As product manufacturers grapple to have clear communications and information ready for distributor firms ahead of the next Consumer Duty deadline of 30 April, they should look to one of the cross-cutting rules for what is required when it comes to ‘foreseeable harm’.
To gain a good understanding for what the Financial Conduct Authority defines as foreseeable harm, we have to dig deep to see what causes it and how it can be avoided (see PRIN 2A.2 9R and PRI N 2A.210.G), plus the circumstances where it may or may not apply (PRIN 2A.12-13G).
The FCA intends on using foreseeable harm to enforce Consumer Duty rules and force firms to become more client centric
Then, in FG22/5, published alongside PS22/9, the FCA stipulates:
“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.”
For example:
- 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 consumers 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 them or give effective warning messages.
With clear guidance on how foreseeable harm could manifest, there are tools advisers should use to ensure their clients have appropriate products.
Scenario planning management information and cashflow modelling data should be used to evidence that key risks such as behavioural biases, product changes and change in circumstances are discussed and factored into suitability reports and ongoing reviews.
You only have to look at the FOS’s upheld client complaints data to see glaring examples of it in action
Attitude to risk and capacity for loss tools also allow advisers to factor in and evidence investment risk, 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 warnings of, for example, changes in financial circumstances, scams and unusual cash transactions that can alert them to intended outcomes.
This all has three benefits:
- It evidences advisers are looking both ways across the value chain, gaining clear information from manufacturers and using careful research and due diligence.
- It facilitates meaningful fact finding and ongoing reviews that deep dive into scenario planning with ‘what if’ conversations, and ensures advice is suitable based on the scenario testing.
- It 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 where their products and support 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 and significant barriers such as long waits for disinvestment, switching or support calls.
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 Service’s upheld client complaints data to see glaring examples of it in action.
It is clear the FCA intends on using a broad concept of foreseeable harm to enforce the Duty rules and force firms to become more client centric.
So I would urge advisers to bear foreseeable harm in mind and ensure they are scenario planning at any given opportunity and segmenting with this in mind.
It is also important to conduct due diligence with manufacturers to ensure clear, up-to-date product and service information is attained, and use tools that deliver quality data and management information to provide them with evidence they have done so.
Chris Davies is chief executive of Model Office
I hope not to offend any veteran posters by asking a question regarding Consumer Duty in this context.
My understanding of the foreseeable harm requirement is that a firm must not act in any way that would result in foreseeable harm to a consumer (please correct me if that understanding is not right).
If this understanding is correct, then how can any adviser recommend anything with recognisable and real risk? If the client experiences a financial loss, which must be a harm, and the risk profile of the fund demonstrated that such a loss is foreseeable, has not the adviser acted in a way that has resulted in foreseeable harm?
I think you are overlooking the fact that much of this regulation is there not for the benefit of consumers or practitioners, but to justify the jobs and generous salaries of the bureaucrats in East London.
Attitude to risk and capacity for loss should go a long way to help clients recognise that all investments – including cash – have a risk. Whether that satisfies the regulator is a moot point.
Oh Nick – Your Logic is undeniable (NOT!!)
Best you don’t get out of bed in the morning – otherwise you will come to meet some Forseeable Harm!!
Life is full hazards – it is how we quantify the risk depending on the person and their circumstances.
Forseeable Harm is another made up rule from the FCA.
Hi Contrary View.
You clearly misunderstand the point that I am making. In any event have not answered the question posed and you have not explained why the logic is flawed. Day to day life doesn’t have such a draconian regulator or inconsistent arbiter.
Foreseeable Harm is NOT a made up rule. Check out the Law of England and Wales. It is a legal concept with many legal cases.
I have defended IFAs in a professional capacity for over 20 years, for the most part successfully.
Whilst not anti regulator per se, I absolutely hate edicts being issued that are so ambiguous as to make advisers potentially
guilty of malpractice dependent upon the interpretation of an expression.
In this case, if an adjudicator or Ombudsman at FOS elect to interpret this edict to mean that a financial loss IS a financial harm and that despite the client having been made aware of the risks involved, he was still advised to take that risk, then the Ombudsman will be perfectly entitled to uphold the complaint on the basis that the possible harm was foreseeable.
I see no flaw in that logic, but potentially huge problems for the advisory community.
I would like to see the regulator state unequivocally that an adviser IS permitted to advise clients with regard to investments where the outcome is performance related and might actually result in a loss to a client.
Oh, and thank you Harry and Julian for seeing the argument at face value.
What advisers will never be able to foresee is how the FCA will move the goal posts at some future date and then apply its new criteria retrospectively.
Hi all,
An IFA firm has now kindly sent me a copy of the Consumer Duty Dear CEO letter which clarifies the position.
It expressly states that a firm would not be required to remedy the effects of all risks inherent in a product or service and this statement puts my mind at rest.
For all IFAs out there, keep a copy of the Dear CEO letter safe, just in case.