This should translate to consumers receiving the requisite information to make an informed decision, at the right time, and presented in a way which is digestible. From the adviser perspective, products and services should be specifically designed to meet the needs of consumers, with an appropriate distribution strategy and a regular review process.
However, in order for advisers to meet the new regulations set out by the Financial Conduct Authority (FCA), it is first important that they understand why these criteria have been laid out and what they aim to achieve.
Asymmetries of information
Ultimately, FCA guidance exists to correct asymmetries of information between customers and firms, which could lead to poor outcomes for consumers. Mostly, this is due to a lack of specialist knowledge about the mortgage and protection industry amongst consumers that required to ensure that they are receiving the right product product at a fair price.
The current disclosure-led regulatory regime has been shaped by neoclassical economics, which ultimately believes in the rationality of consumers – therefore, in theory, asymmetries of information can be fixed by providing people with more information. This has shaped current practices of Insurance Distribution Directives (IDDs), long suitability reports and key feature documents, all of which seek to empower the consumer with the information to make an informed choice.
However, it’s clear that consumer behaviours and choices are often formed through more than just the logical weighing-up of information – cognitive biases and preferences also play a central role. Therefore, the new Consumer Duty seeks to eradicate the asymmetry of information by ensuring that firms design processes which deal appropriately with behavioural biases, by seeking good outcomes, not merely good inputs.
What will need to change during the advice process?
Firstly, firms should look to conduct thorough reviews of standard industry communications, including IDDs and suitability reports, with a view to re-write and re-structure them for the benefit of the consumer. Documents should be ‘layered’, meaning that the most important details should be highlighted at the beginning of the text, and language should be simplified to the extent that, in theory, even children aged between nine and 11 could understand. Likewise, materials should take into account low levels of numeracy, and so shouldn’t rely on consumers needing to make calculations to receive crucial information.
To ensure that information is correctly received, customer outcomes monitoring will need to become a central tenet of the advice process and should be repositioned to give firms further insights into good and fair outcomes rather than just inputs.
Advisers should ask themselves – did the customer leave understanding how the product worked? This can be achieved through more direct Q&A during client communications or getting the client to playback their understanding. Firms should also look to be able to demonstrate evidence, and customer questionnaires or service calls can be useful tools to show compliance.
The Consumer Duty is the most significant regulatory development faced by the mortgage and protection industry for quite some time, and it is expected to prompt an overhaul of the advice journey. Advisers should use this opportunity to take stock of how they deliver advice, and embrace change to demonstrate how they are continuing to deliver fair and good outcomes for customers.
