Why Consumer Duty matters
Some recent IPOs have been promoted as a way of opening up investment strategies previously associated with institutional or alternative investors to a broader retail audience.
With the UK Government and regulators continuing to explore ways of increasing retail participation in capital markets, these products may offer a glimpse of how investment opportunities could evolve.
However, for firms operating under the FCA’s Consumer Duty, the key question is not whether a product can be marketed to retail investors, but whether it delivers good outcomes for them in practice.
Can retail investors genuinely understand these products?
At their core, these are not simple products. While they are being marketed as retail-friendly, their structure is often layered and relatively complex.
Investors are not just buying into a straightforward fund; they are engaging with a model that combines a closed-end vehicle, exposure to a listed management company, and incentive mechanics that influence perceived value.
This immediately raises important questions under the Consumer Understanding outcome. If a product requires significant explanation to fully grasp, firms need to be confident that customers genuinely understand what they are buying, not just the headline proposition.
What are the Consumer Duty implications of ‘free share’ incentives?
The use of “free shares” is particularly striking. It is an effective marketing hook, but it also introduces behavioural considerations. Framing an investment in this way can shift focus away from underlying risks and costs, creating a perception ofvalue that may not hold up under closer inspection. Under Consumer Duty, firms must consider whether such features support informed decision-making or subtly encourage customers to act in ways that may not be in their best interests.
Does the product deliver fair value?
There is also a more fundamental question around fair value. Even if the headline fee structure appears reasonable, the economic reality is more nuanced. Investors are effectively exposed to both the fund and the management company that generates fees, complicating the overall value proposition. Consumer Duty requires firms to look beyond surface-level pricing and assess whether the product, in its entirety, delivers fair value to the end customer.
Who is the product really designed for?
Suitability is another area where tension emerges. The underlying strategy remains concentrated and actively managed, with the potential for volatility and pricing dynamics that may be less intuitive to less experienced investors. While the product may well be appropriate for certain segments, particularly more sophisticated or advised clients, it is harder to justify its positioning as broadly suitable for retail audiences without careful controls.
Why distribution matters as much as product design
This is where the real risk lies for firms. The issue is not simply the product itself, but how it is distributed and understood. Consumer Duty requires firms to challenge the narrative, rather than accept it. It is no longer enough to rely on how a product is labelled or marketed. Firms need to interrogate whether it genuinely delivers good outcomes for their target market in practice.
What does this mean for the future of retail investing?
Such IPOs are a clear example of the ongoing trend towards the retailisation of alternative investments. That trend is unlikely to slow down. But innovation in product design does not reduce regulatory expectations, it raises them.
Key takeaways for firms
- For firms, the key takeaway is straightforward: a product being described as ‘retail-friendly’ does not make it suitable for all retail investors.
- Under Consumer Duty, what matters is whether customers can understand the product, whether it delivers fair value, and whether it is distributed to the appropriate target market.
- Even if regulatory reforms broaden access to certain investment opportunities, firms will still need to demonstrate that retail customers are capable of understanding the risks and making informed decisions.
How fscom can help
As firms explore new ways of bringing investment opportunities to retail audiences, Consumer Duty remains a critical lens through which products, communications and distribution strategies must be assessed.
At fscom, we help firms evaluate whether products are delivering good outcomes across the four Consumer Duty outcomes, from fair value and consumer understanding through to target market suitability and ongoing monitoring. Our team supports firms with product governance reviews, Consumer Duty assessments, customer journey testing, financial promotions compliance and distribution oversight, helping to identify potential risks before they become regulatory concerns.
Whether launching innovative investment products or reviewing existing propositions, we work with firms to ensure that regulatory expectations are embedded throughout the product lifecycle and that retail customers remain at the centre of decision-making.
This post contains a general summary of advice and is not a complete or definitive statement of the law. Specific advice should be obtained where appropriate.
