Niels Bohr, the Nobel laureate in Physics and father of the atomic model, is quoted as saying, “Prediction is very difficult, especially if it’s about the future!”

A related axiom states: “Predicting the future is easy – the hard bit is getting it right!”

And with those thoughts in mind, we can ponder the wisdom, or otherwise, of the Consumer Duty cross-cutting rules apparently requiring firms be able to predict future events.

At least, that‘s how some might view the rule which requires firms to ‘avoid causing foreseeable harm to retail customers’

What is foreseeable harm?

The FCA’s finalised guidance (FG22/5) lists some examples of foreseeable harm including:

• consumers being unable to cancel a product or service that isn’t right for them anymore because the firm’s processes are unclear or difficult to navigate
• products and services performing poorly where they have not been appropriately tested in a range of market scenarios to understand how consumers would be affected
• products and services causing harm because the firm’s inappropriate distribution strategy leads to products and services being distributed widely to customers for whom they were not designed and whose interests they do not serve
• consumers incurring overly high charges on a product because they do not understand the product charging structure or how it impacts on the value of the product
• consumers incurring high total costs of investing such that the total charges are likely to outweigh the expected above-cash returns from the investments
• consumers with characteristics of vulnerability being unable to access and use a product or service properly because the customer support is not accessible to them
• consumers becoming victims to scams relating to their financial products for example, due to a firm’s inadequate systems to detect/prevent scams or inadequate processes to design, test, tailor and monitor the effectiveness of scam warning messages presented to customers
• consumers finding it too difficult to switch to a better product or different provider because the process is too onerous or unclear

That is all very helpful – to a point. But it is not too difficult to imagine that there could be an issue in the next few years on which the regulator might take the view that it was foreseeable as a matter of opinion rather than fact. So, what can firms do now to identify potential sources of foreseeable harm in their products, processes or services? The immediate answer is to at least document consideration of the possibility of harm arising from any of its activities. This is undoubtedly difficult and requires firms to really challenge themselves with an open mind. It is not dissimilar to the requirement that firms must identify and resolve all potential conflict of interest. Again, not easy but it has to be done.

The FCA expects all firms to collect enough information to be able to act to avoid causing foreseeable harm. However, while the information gathering and analysis should be realistically thorough, and identify as many potential issues as possible, the exercise should be approached in a proportionate manner, with remedial action being proportionate to the nature and size of the firm and its ability to address all or part of any issue found. As the FCA states in PS22/9:

“Underpinning the whole of Consumer Duty is the concept of reasonableness, firms are only responsible for addressing the risk of harm when it is reasonably foreseeable at the time, considering what a firm knows, or could reasonably be expected to have known.”

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.

The rules do not permit firms simply to hide behind ineffective disclosure stating that customers had accepted the risks inherent in a product or service.

Some real-life examples

• Agent as client
  Many firms use DFM based model portfolios. These are usually set up on the ‘Agent as client’ model (AAC). This model works well for the DFM but creates known difficulties for both the adviser and the investing client. We have written about this before so see here for a fuller explanation. Suffice to say that there are three primary aspects of this operating model that carry potential for foreseeable harm. First, in the event of any problem arising in the DFM that would otherwise warrant a complaint, the investing client has no right of complaint to the DFM as he/she is not the ‘client’. And the adviser, who is technically the client in this model, would not be an eligible complainant either. Second, it is unlikely that there would be any recourse to the FOS. Third, the AAC model permits the DFM to consider the adviser as a per se professional client. That means that the DFM could include assets within the portfolio that are not suitable for retail clients. The last of these issues can be readily addressed by the DFM giving a warranty that the portfolio will only contain assets suitable for retail clients. Some already do this. However, the lack of regulatory protection for the end investor is a function of the AAC model and not able to be remedied. Firms need to consider how the deal with this scenario and the solution will depend on what is proportionate and possible. Finally, what happens if the client decides to end the adviser/client relationship. The whole AAC model then doesn’t work. What will happen to the client’s portfolio? Will the client be disadvantaged?
• Adviser only platform
  Similar difficulties could arise where a client on an adviser only platform decides to change adviser or have no adviser at all.
• Ongoing reviews for clients who don’t need regular reviews
  The FCA is increasingly focused clients being placed into solutions that are more complex and costly than other solutions that would be equally effective. In particular, where solutions are used that require ongoing reviews and adviser charges when the client’s situation is unlikely to change. We have written about this before. See here and here. Clearly, where this could apply, there is the ‘foreseeable harm’ of unnecessary charges. The solution is to ensure that clients are filtered appropriately according to whether they need ongoing reviews or not and for firms to have investment solutions where the target market comprises those clients who do not need ongoing review.