Consumer Duty

As summarised in our recent article, the FCA Consumer Duty implementation date has been extended and phased, but overall the final rules and guidance remain in line with the consultations.

In this article, we reflect on the specific challenges for UK and EEA wealth, fund and asset managers as they approach implementation and consider immediate next steps. Where they comply with existing rules, managers have a head start on firms in other sectors. However, they also have new requirements to consider. All types of managers should therefore take this opportunity to review their approach to delivering good customer outcomes.

The FCA has clarified that compliance with existing product governance (PROD 3) or assessment of value (COLL 6.6) rules will meet the FCA's expectations for the “products and services” and “price and value” outcomes, respectively.

Where there are gaps from an individual legal entity perspective (for example, MiFID investment firms and wealth managers approaching a value assessment for the first time), it may be possible to leverage the design of existing intra-group structures and frameworks, as well as lessons learned from those experiences.

The implementation of the Duty also provides a useful opportunity to review the effectiveness of existing arrangements, particularly against the FCA's 2021 reviews of asset managers' product governance arrangements and assessment of value reports.

Given that the requirements in PROD are not entirely aligned with those in the Duty, managers will wish to consider going beyond technical compliance with existing rules for reputational or operational reasons, and to deliver good customer outcomes. This is particularly the case where expectations in the new rules are more rigorous in important areas, for example, regarding the treatment of vulnerable customers.

As one of the first steps in approaching implementation, managers should review their universe of regulatory activities and clients to determine what could be in and out of scope. There are different requirements for manufacturers and distributors. Firms should determine whether individual legal entities may be subject to either (or both) sets of rules.

Determining the application of the Duty is more straightforward for firms such as wealth managers or authorised fund managers (AFMs) with retail (end) clients, compared to delegated portfolio managers or investment managers with a variety of client types. Importantly, the FCA emphasises that the scope is dependent on whether firms “determine or materially influence” retail customer outcomes. The high-level nature of the scope is therefore particularly challenging for some managers, including:

• Delegate portfolio managers: This is one of the most subjective areas when it comes to the scope of the Duty. The FCA gives examples of circumstances that could impact whether firms are captured, including whether a portfolio manager is:
  • independent of a fund manager,
  • has a decision-making role regarding target market or investment strategy, or
  • has a material influence on the “design, branding and promotion of the product”.
• Investment managers with segregated mandate clients: Where MiFID firms have a variety of segregated mandate clients, they will need to carefully consider the nature of each of their clients and their categorisation — for example, the likes of local authorities or charities. The FCA has warned against “opting up” clients to circumvent the Consumer Duty requirements.
• Firms that manufacture “investment services” not captured by PROD 3: The scope of PROD 3 is limited to the manufacture of financial instruments and structured products, and the distribution of investment services. Given the definition of a “product” is broader in the Duty than in the PROD 3 handbook (and includes the provision of services), it gives rise to potential gaps under the Duty for the manufacture of investment services. A detailed gap analysis is needed to determine whether any actions are required.
• EEA firms in the temporary permissions regime (TPR) or temporary marketing permissions regime (TMPR): The FCA has confirmed that TPR firms are in scope, while TMPR firms need to comply with activities relating to the communication and approval of financial promotions (which is a relatively uncommon activity for fund management companies). EEA firms will therefore need to consider whether they are impacted. UK distributors that distribute EEA funds in the UK will also need to consider how best to meet their own requirements (including taking reasonable steps to comply with a sub-set of the requirements, and gathering information from non-UK manufacturers).

Wealth, fund and asset managers should work through the specifics of their own situation and should document their view on how the Duty applies to their arrangements.

Since the introduction of MiFID II, parts of the industry have been seeking more information from distributors to help them monitor target market outcomes. In its 2021 product governance review, the FCA specifically acknowledged some of the challenges that fund and asset managers face in terms of getting end-client data from distributors. At the time, the FCA stated that managers could do more to challenge distributors for information, and to document that challenge.

Aspects of the Duty could improve the flow of information in both directions:

• The FCA expects manufacturers to “do what is reasonable” to gather information from distributors, with some limited examples given of what would be appropriate (for example sending a periodic survey to distributors).
• Distributors will be required to share information with manufacturers upon request. They will also be entitled to receive information from manufacturers in certain circumstances — for example, manufacturers should provide distributors with “all necessary information” to understand a product's value.

Over time, information sharing good practice should become clearer, particularly in the run-up to the April 2023 deadline. The industry's development of an information sharing template could assist with this process.

Firms will also need to consider how best to comply with a new rule that will require them to notify the FCA if they become aware that other firms in the distribution chain are not complying with the Duty.

In recent years, the FCA has adopted an increasingly stringent supervisory approach to individual legal entities and their governance. This can be seen through the FCA's focus on the role of fund management companies and their unique responsibilities (for example, through the 2021 review of “host” AFMs).

In the context of the Duty, the FCA has acknowledged that certain activities might be performed by wider groups that individual entities are part of (where this avoids duplication, and the activities can be better handled centrally). But it is clear there is an expectation that individual regulated entities remain responsible for implementation and outcomes, and that each regulated firm's board should challenge and sign off the implementation plan. It is therefore imperative that groups of companies consider specific responsibilities and evidence them clearly at an individual legal entity level.

More broadly, the FCA is seeking to drive a change in firms' culture. It expects the Duty to be reflected in firms' strategies, governance, leadership and people policies, including incentives at all levels. Senior managers will need to review their responsibilities and ensure the new, sixth conduct rule (acting to deliver good outcomes for retail investors) is appropriately embedded throughout the business.

Where managers outsource to third parties, they will need to ensure robust oversight is in place to ensure services are being delivered in line with expectations. This will be particularly important under the Consumer Understanding and Consumer Support outcomes, where firms such as transfer agents will be communicating directly with retail customers on fund managers' behalf.

Although a significant project in itself, Consumer Duty implementation should not be done in isolation but, rather, should be part of a broader, coherent approach to regulatory change and the development of managers' wider business strategies.

The Consumer Duty has clear links to other regulatory priorities, particularly to developments in the sustainable finance space and “greenwashing” concerns. The implementation of the Duty should build on existing regulatory guidance — for example, the FCA's guiding principles for authorised funds. The Duty will also need to be considered alongside the FCA's incoming “Sustainability Disclosure Requirements” and the introduction of product labels. Each of the four outcomes will be relevant in this context.

The deadline of October 2022 for regulated firms' boards to have agreed, scrutinised, and challenged implementation plans has been the main area of focus for many managers. In a recent speech and in information published for firms, the FCA noted firms do not need to have fully scoped all the required work, but plans should be “sufficiently developed” to provide assurance that firms will meet the implementation timeline.

As part of the process, the FCA will expect firms to have compiled information on program governance arrangements, material gaps (ideally prioritised, with associated deliverables and actions), and a project plan — including the budget and resources to deliver implementation in practice. Appropriate training should also have been delivered to board members to ensure they are informed on what they are being asked to review and approve. When formulating plans, firms should be clear on what is being addressed centrally or at “business unit” level, and what relates to specific legal entities. The FCA expects boards to have an ongoing role overseeing the plans.

Firms also need to appoint a Duty “champion”. For authorised fund managers there may be an obvious choice (given the existing requirement for these firms to have at least two independent non-executive directors (NEDs)). The choice may be less obvious for MiFID investment firms that do not have independent NEDs and will need careful thought. The FCA has clarified that the champion role is not a prescribed responsibility under SM&CR. Some firms have already appointed “champions” to maximise their impact and ensure they have appropriate oversight of the October implementation plans.

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