UK: Implementation Of The Consumer Duty For Asset Managers

Products and services

Firms must identify a group or groups of customers sharing common features whose characteristics, needs and objectives the product is or will be designed to meet (the target market). These customers are the end-users of the product or service, not other firms in the distribution chain. The rules require firms to identify the target market at a sufficiently granular level, considering the characteristics, risk profile, complexity and nature of the product or service.

One way firms may wish to test whether the target market has been identified appropriately is to consider if it would include any groups of customers for whose needs, characteristics and objectives the product or service is generally not compatible. For example, an investment fund might start with a target market described in terms of investment objective and investment risk. However, the target market should be refined and clarified if the product is generally incompatible with the needs, characteristics and objectives of people who cannot commit to hold the investment for more than five years or who cannot afford to bear potential investment losses.

For more complex or niche products or services, firms should define target markets in more detail, taking account of any increased risk of consumer harm associated with these products or services and their potential mis-sale. For example, a structured product with capital at risk that offers high headline rates of return but with complicated features that make it difficult for investors to understand what returns are likely in practice may need a more defined target market and a particular distribution strategy, such as being sold only with advice.

Asset managers and platform providers acting as manufacturers must develop the product or the platform, including decisions over the range of investments it provides, to meet the needs and characteristics of the identified target market.

A firm would be considered a co-manufacturer where they can determine or materially influence the manufacture of a product or service. This would include a firm that can determine the essential features and main elements of a product or service, including its target market. There may be multiple manufacturers for a single product or service. For example, an intermediary might design an investment fund and work with a fund manager to launch it, in which case both could well be co-manufacturers. Where firms collaborate in this way, they must have a written agreement outlining their respective roles and responsibilities and which firm is responsible for meeting different aspects of the rules under the products and services outcome so that, in the event of a problem, it is clear which firm is accountable.

Firms will need to continually monitor and update the product where necessary to ensure it continues to meet the needs of the customer throughout the product lifecycle. The new rules state that manufacturers must regularly review whether any aspects of closed products may result in the firm not complying with the cross-cutting rules. While the FCA is not intending to apply the Consumer Duty retrospectively, firms will need to review whether closed products meet the on-going requirements of the Duty.

The product must also take into account the risk of harm to consumers: for example, if a manufacturer is developing a higher risk product, it should take additional care to ensure it meets customers' needs and is targeted and distributed appropriately. There will be types of products (such as those that are higher risk) and types of services that may only be appropriate for certain types of customers or certain customer needs and firms will need to be particularly careful with these products.

Price and value

This outcome requires manufacturers to ensure that their products provide fair value to retail customers and to consider their value assessment when selecting distribution channels. Distributers must consider at least the following when assessing value:

• the nature of the product or service, including the benefits that will be provided or may reasonably be expected and their qualities;
• any limitations that are part of the product or service; and
• the expected total price customers will pay, including all applicable fees and charges over the lifetime of the relationship between customers and firms.

Distributors must obtain relevant information from manufacturers to understand the value a product or service is intended to provide and to enable them to understand whether their distribution arrangements (including any remuneration it or another person in the distribution chain receives) would result in the product or service ceasing to provide fair value to retail customers.

This means that the distributor will need to consider the cumulative impact of the remuneration added by each person in the chain on the overall value of the product to the customer. This is important as fees charged by different firms along the distribution chain might together result in a higher overall fee that does not represent fair value for consumers. This is likely to be particularly relevant where there are long or complex distribution chains with multiple fees added by multiple parties. In this scenario, each firm will need to work out its role in assessing value. For example, co-manufacturers of a fund where there is a delegation or sub-delegation arrangement must outline their respective roles in a written agreement.

Where different firms are involved in the distribution chain for an investment product, they all have responsibility to consider fair value as part of avoiding foreseeable harm and helping support customers in pursuing their financial objectives. For example, fund managers will need to ensure they assess whether their charges are justified in the context of the overall value of the product, and platform providers must ensure that they set fair value charges for using the platform. In some cases, the platform provider will be the final firm in the distribution chain. In this case, the platform provider will need to consider the overall impact of the remuneration added by each person in the chain on the value of the product to the consumer. It is important to note that an unreasonably high platform fee can sometimes undermine the value that an investor is getting from the products they are being advised to buy.

By way of example, if a platform provider is charging a high annual fixed fee (this can be the case if the platform has a lot of research on it) but low trading costs (this type of a model can be attractive to customers), but the data shows that customers are only investing relatively low capital with low frequency, this could be an indication that this may not be the right product for them and that the target market does not have a comprehensive understanding of the product. In this case, it would be prudent for firms to review their on-boarding processes as well as their literature to ensure that the products are directed towards the right target market. This would also be a good opportunity to examine whether certain groups of customers are paying higher fees and charges for a particular product (for example, are long standing customers paying a 'loyalty penalty' when compared to new customers?).

The FCA has provided some comfort in that where a manufacturer sets the final price that the retail customer receives, including distribution charges then they are responsible for ensuring that the product provides fair value. The distributor does not need to carry out a value assessment - though they must confirm that the manufacturer has carried out a value assessment and review the information shared by the manufacturer to understand the benefits for the target market before they distribute.

Price and value assessments should be supported by customer research and data collected on retail customers and should be scrutinised at board level.

Price and value assessments will require careful consideration of the fundamental ways firms make money from retail customers. The value assessment is wider than just financial considerations. For example, the non-financial costs customers may incur include the firms' use of customer data. If customer data is used to develop and sell new products and services, the firm should consider the value of this and factor it into the fair value assessment.

Finally, it is important to note that there are rules on 'fair and value', and 'value assessments' elsewhere in the FCA Handbook. For example, authorised fund managers will already be carrying out a detailed annual assessment of the value that their authorised funds deliver under the Collective Investment Schemes sourcebook in the FCA Handbook. It is useful note that where a fair value assessment has been carried out under other rules, there is no need to repeat the fair value assessment separately under the Duty. However, as mentioned above, the Duty covers all firms that manufacture or distribute products for retail customers which means that distributers including authorised investment fund managers managing unauthorised funds with retail customers will be required to demonstrate that they are providing fair value for the first time.

Consumer understanding

This outcome focuses on the whole consumer journey, and so goes beyond the existing Principle 7 (clear, fair and not misleading communications). This outcome will be particularly important for asset managers, as asset managers can act in situations where there can be significant information asymmetries and behavioral biases. Indeed, consumer harm arises where communications encourage customers to make decisions without full awareness of relevant information (especially in relation to costs and exclusions about a particular product or service). For instance, the FCA has identified poor practices in relation to charging information, including:

• a lack of succinct comprehensive list of charges being clearly sign-posted;
• information being spread out across different webpages;
• too many links to different sections and pages;
• omission of a clear statement of the interest applying to any cash held or the information being 'hidden away' in legalistically worded terms and conditions.

Asset managers must communicate in a way that customers can understand and offer appropriate customer support standards. Asset managers must support their customers' understanding by ensuring that their communications meet the information needs of customers and equip them to make decisions that are effective, timely and properly informed. The communications must also be tailored to take into account the characteristics of the customers intended to receive the communication - including any characteristics of vulnerability, the complexity of products, the communication channel used, and the role of the firm. In relation to communicating complex products, we recognise that some documents, such as the UCITS prospectus, require firms to communicate large amounts of relatively complex information to customers. This is where firms need to pay attention to the FCA's guidance on 'simple' communications. For example, where the use of jargon or technical terms is unavoidable, firms should explain the meaning of key terms in plain and intelligible language that retail customers are likely to understand. Expanding on this, the FCA has found evidence that having risk warnings that clearly describe the risks can help customers better understand the risks associated with high risk investments. The prescriptive nature of some customer communications (such as the UCIITS KIID or PRIIPs KID) means firms have little flexibility in adapting them. This is where firms need to pay attention to the FCA's guidance on 'layering' information. This is presenting information in a logical order with key information up front and signposting more detailed information in a logical order with key information up front and signposting more detailed information that can be accessed later on.

Importantly, the Duty requires firms to test communications before sending them out, and to monitor their impact regularly, where these steps are proportionate taking into account factors such as the scope for harm if retail customers misunderstand or overlook the information. In addition, in one-to-one interactions with retail customers, firms should use opportunities to check that customers understand relevant information provided to them, particularly if the information prompts the customer to make a decision. For asset managers, examples of communications that require testing and ongoing monitoring may include information on costs and charges, fund objectives and investment policy, risk and reward profile, performance and redemption terms. At Freeths, our Terms of Business have been given the Crystal Mark by the Plain English campaign, which is part of our work to test the clarity of our communications. This could be a useful starting point for asset managers, but data on consumer understanding should also be collected.

Firms should take particular care when communicating with consumers in vulnerable situations. Asset managers in particular should consider how they can accommodate the needs of vulnerable investors, who for example, may need to receive their money promptly on redemption or have difficulty with a particular communication channel. For example, some customers may find it difficult to take in information provided over the phone and have a need for written communications. Other customers may find written communications difficult to deal with and have a need for additional support. Firms will usually need to be able to provide support to their customers through different channels or by adapting their usual approach.

Firms offering more complex products and services should take extra care to promote, and monitor, customer understanding.

Consumer support

Under the consumer understanding outcome firms should communicate with customers in a way that equips them to make effective, timely and properly informed decisions. Under the consumer support outcome firms should enable customers to act on these decisions without facing unreasonable barriers.

The FCA states that in complying with customer support outcome, firms should consider their call waiting times. 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.

Asset managers should identify all channels of communication and support customers might access and consider how each of these channels will meet the new standards. In doing so, firms should ensure the various channels of communication meet the needs of customers, including customers dealing with non-standard issues, and customers with characteristics of vulnerability. For example, platform providers should be aware that badly designed websites that make it difficult for customers to find key information online are likely to be non-compliant. In relation to vulnerable customer redeeming investments, the guidance also states that unreasonable delays in making payments to retail customers will be non-compliant.