Consumer Duty and how to evidence you’re really focusing on client outcomes

In giving financial advice, there’s a lot you must communicate to your clients. Doing this in a compliant way used to be relatively straightforward: write what the legislation told you to, send it, and put a copy in the right file. Under Consumer Duty, things are a bit different.

In line with the key outcomes of ‘Consumer support’ and ‘Consumer understanding’ (which we’ve previously looked at through a behavioural-finance lens), simply sending stuff isn’t sufficient. Because the message you send is not always the same as the one that’s received.

The Consumer Duty rules prompt you to ask: Is it clear to these clients what I’m telling them? Can I evidence that they’ve understood it? Have I proactively considered how my comms could go awry?

In the FCA’s words, advisory firms will need to evidence how they account for their clients’ ‘needs, characteristics, and objectives’, including ‘how they behave, at every stage and in each interaction’, acknowledging, when doing this, that investors ‘are susceptible to cognitive and behavioural biases’.

This shift towards the effectiveness of your communication is mirrored in MiFID II, for example in the 3 April 2023 Guidelines, which state:

Provided that all the information and reports given to clients shall comply with the relevant provisions […] firms should also carefully consider whether their written disclosures are designed to be effective.

This goes for both your own direct communication and any external tools you use – like Oxford Risk’s suite of suitability assessments (which are rigorously tested for cross-cultural client understanding).

In communicating effectively with clients, no one size fits all. That’s the point of Consumer Duty’s outcomes focus. If effective communication were merely a matter of what you say, rather than the way in which you say it (duly accounting for the person to whom you’re saying it) then the rules would simply become ever-more precise with their prescriptions.

You can’t rely on a prescription of what to say, but you can be clear on the process that evidences you’ve made the effort to be effective.

Below are five ways Oxford Risk’s suite of scientific suitability tools help you do this.

1. Personalised communications, including performance reporting

It has been shown again and again in behavioural research that our decisions are hugely influenced by the way information is presented to us. Sadly, the typical way investment performance is presented is abysmal. Dumping numbers on people with no regard for their psychology or their preferences is not a reliable route to a comfortable and confident investing experience.

How would you tailor communication to better manage emotional states, and improve decision-making? You would show information in a specific order; for example, for an investor with low Composure, presenting the big picture before the detail, and prioritising long-term rolling returns over whatever happened last quarter. You would also tailor frequency, length, and the aspects you chose to emphasise – for example, dialling up or down the role of the adviser depending on the investor’s need for involvement to feel in control.

By personalising communication by personality types, you can also encouragement deploying cash that an investor may be otherwise too nervous to deploy, and you can help clients keep calm in tempestuous markets.

For more on behavioural information design, see this article.

2. Dynamic suitability

Good investor outcomes are dynamic. To keep an outcome stable when the inputs – the interaction of an emotional human with shifting financial circumstances – are not, requires a reliable, robust, and responsive suitability system. Most systems are nothing of the sort. Instead, they are clunky, inconsistent, noisy, and overweight information collected at the start of the journey over lived experience along the way.

Oxford Risk’s approach is different. Dynamic suitability requires constantly updating suitability in response to changing client circumstances and preferences. If the client’s balance sheet, circumstances, and goals and preferences are continually in flux, then so should be the suitable solution.

In March 2020, as the world was burrowing into the first Covid lockdowns, and global markets plunged 20% or more, every wealth manager had the financial circumstances of all their clients change dramatically, not with the stately rhythm of annual review processes, but over a period of weeks. Clients all simultaneously had changing incomes, spending plans, goals, portfolio values, and emotional states. Static suitability systems, and slow, human-heavy processes, were simply not up to the task of adequately adjusting client solutions in response to these changes.

Dynamic suitability requires technology. Applied well, such technology can blur the distinction between a) engagement, b) profiling, and c) suitability. Processing real-time data allows systems to continually refine and update the client’s profile and use this to prompt appropriate risk levels, engagement, and interaction. This in turn provides profiling information for the suitability inputs and permits constantly updated solutions that serve the client’s constantly changing needs.

3: Consistency and combatting noise

Consistency is a major theme of the Consumer Duty rules. This is of course consistency in the way consumers are treated, not pushing them all towards the same solution. We conduct ‘Noise Audits’ within firms yet to adopt Oxford Risk solutions to assess the consistency of advice across advisers within a firm, or even across individual advisers at different times of the day. The results universally show a vast room for improvement. A consistent process and fit-for-purpose tools applied within that process are the means of improvement. When you’re focused on the outcomes of how well supported a consumer feels throughout their investment journey, and how well they understand what they’re being advised to do, accounting for a consumer’s behavioural traits and tendencies in a suitability process is paramount for treating consumers consistently.

4. Vulnerability

Part of the need to focus on consumer support is recognising that some consumers need more support than others. Vulnerability comes in many forms, yet typical approaches crudely focus solely on age, or obvious infirmity. Oxford Risk’s financial personality-based approach allows for a more multifaceted view, bringing in variables such as Composure, Confidence, and Impulsivity, together with indicators of financial vulnerability from our Risk Capacity and Knowledge and Experience Assessments into a Vulnerability output, which guides advisers on exactly which clients they should devote more attention to, and why.

5. Client segmentation

Understanding the make-up of your client base is key to effectively leading clients towards better outcomes at scale. Segmenting based on account size or demographics won’t get you very far. Viewed with a focus on consumer support and consumer understanding, client needs are a function of personality and attitudes, not product ownership. Assessing the suitability of your proposition for your client base is more accurately done by breaking your client base into segments based on clusters of attitudes and psychological proclivities.

You have a duty not only to communicate certain things to clients, but to do so in a way that you can reasonably expect will prove to be effective – that will engender comfort and confidence rather than confusion with the investment journey. You need not merely to disclose risks, but deliver relevant information in a helpful way and at a helpful time. You need, to repeat the FCA’s words quoted above, to account for your clients’ ‘needs, characteristics, and objectives’, including ‘how they behave, at every stage and in each interaction’, acknowledging, when doing this, that investors ‘are susceptible to cognitive and behavioural biases’.

The best way to do this is with Oxford Risk’s behavioural tools. These provide the management information to monitor your whole client base, understand their behavioural personas, see who is most vulnerable or in need of suitability updates, and know which clients to talk to when, and with what message. They make advisers more effective, directly improve client outputs, and evidence that you’re doing so. Click here to find out more about how Oxford Risk’s solutions meet the FCA Consumer Duty and can better support you and your investors in improving financial outcomes.