FCA sets the alarm for Consumer Duty…are you ready?

2022-07-26 |  Mary Wong

Last September, I raised the issue of the Consumer Duty regulation and the need for asset manager CEOs to play an active role in preparing their organisations for its introduction.

We are now about to find out what the new regulation will actually mean, with the FCA expected to publish the details imminently.

Here is a quick recap of some aspects it will introduce:

  • The consumer principle: "A firm must act to deliver good outcomes for retail customers"
  • Cross-cutting rules, designed to ensure firms:
    • Act in good faith towards retail customers
    • Avoid foreseeable harm to retail customers
    • Enable and support retail customers to pursue their financial objectives
  • A particular interest in four elements of the relationship with consumers:
    • Price and value
    • Products and services
    • Consumer understanding
    • Consumer support

An important point to remember is the overall expectation of a fundamental shift in culture and behaviours to achieve this, which needs to be evidenced.

A duty with far reaching scope - for all across the investment product chain

The scope of the Duty covers both direct and indirect relationships with retail customers, with the obligation to meet the duty extending across the product chain. The implication of this for asset managers is that there is a more definitive expectation for them to consider end outcomes for retail investors even if, for example, product distribution is done by third parties, platforms or other intermediaries.

CEOs must own Consumer Duty

The duty stipulates a crucial necessity for firms, including asset managers, to develop aspects of the design or performance of a product or service for the benefit of consumers.

It is for this reason that asset managers should see reason enough to think whether or not their products and the impact these have on end-consumers, complies with the duty.

But if not, there are three key requirements that will define whether or not asset managers are able to demonstrate adherence.

Who is the target market?

Firstly, asset managers need to demonstrate to the regulator an understanding of who the end-consumer of their product(s) is, and how this may differ from the intended target market.

For some asset managers this is more easily done where there is easier access to consumer data through a direct-to-consumer relationship or where they are selling through intermediaries to a direct customer base, typically in cases where customers don't have financial advice support.

This is in contrast to scenarios where asset managers get data from intermediaries. In these instances, the intermediary may use bolt on tools to get a sense of who the demographic is, the geographical distribution of consumers and other key metrics.

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Where this is the case, asset managers need to be considering what data is being collected through these types of relationships - and does it provide enough detail to enable them to show that they know who their funds are being sold to?

If this isn't known, it's worthwhile finding out before April 2023, when the regulator will be looking to see how steps have been taken to uncover this information.

How is the data being interrogated and what does this tell you? Is the target market being reached with good outcomes in mind?

The way that data is interrogated will paint the picture for the regulator of the asset managers approach to what they consider acceptable provision of products to be.

From a distribution perspective, asset managers need to determine what are the acceptable parameters for product performance and total cost within a client's portfolio, whether distributing through a platform, or direct or advised.

If, for example, if the total cost of clients' investments fall outside the market average by a certain number of basis points, there is an obligation under the Duty to review whether this is justified or if further investigation is needed.

Reviewing these questions should signpost if an assessment of the overall relationship with the customer is required. It will also help outline if they are the appropriate target market for the product.

Importantly, the answers will also indicate if the post-sale review process is working to gauge how closely safeguarding processes have been built-in, to ensure good outcomes to the end consumer.

Have vulnerabilities been identified?

It's not just about sense checking data collection and compliance processes. Ultimately the new Duty is about doing right by the consumer.

While TCF and PROD have already established the baseline from which to view the appropriate treatment of customers, Consumer Duty takes these established principles and reinforces the need to make a connection between the scrutiny of data and whether, as a result, it is highlighting potential vulnerabilities within groups of consumers receiving a financial product.

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There is a particular emphasis on whether consumers are disproportionality vulnerable - so asset managers will need to know if the data they have, or receive from third parties, is enough to tell them all they need to know in treating the customer fairly and appropriately to ensure the good outcomes required.

It is in this context that asset managers need to question whether they know where their funds are going, even (arguably, even more so) when intermediaries are involved.

The clock has been ticking on Consumer Duty for a while. The FCA is about to set an alarm for nine months' time. Now is the time for asset managers to wake up and get ahead of the race to be compliant.

If you'd like to learn more about the new regulations, get in touch with Mary Wong, partner at PEN.

This article was originally published on Investment Week. View the original article here