As market participants across the distribution chain now grapple with the next deadline (30th April ’23) for product manufacturers to have clear communications and information provided to adviser (distributor) firms for them to meet the Duty obligations, they should look to one of the cross-cutting rules to help them gain context for what the regulator requires when it comes to data and information for Consumer Duty compliance.
To gain a good understanding for what the FCA define as foreseeable harm, we have to dig a bit deeper to gain text on what causes foreseeable harm and how it can be avoided (see PRIN 2A.2 9R and PRIN 2A.210.G) plus the circumstances where foreseeable harm may or may not apply (PRIN 2A.12-13G).
Yet in FG22/5 published alongside PS22/9, the FCA stipulates foreseeable harm as, ‘whether harm is considered foreseeable would depend on whether a prudent firm acting reasonably would be able to predict or expect the ultimately harmful result of their action or omission in connection with the product or service ...
- consumers being unable to cancel a product ... because the firm’s processes are unclear ...
- products and services performing poorly where they have not been appropriately tested in a range of market scenarios ...
- the distribution of products ... to customers for whom they were not designed ...
- consumers incurring overly high charges on a product because they do not understand its charging structure or how this impacts on the product’s value ...
- consumers with characteristics of vulnerability being unable to access and use a product or service properly because of unsuitable ... customer support ...
- consumers becoming victims to scams ... due to a firm’s inadequate systems which should detect/prevent scams or give effective ... scam warning messages ...”
So with clear guidance on examples for how foreseeable harm could manifest, there are tools and technologies that advisers should use in their client meetings to ensure they have appropriate products and they employ a key strategy to mitigating foreseeable harm, that of scenario planning.
As the FCA stipulates firms need to address the risk of harm when it is reasonably foreseeable, it follows that advisers should use cash flow modelling data and scenario planning management information to evidence key risks such as behavioural biases, product changes and change in a client’s circumstances are discussed and factored into the suitability reports and on-going reviews.
Attitude to risk and capacity for loss tools also allow advisers to factor in and evidence investment risk, behavioural biases and good old fact finding can assess which clients are underinsured or underinvested against their goals and promote constructive conversations.
Finally, with the rise of open banking apps and client portals, advisers have tools that can provide early warning oversight, for example, changes in financial circumstances, scams and unusual cash transactions that can alert advisers to intended outcomes that are no longer achievable.
This all has three benefits:
- Evidence that advisers are looking both ways across the value chain, gaining clear information from manufacturers and using careful research and due diligence strategies to ensure the client has the best possible chance of gaining sustainable good outcomes
- Facilitates meaningful fact finding and on-going reviews that deep dive into scenario planning with ‘what if’ conversations and ensures advice is suitable based on the scenario testing
- Empowers client segmentation, for example, where vulnerable circumstances can be mapped across each segment a client may find themselves in and provides strategy to deal with this
When dealing with manufacturers and with the April deadline in mind, advisers should request reasonable information and challenge them on scenarios their products and support where they may risk good outcomes and cause foreseeable harm. This could be feeding back client complaints root cause data, product withdrawals with no alternatives, communications that are not timely, clear or sensitive to the client circumstances and significant barriers such as long waits for disinvestment, switching or long support call waits.
From a legal perspective, foreseeable harm is a key concept in the law of negligence such as misstatements and misinformation, The contentious issue with foreseeable harm is whether a particular form of harm can be said to be capable of being foreseen at all! You only have to look at the Financial Ombudsman upheld client complaints data to see glaring examples of foreseeable harm in action. It is clear that the FCA are intending on using a broad concept of foreseeable harm to enforce the Consumer Duty rules and force firms to become more client centric.
So we would urge advisers to bear foreseeable harm in mind and ensure they are scenario planning at any given opportunity with their clients and segmenting with this in mind, also conducting due diligence and research with product manufacturers to ensure clear up-to-date product and service information is attained and using tools that deliver quality data and MI that will provide them with evidence they have done so.
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