FCA Consumer Duty: Understanding and Evidencing Investor Behaviour

The FCA Consumer Duty (PS22/9) rules are the clearest regulatory call yet that investor support shouldn’t stop when investing begins. Advisers must account for human behaviours throughout an investing journey as well as bank balances at the beginning. But what does this look like in practice? And how do you evidence how well you’re doing it?

The FCA Consumer Duty rules, which come into effect on 31 July 2023, are the next stage in regulatory oversight of how well advisers understand their clients, and can evidence this understanding.

This understanding includes two areas that are at the heart of Oxford Risk’s own approach to suitability: investor behaviour, and assessments designed to support the entire investment journey.

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’. There is a further specific acknowledgement that investors ‘are susceptible to cognitive and behavioural biases’.

The new rules relate to four outcomes:

• Products and services – How they are designed to meet the needs of customers, and ensuring that they are sold only to those whose needs they meet.
• Price and value – Demonstrating fair value for the price paid.
• Consumer support – How well clients are supported in meeting their objectives throughout their investment journey.
• Consumer understanding – How well client communication engenders comfort and confidence rather than confusion, by delivering relevant information in a helpful way and at a helpful time.

Applied behavioural finance has an especially important role in consumer support and consumer understanding.

Consumer support: Applying behavioural finance to improve financial outcomes

A better behavioural understanding of clients helps them achieve better long-term investment outcomes.

The ‘consumer support outcome’ requires firms to support clients in the pursuit of their long-term financial objectives, throughout their investing journey.

The emphasis on the journey is crucial. A typical failing which these regulations seek to address is the imbalance between initial and ongoing understanding – both in terms of advisers understanding clients, and clients understanding investments.

In investing, what you own often isn’t as important as how you own it. Not only do immediate emotional objectives often derail long-term financial ones, but an investor that stays the course but feels uncomfortable the whole journey hasn’t really had a ‘good outcome’ in the sense a human would understand it. When the regulations talk of ‘avoid causing foreseeable harm’, as they do in the new ‘cross-cutting’ rules, it must include predictable emotional discomfort.

What good support looks like for each individual is heavily driven by their financial personality. Different combinations of personality traits and likely behaviours, in conjunction with individual circumstances, can affect the most supportive option in terms of investment selection, investment positioning, and decision-making processes.

Consumer understanding: Applying behavioural finance to improve client communication

A better behavioural understanding of clients helps them better understand their investment options.

The ‘consumer understanding outcome’ requires firms to make communications responsive to needs, to ensure clients understand what they’re investing in – and why – and continue to do so as their circumstances change.

It’s about giving consumers the information they need, at the right time, and presented in a way they can understand.

The FCA notes that: ‘Bulleted and layered communication approaches with signposted information work well and should be considered particularly with client agreement, suitability reports and cost disclosure.’

These can be excellent, effective, techniques. However, good communication is about more than using bullet points and signposting key information. Blindly spraying bullets everywhere can backfire. Sharper shooting requires more tailored targeting.

In applying behavioural finance, one size rarely fits all. The same message or the same frequency of communication can reassure one client, but patronise another.

The focus is – rightly – clarity. A VouchedFor survey reported that 59% of clients said that correspondence from their adviser could be clearer.

Clarity is always important, but it’s a hygiene factor. Deeper levels of client engagement are unlocked only with a deeper understanding of individual client personalities and preferences… remembering, of course, that these will evolve along the journey.

How do you evidence that you've met the Consumer Duty regulations?

A rigorously tested and scientifically validated behavioural-based suitability process evidences that clients have the best opportunity to experience good outcomes.

Evidencing financial outcomes is easy. Evidencing human outcomes is harder. Especially when the right behavioural thing to do is nothing.

But it’s not impossible.

It’s what Oxford Risk’s suite of behavioural suitability tools are designed to do. Our tools provide a scientifically supported system for measuring the unique recipe of financial personality traits that determine an investor’s emotional comfort throughout their investment journey. This helps you understand in which ways a client could be vulnerable, and which behavioural obstacles are most likely to arise, so you can take steps to deal with them before they do.

Even non-advised clients need to be understood. Our tools help you evidence that they are.

You can’t meaningfully measure how supported an investor feels ‘at every stage and in every interaction’. But you can embed a suitability process with investor behaviour at its heart, thereby evidencing that reasonable effort has been made to support clients throughout their journey, and help them identify and understand the information needed to make effective decisions.

For more information about how Oxford Risk can support you and your firm in meeting the upcoming FCA Consumer Duty regulation, please click here to download our guide. Alternatively, you can email us at contact@oxfordrisk.com.