Implementing the Consumer Duty in the Consumer Investments sector [pdf]

The Financial Conduct Authority, FCA, has published an open Dear CEO Letter addressed at firms providing or facilitating any type of consumer investment (e.g. investment firms, financial advisers, mutual fund managers) 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 their firms, and sets out the expectations of the FCA with respect to the measures firms 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 (FG 22/5) 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 firms providing or facilitating any type of consumer investments
Generally speaking the new rule applies to all firms and persons that are engaged in manufacturing or distribution of products and services designed for or targeting retail investors – regardless of their size or business scope. Specifically, the FCA notes that „all firms involved in the manufacture, provision, sale and ongoing administration and management of a product or service to the end retail customer“ will be in-scope of the new requirements. Depending upon the nature of a firm’s business, firms may need to adopt different measures or review different business functions to accommodate the new consumer duty.
Independent from any specific business models the FCA expects in-scope firms to:
– „pro-actively act to deliver good outcomes for customers generally and put customers’ interests at the heart of their activities
– focus on the outcomes customers get, and act in a way that reflects how consumers actually behave and transact in the real world, better enabling them to access and assess relevant information, and to act to pursue their financial objectives
– ensure they have sufficient understanding of customer behaviour and how products and services function to be able to demonstrate that the outcomes that would reasonably be expected are being achieved by those customers
– where they identify that good outcomes are not being achieved, act to address this by putting in place processes to tackle the factors that are leading to poor outcomes, and
– consistently and regularly challenge themselves to ensure their actions are compatible with delivering good outcomes for customers“.
Additionally, however, the FCA specifically emphasizes that it does NOT expect firms to be held responsible for any poor investment returns of investors so long as they have met their statutory obligations*. This would include – for instance – the delivery of relevant disclosures to clients, the clear communication of product features, risks, and benefits (including investor warnings, where appropriate), an adequate assessment of an investor’s risk appetite, the distribution to the target market only, etc.
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#### The expectations of the FCA and the way forward*
The FCA expects firms providing or facilitating any type of consumer investment to take appropriate steps to meet the new consumer requirements by the above noted deadlines. A particular focus thereby needs to be put on the identification of the target market and the assessment of how their products and services meet the needs of this identified target market. Furthermore, firms need to regularly review their products and services to ascertain that the product features still match the targeted audience.
Additionally, the FCA expects firms to review their charging models, including any fees that a client occurs along the value chain, to ensure that customers receive a „good value“ for their money. In this context, the FCA notes that – for example – high fixed fees for small investments are unlikely to be considered a „good value“. Moreover, firms need to ensure that they clearly disclose any charges to customers PRIOR to the provision of any products and services. On top, firms offering investment applications need to assess whether or not their applications permit an adequate degree of customer due diligence and whether or not they are delivering their products at a fair value.
Further expectations as regards client communications, possible redress assessments, and customer support are outlined in Annex II of the Letter.
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The FCA concludes its Letter by noting that it will closely monitor the progress made by firms up to July this year and will continue to engage with stakeholders to provide further support and guidance where ever needed.