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Less than a week after releasing the results of its Consumer Duty implementation plan review, the FCA has published a Dear CEO letter to firms in the consumer investments market. The letter outlines expectations in the sector and clarifies some specifics on the application of the Duty. The regulator also reiterates its intension to act ‘quickly and assertively’ where firms are not meeting its requirements.
The volume of communications on Consumer Duty is not letting up. The implementation plan review has followed numerous podcasts, regional in-person events with groups of firms, regular updates to the website and Dear CEO letters. An implementation progress survey is also in the offing. It seems the FCA is leaving nothing to chance when it comes to reiterating the seriousness of the changes required.
One of the takeaways of the implementation plan review was that some firms are not far along enough in their implementation efforts, particularly with regard to collaborating with other firms in the distribution chain. It’s a message reiterated by the FCA in the Dear CEO letter, alongside additional pointers on what it expects to see.
Priorities for the consumer investments market
The FCA highlights four main areas in the consumer investments market where focus is needed:
- Mainstream investments – the FCA is worried about the fair value consumers receive from, particularly, platforms and financial advisers. These firms are reminded of the need to conduct a value assessment for products and services they manufacture and distribute.
- Higher risk investments – the concern here is with consumers investing in unsuitable products. If you’re a manufacturer, you need to ensure products and services meet the needs of the target market and are distributed appropriately. Trading apps are specifically mentioned, which isn’t a surprise given their ‘gamified’ systems and high usage among younger, less experienced investors.
- Scams and fraud – the FCA wants firms to take steps to protect their customers from the risk of fraud and scams, and to support them when these occur. Steps might include training customers for scam-awareness, and implementing systems and controls to prevent transfers to fraudulent investments.
- Consumer redress – firms are encouraged to take appropriate action when they identify they have caused harm, which may include redress. Potentially the thorniest point considering what constitutes ‘harm’ will require a judgement, and there will need to be an assessment of a firm’s responsibility for the harm. The key will lie in the cross-cutting rule to act in good faith, and in what steps the firm took to mitigate the risk of the poor customer outcomes that resulted in the harm.
Clarity on the application of the Duty
In addition to those four areas of focus, several points of clarification are given in the letter on the application of the Duty in the consumer investments market. Firms that have studied the Policy Statement and Finalised Guidance will recognise that these points have all been made before, but the clarity is useful in some areas. Some of the highlights are:
- All firms in the distribution chain for a product or service that will reach an end retail customer are caught. This is a point the FCA has made in various forms consistently and is one of the biggest changes brought in by the Duty. Some firms may be struggling with the change in approach that this new ‘look-through’ concept brings, especially fund and asset managers who previously considered that they only provide their services to institutional/professional entities.
- Although seemingly sympathetic to the challenges firms in the distribution chain will face in communicating information among themselves, the FCA nonetheless reiterates the requirement to do so, especially to comply with the April and July deadlines. It says that it is “essential for firms to recognise this: we expect firms to invest the time and commitment to meet these deadlines.”
- Principal firms need to develop frameworks to ensure their appointed representatives are compliant with the Duty. Similarly, the FCA is concerned about unregulated introducers, and expects firms to maintain scrutiny and oversight of their introducers.
- The Duty applies to firms providing services, such as managed portfolio services and advice, as if those services are ‘products’ and the firm is the ‘manufacturer’. The firm may also be a distributor of products manufactured by other firms, such as funds.
- Co-manufacturers must have written agreements in place outlining the responsibilities of each party.
- It is not expected that firms ensure customers receive good investment returns, as investments inherently carry a risk of loss. Remember, investment performance is not a customer outcome for the purposes of the Duty.
- Similarly, firms are not expected to protect customers from risks that they ‘reasonably believed’ the customer understood and accepted.
- The Products and Services outcome, and of course the Duty as a whole, is broader than PROD. Whereas the FCA has stated that complying with PROD will infer compliance with the Products and Services outcome, they seem to be adjusting their stance slightly.
- Distributors such as financial advisers and platforms must consider the ‘total costs of solution’ of each product and service, which is made up of their own charges combined with other charges the customer is paying (for example, to other firms in the chain), when assessing fair value.
A culture change is needed
There are helpful pointers at the end of the letter on cultural change. Firms are advised to view their activities from the perspective of the end retail customer, and to consider what impact their activities have on the customer. It’s true that processes alone won’t be sufficient for Consumer Duty compliance. An implementation project that starts from the point of asking what the firm can get away with against the black-and-white rules will be doomed to fail. You need to look at the outcomes of your activity and work backwards using your best honest judgement.
The FCA says in the letter that the Duty will drive its supervision strategy and prioritisation over the course of the next couple of years. In addition, firms are warned that they can expect the FCA to act much more quickly and assertively where firms are not meeting their requirements under the Duty. Therefore, it is crucial to do all you can in this next six-month implementation period to get into good shape for when the rules come into force.
How we can help
We are currently working with firms across the consumer investment space on their implementation efforts.
If you would like us to review your implementation plan against the expectations outlined in the FCA’s recent review – or need help with any aspect of Consumer Duty, get in touch.