The FCA wants advisers to ‘put themselves in their customers’ shoes’ – but how?

May 18, 2023


Globally recognised expert in applied decision science, behavioural finance, and financial wellbeing, as well as a specialist in both the theory and practice of risk profiling. He started the banking world’s first behavioural finance team as Head of Behavioural-Quant Finance at Barclays, which he built and led for a decade from 2006.

The FCA wants advisers to ‘put themselves in their customers’ shoes’ – but how?

There’s something different about Consumer Duty – a quality we haven’t seen in previous directives from the Financial Conduct Authority. As systematic as the guidelines may be, there’s one theme running throughout that is (at first glance) more nebulous than anything we’ve seen before: the insistence on empathy. This ethical call to action is summed up with utter clarity in this clause from the regulator:

Firms should ‘put themselves in their customers’ shoes’.

Source: FCA, 8:9: Final non-Handbook Guidance for firms on Consumer Duty (FG22/5), July 2022

It’s crucial to remember that this ‘soft’ edict comes from the very same body that has the power to issue penalties, suspensions, restrictions, conditions, limitations, disciplinary prohibitions, and public censures on the firms it regulates.

While it’s unlikely that we’ll see sanctions levied on investment firms for the explicit offense of failing to put themselves in their customers’ shoes, the call to empathy may still serve as a central guiding premise for firms scrambling to comply with the new regulations by 31st July 2023. When it comes to putting yourself in your customers’ shoes, mere lip-service won’t suffice. Actions, attitude, and evidence will distinguish the key actions (and attitude) of firms who comply effectively from those who may fall foul.

At Oxford Risk, we’ve taken the FCA’s ethical call to action to heart, by conducting some proprietary research to help you put yourselves in your customers’ shoes. Our findings – including the fact that 48% say they would invest more if they felt better educated by their adviser/wealth manager – reveal that Consumer Duty (as onerous as it may seem) represents a powerful opportunity to build longer term customer relationships that bring increased profits on both sides of the relationship.  

In this article we’re going to look at two key areas of our findings that echo the FCA’s call for empathy, and tie them directly to Consumer Duty guidelines, with the aim of encouraging firms to use the new regulation as an opportunity for growth and market differentiation.

#1: My adviser doesn’t understand me – behavioural biases

21% of investment clients don’t agree advisers understand their behavioural biases

In other words, more than one in five investors feel that their advisers may have failed to put themselves in their customers’ shoes. In the case of behavioural biases, the FCA is very clear on the fact that this lag must be remedied:

“Firms should proactively consider how consumers’ behavioural biases, such as inertia, might lead their products or services to cause foreseeable harm.” (5.2)

For obvious reasons, much of Consumer Duty’s focus on behavioural biases relates to preventing firms from exploiting their clients’ behavioural biases, e.g.: firms should… “not seek to exploit customers’ behavioural biases, lack of knowledge or characteristics of vulnerability” (1.9). The caution against exploiting behavioural biases also extends to the way information is communicated, so that firms should not exploit “tendencies to be influenced by the way things are presented.” (5.9).

Aside from the ethical and regulatory problems, exploiting an investor’s behavioural biases could lead to long term harm on the firm’s side. After all, an investor who panics and exits the market during times of volatility (where weathering the storm would otherwise be in their best long-term interest), is far less likely to be party to the sort of meaningful investor/adviser relationship that both sides would benefit from more over time.

Gaining a deeper and more robust understanding of your client’s behavioural biases at the outset of the relationship is win: win. It’s impossible to make a truly suitable long-term investment recommendation without that level of behavioural understanding.

You can use those same behavioural insights to avoid accidentally exploiting your clients’ biases, while also delivering the evidence of proactive compliance that the FCA requires. Behavioural analysis is an important part of the FCA’s expectation that firms are able to evidence their compliance with Consumer Duty’s focus on good outcomes, as in this case study: “A firm acting in line with the Duty would use its behavioural analysis as evidence of the need for a simpler approach to support good outcomes” (9.27)

#2: Customer ethics and values

69% agree that good investment outcomes include matching their ethics and values

Good outcomes are the cornerstone of Consumer Duty; indeed the incoming addition to the FCA’s Principles (to coincide with the Duty’s implementation), makes this clear:

PRIN 12: A firm must act to deliver good outcomes for retail customers.

You won’t find many explicit references to your customers’ ethics and values in Consumer Duty guidelines themselves – but that’s because the area is so significant and complex that the FCA has deemed a specific regulatory review necessary to address it. Consultation on the FCA’s new Sustainability Disclosure Requirements (SDR) and investment labels regulation closed earlier this year, with the goal of addressing what the regulator called “growing concerns that firms may be making exaggerated, misleading or unsubstantiated sustainability-related claims about their products.” (1.1)

The link between Consumer Duty and the SDR consultation is crystal clear, with the regulator stating that the outcomes sought in the SDR consultation “align with Consumer Duty’s requirement for firms to act in good faith and for consumers to be provided with information that enables them to make informed, effective decisions.” (1.5)

At Oxford Risk, we believe that non-financial objectives, such as Sustainability, or other values-based investment preferences, must form a central part of the robust understanding that advisers need to achieve at the start of a relationship. We’re also clear that those values- or ethics-based preferences may change over the course of an investor’s lifetime – and that these changes may in part be driven by cultural trends.

Our finding – that almost 70% of investors agree that good investment outcomes include matching their ethics and values – shows that compliance with Consumer Duty (and any incoming SDR regulations) could do far more than merely avoid regulatory censure. It’s also a valuable opportunity for firms to capture their clients’ appetites for investment outcomes that accord with their values, ethics, and other non-financial objectives.

Far from being a nebulous suggestion, the FCA’s call for firms to put themselves in their customers’ shoes embodies the ethical imperative behind the detailed regulations in Consumer Duty. As ever, empathy, and good will, must be backed up with solid action. Rigorous behavioural analysis – including an evidence-based commitment to building a robust understanding of each client – is the key to unlocking the opportunity that the new regulatory environment presents.

The FCA maintains that implementing the new Consumer Duty will require nothing less than “a significant shift in both culture and behaviour,” and has called for a “fundamental shift in industry mindset.” The regulator is not overly optimistic about firms’ readiness, stating (in 2021) that they “may not be ready in time,” and “may struggle to embed the Duty.

We believe that readiness for Consumer Duty offers a chance for empathetic firms to ‘get the edge’ over competitors. In times of market volatility, and geopolitical uncertainty, the prospect of succeeding in the eternal quest for differentiation means that forward-thinking investment firms can turn to behavioural insights and truly shine.

Read: Advisers love Oxford Risk’s Investor Compass solution because it meets the FCA New Consumer Duty regulation in a client-friendly way straight out of the box.

Learn more about Oxford Risk's Consumer Duty Solutions

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