How UK investment management firms should prepare for the Consumer Duty as implementation deadline approaches

There are only three months to go until the deadline for firms to implement the new Consumer Duty. Addressing these requirements is top of the agenda for the investment management sector at present. Indeed, the FCA’s recent “Dear CEO” letter to asset management and investment firms told CEOs the Duty should be “a top priority for you personally”.

Whilst the FCA has by the deadline of 31^st July, it also said there will be no waivers or extensions to meeting it. In this blog, we explore what firms need to do to be in the best shape possible on the implementation date.

The Consumer Duty: introducing a new principle, rules and outcomes

The Financial Conduct Authority (FCA) says the Consumer Duty will lead to “a major shift in financial services”. At the core of the Duty is an overarching principle known as the “Consumer Principle”, or PRIN 12. This requires firms to act to deliver good outcomes for retail customers.

Then there are “cross-cutting rules” which provide more clarity on the expectations around the PRIN 12. The rules specify that firms must consider the needs, characteristics and objectives of their customers and how they behave “at every stage of the customer journey”. This includes customers with vulnerable characteristics.

Firms will need to both deliver good outcomes to customers, and to understand and demonstrate that they are achieving that goal. Essentially, the regulator expects firms to put customers’ interests at the heart of their activities – and be able to evidence that.

Finally, the Duty introduces “four outcomes” which the FCA wants to see firms deliver for their customers. These relate to:

• Products and services: These should be designed to meet the needs, characteristics and objectives of a specified target market.
• Price and value: Products and services should provide “fair value” for customers.
• Consumer understanding: Consumers should receive communications from firms in a way that they can understand.
• Customer support: Firms should support consumers throughout the life of a product or service.

This year’s deadline applies to new and existing products and services that are open to sale or renewal. Closed products and services will then come into scope on 31^st July 2024.

What should firms have done by now?

With the deadline for implementation approaching rapidly, investment management firms should already be well advanced in their preparations, including:

• Identifying areas within the firm’s practice which are likely to cause harm to consumers, then assessing the level of risk each poses. This assessment should determine prioritisation of the implementation of the Duty.
• Carrying out a gap analysis and devising an implementation plan.
• Appointing a Consumer Duty Champion who owns and is accountable for the regulatory requirements within the firm.
• Collecting and analysing data to understand the impact of products and services on consumers.
• Reviewing products and services, communications, and the journey of customers throughout their dealings with the company.
• Sharing key information with distributors via Product Managers.

What should they be doing next?

Most firms will still have a considerable amount of work to do in the coming months to be ready for the implementation deadline of 31^st July. Investment firms’ to-do lists could include:

• Training relevant staff and Board members in the requirements of the Duty.
• Developing or enhancing existing internal policies and procedures, and logs and registers.
• Allocating internal and/or external resources as required.
• Updating the company’s compliance monitoring programme to incorporate effective testing of risk controls.
• Implementing assessment frameworks to test good customer outcomes. This might include gathering customer feedback, reviews and audits of calls, or analysing complaints data.
• Implementing a Board assessment framework and management information packs on treating customers fairly.
• Implementing protocols for escalation when there has been a breach of the Consumer Duty.

fscom’s key takeaways for investment firms

While the Principle, rules and outcomes appear to be wide-ranging and prescriptive, firms should not seek to reinvent the wheel when it comes to implementing the Consumer Duty. It is likely that the work firms have already done on risk assessment and management – as well as business continuity planning, operational resilience and cyber security – will provide a solid foundation.

There are three further aspects of the Duty which should reassure firms that the task of implementation is manageable:

• Duplication of existing requirements: Many investment firms will be subject to (and compliant with) the FCA’s PROD 3 and COLL 6.6, 5 and 15.7 requirements, which can be found in the regulator’s handbook. Compliance means they will also largely be compliant with various aspects of the Duty’s rules. For example, firms are not required to duplicate the fair value assessment in COLL 15.7.
• Limited accountability: The scope of the Duty is limited to a firm’s own activities. Unlike in other areas, a company is not responsible for actions of firms in its distribution chain.
• Flexibility: The Duty is not a one-size-fits-all compliance framework, but should be tailored to an individual business. The potential impact on consumers varies depending on the types of products and services a company offers and the segment of customer it is targeting.

Nonetheless, implementing the Duty is a significant undertaking for firms and the scope is broad. Its characteristics and likely impact will include:

• Wide application: The Duty applies to all products and services offered to retail clients. It also covers all firms that could have an impact on outcomes for retail clients, even if they do not have a direct relationship with the client. This includes unauthorised funds and institutional mandates where these ultimately affect retail investors – although the rules will apply proportionately.
• More scrutiny to come: Further regulation could follow because the regulator has indicated that it is concerned with firms’ Assessment of Value implementation. Over the next 18 months, the FCA will review this along with approaches to the price and value outcome.
• Greater enforcement: PRIN 12 provides an additional high-level principle which the FCA can use to pin down firms and potentially hold them accountable for regulatory breaches and pursue enforcement action.
• The need for a new framework and testing: Firms should consider how their Board will monitor good outcomes and mitigate foreseeable harm, and what existing data can be used to ensure good outcomes for consumers. A framework should be implemented for this.

This blog shows there is a lot of work for firms to do ahead of the implementation deadline for the Consumer Duty. But investing time and resource in preparing for the Duty over the next three months and beyond will not be wasted. Identifying and resolving potential harms will protect consumers, satisfy regulatory expectations, and even help improve the products and services firms offer.

fscom can help investment firms with all aspects of regulatory compliance and rethinking their approach from the point of view of the consumer. Contact us today.