rules which define the Consumer Duty’s core principle to do the right thing, ‘enable customers to pursue their financial objectives’ and ‘act in good faith’ already lie at the heart of advice.

The remaining rule, ‘avoid causing foreseeable harm to customers’ is the one that’s the most debated in terms of what the FCA means by it and how firms can avoid causing ‘foreseeable harm’ to their customers.

The regulator does say it doesn’t expect firms to anticipate harm if it’s not obvious – it doesn’t expect us to have crystal balls.

So as I see it, foreseeable harm is about recognising that when crises occur - such as the pandemic, the Russia / Ukraine conflict or the current cost of living crisis – that these are fundamental shifts and while no-one in the industry can be held responsible for them advisers should potentially consider:

  • how clients may be affected by the change
  • how to reassure and protect them
  • identifying the steps to take to minimise the impact of the crisis
  • if the best processes are in place
  • If clients’ products and investments still meet their needs over the short and long term.

Foreseeable harm then is not about predicting the future. It’s about anticipating what may happen based on shared experience and knowledge and when the world’s axis shifts, carefully considering if products and services are still suitable for clients.

The advice process is about avoiding foreseeable harm

The advice process is, by definition, resilient as under the FCA’s suitability of advice rules, advisers have to consider potential changes in clients’ circumstances over the short and long term, for example job loss or falling markets. It means there are already specific processes within advice which are all about avoiding causing foreseeable harm to clients.

The regulator also requires advisers, as part of a personal recommendation, to take ‘known factors’ into account that may harm their clients.

Many parts of the advice process, including the fact find, are therefore designed to identify how client circumstances may change and what steps can be built into advice to anticipate this. Checking a client’s capacity for loss is also a good example of how the advice process considers ‘foreseeable harm’ too.

Although it shouldn’t be challenging for adviser firms to embed this rule, it would still be useful, under their Consumer Duty obligations, to evidence how they ‘avoid causing foreseeable harm to clients’ by documenting advice processes and sharing this with the Board or Senior Managers. This is helpful for two reasons:

  • the regulator can see ‘avoid causing foreseeable harm’ is being considered at the highest level, and that appropriate controls are in place
  • any gaps can be identified with additional processes implemented as needed.

Adviser firms may also want to consider how they can identify a major shift when it happens, and how they can document and implement a consistent strategy for supporting clients through it. Their respective responses to the pandemic would be a good starting point to formalise the approach to do the right thing.

Doing the right thing as an industry

No-one could reasonably have been expected to foresee the impact of the Covid-19 virus across the globe back in 2020.

But our industry, and in particular advisers, knew to take a step back and consider the impact on their clients’ needs, rapidly adapting advice services to deal with the fast-changing circumstances.

Then, as now, it’s about doing the right thing and for the majority of adviser firms, adhering to the principles-based Consumer Duty and ‘avoiding foreseeable harm’ will not mean a marked shift to how they already deliver advice to clients for good outcomes.

The value of investments can go down as well as up and your clients could get back less than they paid in. The views expressed in this blog should not be regarded as financial advice.

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