UK Consumer Duty Regulation – Impact on buy side firms

The Consumer Duty regulation sets higher and more defined standards of consumer protection across UK financial services sectors and requires FCA (Financial Conduct Authority) regulated firms to put their retail market customers’ needs first. This affects financial service providers such as banks, building societies, insurance, life & pension firms, investment trusts, wealth, asset managers, and platform providers. The Duty requires these firms to act to deliver good outcomes for retail customers explained through three cross-cutting rules and four outcomes. This paper summarizes impact on fund managers, financial advisors, and platform providers, who are manufacturers or distributors of financial products for UK retail customers.

Product segments and implementation timeline

While the Duty protects interests of retail customers, it exempts firms which offer products and services only to professional clients. These are firms who use prominent disclosures in their marketing materials that their funds are only for eligible professional clients, or funds with a minimum denomination or investment of GBP 50,000 or more. Also, non-UK firms who market funds or provide managed account services to UK retail investors are not in scope of this Duty.

The Duty was published by FCA on 27th July 2022 and it comes to force on are 31st July 2023 for products or services which are open to sale or renewal, and 31st July 2024 for closed products or services.

Three cross-cutting rules

1. Act in good faith: Manufacturers and distributors of financial products should ensure that customer’s own interest is fulfilled by standard of conduct characterized by honesty, fair and open dealing and acting consistently with the reasonable expectations of customers.
2. Avoid foreseeable harm: Firms must consider consumers’ limited experience and behavioural biases at all stages of the product lifecycle. They should respond to new or emerging sources of harm identified through consumer complaints, management information, press reporting, FCA supervisory communications, etc.
3. Enable and support retail customers to pursue their financial objectives: Firms should enable consumers to realise the benefits of the products and services offered. They should provide required support and information through appropriate channels throughout the life of products and services.

Four outcomes of the regulation

1. Products and services: Manufacturers of financial products should design and continuously review products/ services to ensure their product is appropriate for customers in specific target markets. They should enable and monitor all distributors in chain to comply with the regulation.
2. Price and value: Manufacturers and distributors must decide appropriate price and fees for products and services through value assessments. They must ensure that their total charges do not result in the product ceasing to provide fair value.
3. Consumer understanding: Understand requirements of retail customers in specific target markets and provide required information to help them make effective decisions at key points in customer journey. When the information is complex and firm is not authorized to provide advice, they should consider additional steps to support consumer understanding.
4. Consumer support: Enable customer service teams to provide appropriate support to retail customers’ needs throughout their relationship with the firm. They should decide and inform available channels for support before the sale of the product, ensure that support works effectively, have exceptions processes in place to deal effectively with non-standard issues, ensure operational resilience, and ensure interests of consumers with protected characteristics/ changing needs.

Actions for Manufacturers and Distributors of Financial Services

Products and services:

Manufacturers typically identify a target market while designing a product or service. They must consider the needs, characteristics, and objectives of customers with characteristics of vulnerability in its target market. If few firms are working together to manufacture a product or service, they must approve existing products, or any new product or service they introduce. Manufacturers must have distribution arrangements for each product or service. The distributors in the chain must understand the products or services they distribute to identify or create a distribution strategy.

Price and value:

Manufacturers could conduct customer research, testing or use internal data to assess whether a product or service provides fair value.  They must assess value at the design stage and before offering products or services to consumers. They should also monitor and assess the value of their products and services throughout their life, conducting regular reviews of their value assessment. If a product or service does not provide or ceases to provide fair value to customers, firms must take appropriate action to mitigate and prevent harm, for example, by amending it to improve its value or withdrawing it from sale. The price and value outcome rules do not require firms to charge all customers the same amount.

Consumer Understanding:

Manufacturers and distributors should put themselves in their customers’ shoes when considering whether their communications equip customers with the right information, at the right time, to understand the product or service in question and make effective decisions. Where firms must communicate complex information to comply with other disclosure requirements, they should consider what additional steps they can take to support consumer understanding. This applies to all financial promotions, other advertisements and communications provided to consumers, including verbally – such as during conversations with advisers, online, in letters or product terms and conditions

Consumer Support:

A product or service that a customer cannot properly use and enjoy is unlikely to offer fair value. Hence the support firms provide should enable consumers to realise the benefits of the products and services, pursue their financial objectives, and ensure that they can act in customers’ own interests. Firms should also make sure that the support they provide is effective, regardless of the channel used to provide support. Customers should not be waiting significantly longer for their call to be answered in relation to a post-sale issue than to take out a product or service. Firms should apply judgement and be able to distinguish between positive frictions and harmful frictions that create unreasonable barriers.

Conclusion

The overarching rules through this Duty affect the way business is conducted by wealth and asset managers who are manufacturers or distributors of financial services products to retail customers. To comply with the regulation, they should review their product catalog to understand nature and state of current products/ services and client base across all entities. After gap assessment for individual business lines, a detailed impact assessment must be conducted to understand impact of new rules on staff, define concepts like foreseeable harm and fair value, tailored to their products and services. Remediation must be carried out after identification of all impacted policies, procedures, and governance controls.