Implementing the Consumer Duty in Asset Management, Custody & Fund Services and Alternatives portfolios [pdf]

The Financial Conduct Authority, FCA, has published an open Dear CEO Letter addressed at asset managers and management firms as regards the upcoming new consumer duty. The letter thereby reminds firms of the implementation timeline of the new duty, summarizes the key pillars of the duty, outlines how these pillars apply towards firms engaged in asset management or the custody of assets, and sets out the expectations of the FCA with respect to the measures asset managers shall take to ensure compliance. The key issues addressed in the letter are briefly summarized below.
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#### The key pillars of the new consumer duty
The new duty puts upfront the interests of consumers (hence the name) and requires firms to adhere to stringent rules in the following four key areas:
1. communications: firms must ensure that consumers get all the information they need to make informed decisions.
2. products and services: firms must ensure that their products are designed in a way that ensures that they meet the needs of consumers and that – in turn – they are only sold to those customers whose needs they are intended to meet.
3. customer service: firms must ensure that their levels of customer service meet the need of consumers and that such service does not hinder clients from achieving their desired outcomes.
4. price and value: firms must ensure that the products offered to retail customers are priced at fair value.
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#### The implementation timeline
– The policy statement to the new duty was published on July 27, 2022 (please see EventID 16865 in this context for more information).
– A corresponding guidance was issued at the same time.
– The FCA expects / expected that by October 2022, all management boards have agreed upon a plan to implement the new duty.
– By April 2023, manufacturers of products should have concluded their reviews to ensure that their products or services meet the above noted requirements (area 2 and to some extent area 1 noted above) and should communicate any relevant information to their distributors.
– On July 31, 2023, the duty comes into force for new or renewable products and services.
– On July 31, 2024, the duty comes into force for legacy products or services not subject to any renewals.
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#### Application of the new duty towards asset managers and fund management companies
Generally speaking, so the FCA, the new rule applies to all firms and persons that are engaged in retail customer business. It is thereby irrelevant whether or not such engagement is direct or indirect via the use of third parties. Specifically, the duty applies „to firms that can influence material aspects of, or determine:
– the design or operation of retail products or services, including their price and value;
– the distribution of retail products or services;
– preparing and approving communications that are to be issued to retail customers; or
– engaging in customer support for retail customers“.
Firms‘ key responsibility will be to determine whether or not such material influence exists.
For example, a fund management company creating a new mutual fund to be managed by any external fund manager establishes a product – the mutual fund – that has direct consequences upon the outcomes for consumers (communications, price and value, products and services). Thus, they would be in-scope firms of the new duty. On the other hand, a fund manager may not be in-scope if he or she was simply hired to invest the funds on behalf of another company and is – so to speak – just another step in the value chain.
In Annex I of the Letter, the FCA has provided a set of examples to clarify the application of the new duty towards asset managers and fund management companies.
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#### The expectations of the FCA and the way forward
The FCA expects asset management firms and asset managers to carefully analyze whether or not the new duties apply to them. Additionally, they shall carefully evaluate any requirements that go beyond their current duties set out in the Collective Investment Schemes and Product Intervention and Product Governance Sourcebooks of the FCA and take appropriate steps to meet those requirements by the above noted deadlines. Particular attention should thereby be paid to the provision of information to product distributors (e.g. brokers or banks) to help them understand and properly market the funds and to the disclosures made to retail clients. In Annex II of the Letter, the FCA has provided a set of good and bad practices in this context and has listed some aspects fund management firms need to take into account to meet their regulatory new consumer duty requirements.
The FCA concludes its Letter by noting that it will closely monitor the progress made by asset management firms and asset managers up to July this year and will continue to engage with stakeholders to provide further support and guidance where ever needed.