Duty of care ranks very high on the agenda for most financial institutions at the moment. This duty of care is both important when closing on financial products and for the entire duration of those products.
On 1 January 2017 the European-wide legislation of MiFID II will take effect, in which the requirements regarding the “suitability and appropriateness” (of financial advice and products) are described. And it is not only banks and asset managers that must deal with this legislation, but it also affects, to a certain degree, insurers and pension funds. The latter two financial service providers are paying more attention to their duty of care, as the risk from their products is increasingly transferred from the insurer to the policy holders. To give substance to the duty of care insurers and pension funds must take into account two important points of attention: the product characteristics and the communication around the product. The financial product must be composed in such a way that the chance of unexpected risks remains small. Additionally, it is important to communicate in a transparent manner about the risks and potential returns, so that the expectations of the consumer are managed in the right way.
General statements are often not being read
In closing a product the advisor must check whether the product profile connects with or “suits” the client profile and whether the client fits the target audience of the product in question. Moreover the advisor must provide information about the risk and the expected return of the product, for example in the Dutch market via the financial information leaflet. Unfortunately, this instrument has not proven to be very effective in recent years. The financial information leaflet provides only general information about the financial product, and is not translated to the specific situation of the individual client. As a result, a lot of people do not even read the financial information leaflet.
“If you put the client at the center, you will almost automatically fulfill your duty of care.”
Personal information draws much more attention
If the risk and return are translated to the personal situation of the client, and are related to his or her specific goals, it turns out that this information is being read and considered much more closely. The client will then be at the center in the communication. In practice, it is not that easy to communicate about risks in an understandable and transparent manner. However, processing this kind of information has become more common for consumers lately, just like the weather forecast nowadays provides insight in the spread of temperatures and probabilities of rain. We also see that supervising agencies also pay more attention to the communication about risks.
Duty of care is also a commitment to communicate
The duty of care does not end with the creation of a good and transparent product, for example a good lifecycle in a pension product. It pertains to a transparent and personal communication about risk and return as well. Only then a consumer knows prior to, and during the duration of the product, what risks there are and which ones he or she can expect. The guidelines for this are broadly described in European and local regulation and legislation, but in case you do not always have these handy you can stick with a simple rule of thumb: if you put the client at the center, you will almost automatically fulfill your duty of care.