The Consumer Duty has raised the bar for advisory and discretionary research and due diligence.
The scope of product governance requirements has been broadened to capture all products and services distributed to retail clients and all firms in the distribution chain can be held accountable where they don’t tackle foreseeable harms and deliver good outcomes.
It’s undeniable that the duty will have impacted both advisory and discretionary research and due-diligence processes.
The high-level aims of the duty, namely for firms to ‘deliver good outcomes for retail customers’ and to ‘avoid causing foreseeable harm’, along with the need for all firms in the distribution chain to communicate and collaborate, mean that everyone involved could be held accountable if something goes wrong.
Unfortunately, this does happen, as claims management companies and the Financial Ombudsman Service (FOS) know all too well.
In this post-Consumer Duty landscape, where must firms stay vigilant, what are the key pitfalls to be aware of?
How can you ensure you’ve consistently considered the main risks, given the vast variety of products and services available?
By adding ‘how’ and ‘how much’, you have the foundation of a robust, repeatable framework to guide your due diligence and help uncover the information you need
Adopting an approach similar to that used by journalists can work surprisingly well in the context of due diligence.
Journalists often apply the ‘five Ws’ to ensure they cover the key aspects of a story: who was involved, what happened, when, where, and why.
By adding ‘how’ and ‘how much’, you have the foundation of a robust, repeatable framework to guide your due diligence and help uncover the information you need.
While questions will vary by product or service, and sufficient knowledge is required to dig deeper where needed, a rough outline might include the following:
What is the product or service you’re evaluating?
Clarity is essential, as misinterpreting what a product or service is can lead to suitability issues and other regulatory ramifications.
Relying solely on marketing materials can lead to common mistakes, such as:
• Confusing a discretionary model portfolio with a fund of funds or vice versa
• Not realising that a securities qualification may be needed to recommend a business relief scheme marketed as a discretionary service
• Assuming that a fixed-term income product is structured as an annuity when it might be a pension drawdown product
• Under this prompt, you should also capture the product’s basic facts, including:
• Aims and objectives
• Features, benefits, and characteristics
• Risks and limitations
Who is offering the product, and who else is involved in delivering it?
Consider the provider, custodian/platform, trustees, and any other third parties; the roles and responsibilities of all parties (including your firm); whether any complexity, such as multiple fee-earning parties, is necessary for the client; whether there are any conflicts of interest based on the relationships or history of the involved parties
Who is the intended target market, and how are their needs addressed?
Key considerations include: Is the product suitable for vulnerable clients? Is the product literature clear and easy to understand? How will the product or service achieve its aims?
This might involve assessing the investment approach, process, and strategy; what aspects are handled in-house versus outsourced; control, governance, and oversight arrangements; the skills and competence of those responsible for product design and delivery; and the quality of service and ongoing support.
There could be a number of times when it might impact the client.
Examples include maturity dates, when payments will be made, or withdrawals can be taken and the frequency of rebalancing or reviews.
Where are the client’s assets held, and where is the provider based?
Too often, firms may not know who the custodian is in a given arrangement. While advisers may not control this, they should at least identify who is responsible for safeguarding client money and assets and ensure that due diligence has been done (for example by the provider).
Following high-profile cases involving poor trustee controls and record-keeping, which led to some pension scheme shortfalls and fraudulent payments, the FCA is aiming to tighten client money and asset rules for Sipp operators.
Additionally, if a product, service, or provider is domiciled overseas, it may fall outside the scope of UK regulation, the FOS, and the Financial Services Compensation Scheme (FSCS). Client taxation and access to services may also be impacted.
What if something goes wrong? How might your client and your firm be affected?
You should consider foreseeable harms, including the provider’s financial and operational resilience; access to the FOS, FSCS, or alternative overseas schemes; responsibility and liability within the distribution chain; and the client’s options in case of death or emergency.
It is important to consider what the total costs are, and whether they represent fair value.
This can be done by assessing initial, ongoing, exit, and ad-hoc charges and any tax implications.
Why is this product ultimately being recommended?
Ask questions such as; is it appropriate for the target market? Is it suitable for the individual client? Is there adequate documentation to justify the recommendation?
If you already have due diligence questions tailored to different products, ensure the process doesn’t become a tick-box exercise.
If you already have due diligence questions tailored to different products, ensure the process doesn’t become a tick-box exercise.
Every product is unique, and while some questions apply broadly, additional exploration is often needed.
By supplementing your process with an open, questioning mindset, you can better identify and address foreseeable harms, ultimately delivering better outcomes for both your clients and your business.
Julie Hardie is policy consultant at threesixty services
