Disclosure and customer understanding - Managing the risk of consumer detriment

Posted: 26th June 2017

First published on Professionaladviser.com in June 2017.

Since the introduction of pension freedoms, the number of customers purchasing drawdown products without advice has grown significantly.

It is imperative consumers' retirement products work for them in the long-term. Failing to take advice around drawdown options poses a significant risk to the outcomes customers receive. Any suitability issues are likely to become exacerbated over time - for example, in the event of poorer than expected fund performance - and can result in tangible and significant impacts on customers' standard of living in later life.

The growth in the sector - combined with the associated risks - has caught the regulator's eye, and indeed the FCA's Business Plan 2017/18 announced a thematic review of non-advised drawdown was imminent. With this in mind, what are the practical steps firms should be taking to satisfy themselves their non-advised customers with drawdown products are receiving fair outcomes?

Customer Understanding

A key area for firms to consider is disclosure and customer understanding. The recently released findings from the FCA's thematic review of advice highlighted that, in more than 40% of cases, firms had provided inadequate disclosure to clients.

This risk reads across to non-advised sales. As such, it is essential firms ensure their clients' information needs are met - which includes explaining how the product works, any risks associated with it and its costs. Clients should also be told of the importance of regularly considering the suitability of their product to understand whether it still meets their needs.

Cost disclosure has been a recurring issue since 2013's Retail Distribution Review. To meet the client's information needs, the total cost to the customer - that is, product, funds and, where appropriate, platform charges - should be disclosed with a monetary value. Risk warnings are also crucial, as customers need to be aware of the relevant risks to be able to manage them appropriately.

Post-Sale Disclosure

Getting initial disclosure right is the first step towards ensuring customers receive fair outcomes - however, this does not stop at the point-of-sale. It is essential that post-sales disclosure also meets the customer's information needs.

Conversely, firms need to consider the volume of information they provide on an ongoing basis and be mindful they must impart key information while ensuring customers do not disengage due to the volume of information they receive.

This can be a difficult balancing act - and herein lies a challenge for firms. Regular reviews of the information being provided post-sale can contribute greatly to the detection of potential issues before they crystallise in the customer base.

If this process is executed effectively, customers can be assured the firm has their best interests at heart, and firms can gain advocacy as well as great insight into the customer experience.

Focus On Process

Reviewing processes on an ongoing basis to ensure they are leading to fair customer outcomes is a vital element of providing customers with suitable products.

The appropriate frequency of reviews should be determined on a firm-by-firm basis and be governed by its risk appetite, which should be defined and able to be evidenced and articulated. This review should ensure there are no inherent conflicts of interest or biases that lead to customers obtaining products that may not be suitable.

Following the review of disclosure and processes, it is important that firms contact a sample of their customers to ensure they are obtaining fair outcomes. This is the most meaningful management information (MI) a firm can obtain to evidence its focus on enhancing the customer experience on an ongoing basis.

Maintaining an independent view when reviewing policy is vital in order to foster constructive internal challenge if issues arise. At the same time, teams and individuals responsible for reviews must have strong technical and contextual awareness of the business model and prevailing regulatory focus - especially the risk-based approach - to ensure any internal challenge is robust and proportionate.

Although risks identified should be owned by each individual business area, the firm's compliance and audit functions should also review processes as part of their monitoring plans. This is due to the high potential for customer detriment and is also sensible given the current regulatory focus. Firm can also obtain further assurance from an external review of their processes. 

Lastly, boards should be receiving sufficient MI to satisfy themselves their customers are receiving fair outcomes as a result of their processes. Where the MI does not provide this assurance, the board needs to ensure action is taken to refine processes and the information being provided around non-advised drawdown products.

A Clear Challenge

There are clearly many aspects for firms to consider around non-advised drawdown. Non-advised processes have the potential to expose customers to a heightened risk of poor outcomes. By undertaking the activities above, firms can provide themselves with assurance - and the regulator with evidence - they are continuously seeking to manage this risk.

By giving their approach to this expanding market due consideration now, firms can help guard against the possibility of regulatory sanction. The most important benefit of this activity, however, will be the ability to consistently assist customers by providing them with suitable products at this extremely important juncture of their lives.