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2023-Q1

Are high quality bonds primed to bloom in 2023?

Connections Magazine Q1 2023

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The convergence of regulation in Consumer Duty

Eric Armstrong
Client Director, Synaptic

SynapticGood firms will be doing everything correctly as a matter of course. Compliance, therefore, is just a question of tying it all together and providing the various disclosures in an efficient manner. Secondly, distilling all the complexity leaves you with a requirement of ‘putting clients first’. This is already an established regulatory concept.

So how should firms connect the theory and principles of the regulations with the final objective of good consumer outcomes? The answer is in the quality of the firms processes and the quality of their research and due diligence. Let’s review some of the key points from FCA: A new Consumer Duty. Policy Statement PS22/9 in italics below. It’s a great document as it explains some of the reasoning behind the rules.

Cross cutting rules

5.1 In CP21/36, the FCA proposed cross cutting rules that require firms to:
(i) act in good faith towards retail customers; (ii) avoid foreseeable harm (iii) enable and support retail customers to pursue their financial objectives.

Consumer Duty and investment risk

5.11 Guidance under the foreseeable harm rule provides that, where a firm reasonably believes a customer understands and accepts inherent risks in a product (such as investment risk), it will not breach the rule if it fails to prevent such a risk from occurring.

We do not agree that rules and guidance on foreseeable harm permit firms to hide behind ineffective disclosure to say that customers had accepted the risks inherent in a product or service. Ensuring customers understand such risks is an important element of the Duty.

Synaptic: So, disclosure is essential. Also underlines the need for a robust risk framework for both aspects of the risk dynamic – expected growth and potential loss. Synaptic is the only retail investment proposition that provides full access to the Moody’s risk framework, delivering institutional strength risk analysis. The Moody’s stochastic methodology supports the management and communication of risk to the highest possible standard, including alignment to financial planning (objectives), compliant illustrations including calculations for potential loss (via Moody’s unique ‘Value at Risk’ metrics for portfolio losses) and a process to manage Capacity for Loss. Informed consent for risk around investments is very difficult to manage without quantification, especially when looking for consistency across groups of advisers, but this is a feature of the Moody’s proposition.

Products and services outcomes

6.7 Failing to comply with PROD would be taken as failing to comply with the products and services outcome.

Synaptic: This clarification is helpful to practitioners: operate in a PROD compliant manner and your obligations under Consumer Duty will be achieved by default. Synaptic Pathways allows firms to perform PROD compliant research at proposition level, and then deliver it as the basis of proving suitability on a case-by-case basis, within the construct of a Centralised Investment Proposition (CIP) within the software.

The price and value outcome

7.1 We want all consumers to receive fair value. Value is about more than just price, and we want firms to assess their products and services in the round to ensure there is a reasonable relationship between the price paid for a product or service and the overall benefit a consumer receives from it.

Synaptic: The key to delivery here is having a systematic approach to investment where full disclosure of costs is calculated and disclosed at every juncture of the research. Synaptic Pathways is able to provide cost analysis incorporating both deterministic and stochastic calculations. It must be clear what the investment proposition is, and what it costs. This is best achieved through the configuration of the Centralised Investment Proposition (CIP) in Synaptic Pathways. This also provides an automatic benchmark for the performance of investments that are not rebrokered, for whatever reason, into the firm’s CIP.

The consumer understanding outcome

8.1 We want firms’ communications to support and enable consumers to make informed decisions about financial products and services. We want consumers to be given the information they need, at the right time, and presented in a way they can understand.

A good outcome in the context of communications is where consumers are given the information they need, at the right time, and presented in a way that they are likely to understand.

Synaptic: Synaptic Pathways provides up-to-date information and research that can help build meaningful communications.

The consumer support outcome

9.1 We want firms to provide a level of support that meets consumers’ needs throughout their relationship with the firm.

Synaptic: In respect of support to investors, the biggest challenge is pulling together a process to support reviews. Synaptic Pathways has an automated review (ex-post) process that allows hours of research, look-ups, disclosure and calculations to be carried out in minutes.

What about the responsibilities of manufacturers?

Manufacturers should aim to complete all the reviews necessary to meet the four outcome rules for their existing open products and services by the end of April 2023, so that they can:

Synaptic: in the context of the PROD rules, firms are responsible for establishing the suitability of products and services, but manufacturers are responsible for providing the necessary information. Where firms are building investment solutions themselves, for example, portfolios under discretionary permissions, they assume the responsibilities of manufacturers in relation to consumer duties. At proposition level, most of what is needed is already available in the existing Synaptic Product and Fund research tool, and material will increasingly be extended for users as the quality of the information from providers improves. Most firms are asking ‘what does this information look like?’ The answer is consistent with information that would be relevant under PROD – suitability for retail investors, product and service features, how can the product support a high level of servicing to the client, what are the investment attributes including past performance, risk and of course costs.

Monitoring and governance

13.1 In CP21/36, we set out proposals for firms to monitor and regularly review the outcomes for their customers to ensure that they are consistent with the Duty, including whether any specific groups were getting worse outcomes.

Synaptic: This could be the gnarliest of the challenges from the Duty, but Synaptic Pathways provides the tools to monitor outcomes. In providing a compliant report for each investment recommendation, across new money, reviews of existing holdings and switch analysis, the Salesforce™ CRM capabilities of Synaptic can provide a view of the aggregated data in any reporting format required. Because the research is delivered through a firm’s Centralised Investment Proposition, details and outcomes from specific target market mapped solutions can also be mapped in terms of performance, by client or by segment.

This is the pinnacle of the system’s value proposition: embedding robust advice and research processes that can generate the MI to evidence the expertise of the firm and the investment outcomes achieved on an automated basis. Doing this manually is almost impossibly complex and a convoluted task. At Synaptic we call this ‘research-led transformation’, something that is within reach of any firm.

The screen below shows the formation of research in Synaptic Pathways, including R.I.Y. calculations to establish value for money across a range of candidate investment options. Good research is the basis of meaningful client communications and advice.

Fig2

 

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0800 783 4477
hello@synaptic.co.uk

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