By Daryl Roxburgh, President and Global Head, BITA Risk® part of the corfinancial® Group
While plans had to be drawn up by last October, Consumer Duty comes into effect on the 31st of July 2023.
The Consumer Duty
- A new Consumer Principle that requires firms to act to deliver good outcomes for retail customers.
- Cross-cutting rules require firms to act in good faith, avoid causing foreseeable harm, and enable and support customers to pursue their financial objectives.
- Four Outcomes rules require firms to ensure consumers receive communications they can understand, products and services meet their needs and offer fair value, and the support they need
Key to meeting Consumer Duty obligations is assessing, testing, understanding and being able to evidence the outcomes that a firm’s clients are receiving – and having the management information to evidence that products are delivering outcomes consistent with the duty across all clients. Where this Is not the case, there is the need to identify clients or groups of clients that are outliers, and to understand why.
Firms have to ask themselves, are they using the same level of management information and systems to inform their Consumer Duty obligations as they are their sales and product development?
In talking to many firms, we find they have challenges in collecting the data and even when they have, it is in disparate spreadsheets. This prevents the data overlay necessary to understand patterns, problems and solutions. It is also often generated to long after the fact, to enable easy rectification of issues.
In this blog, we are focusing on foreseeable harm, value and quantitative outcome issues. We have assumed that the client’s needs have been assessed in terms of quantifying any goals and putting these into the context of not only attitude to risk, but broader suitability factors in arriving at the right investment proposition. This proposition has then been played back to the client in such a way that they can understand the risks that they will take. As a senior investment manager said, “they may have a disappointment (due to the markets), but I do not want them to have a surprise”.
Consistency of performance outcome and cost of outcome are cornerstones. Logically, foreseeable harm can then be considered as a factor that could result in a performance or cost deviation from the norm for the portfolio mandate within the firm. So, there is a two-step process, identify potential foreseeable harms – rectifying or acknowledging – and then monitor outcomes. The outcomes should be reviewed separately for those with acknowledged variations and for those expected to conform.
This process creates a feedback loop, identifying clients or groups of clients that have suboptimal returns for their risk mandate and separating out those for which there are known exceptions. By combining data from foreseeable harm factors with risk and return outcome statistics, MI analysis can lead to rectification of systematic issues and discussion of portfolio specific issues with the client.
BITA Wealth brings all of this data together at the Investment Managers’ desktops and enterprise views for management, compliance, and governance. With over 40 portfolio monitor metrics to choose from, the reporting will reflect the metrics key to the firms’ investment propositions.
While many of these foreseeable harm factors are well known as issues, not all firms are able to put them into the context of performance impact. Typically, BITA Wealth will monitor some six to ten portfolio risk and construction factors, along with asset allocation, daily.
Reasons for known exceptions are recorded and can be reported and investment managers have the tools to model rectification, where possible. This can is then overlayed on performance and risk outcomes, giving direction on factors that may have led to deviation from expected performance across groups of clients and possible routes to rectification.
We have interfaced BITA Wealth with most of the leading investment management systems to provide this first and second line of defence for many firms, and today, some £180 billion of private client AUM is monitored and checked in this way. This provides the management information not only to meet Consumer Duty criteria, but also insight into your firm and to ensure that good client outcomes are delivered.