| UK & Europe | Articles
As the new Consumer Duty regime reaches another milestone, it’s a good time for in-scope brokers to check their progress. Wherever you are in your implementation project, there are six questions you should be asking to make sure you’re on track to meet your obligations.
Brokers: manufacturers, distributors or both
First, a quick recap. Given the nature of brokerage services, most brokers who are in scope for Consumer Duty are likely to be categorised as manufacturers or co-manufacturers of the investment services through which they distribute investment products to retail clients. In such cases these brokers are likely to be seen as both manufacturer and distributor.
The Consumer Duty requires that by the end of April 2023 manufacturers should have completed all of the reviews necessary to meet the Duty’s four outcomes rules and share the information their distributors need to comply with their own obligations under the Duty.
In particular, manufacturers are expected to understand and assess how their products or services could cause foreseeable harm to customers or exacerbate any potential vulnerabilities in the target market. Distributors are expected to use the information they receive from manufacturers to review their business model and determine how it impacts their products and services and, where necessary, further refine their target market.
This means you need to know and understand your retail target market inside out AND ensure the products and services you provide for your customers are right for their needs.
Assessment checkpoint
Now the assessment phase is in full swing, firms are no doubt looking at their products and services through the lens of the four outcomes rules. As a checkpoint, there are six key questions you should be asking internally.
1) Are there any inherent conflicts of interest in your business model that might have influenced your product range and fair value assessment?
This can be quite a challenge for some firms whose business model and profit are derived from customers trading more frequently or in larger volumes than they would otherwise have done or where the products or services on offer appear to be benefiting the firm the most, rather than delivering good customer outcomes.
2) Has your target market been identified at a sufficiently granular level and taken account of potential customer vulnerabilities that might exist?
Many brokers are likely to leverage off the target market assessment aspect of their existing Product Governance for compliance with the Duty. If that is the case, it is essential that the existing framework is uplifted to ensure it is granular enough and capable of considering outcomes for different groups. It also needs to incorporate an assessment of potential vulnerabilities.
3) Have you considered all the characteristics of the services offered and how they might cause foreseeable harm to customers?
Firms offering investment accounts or investment platforms need to ensure they design and operate them in a way that helps their customers make good investment decisions. They also need to avoid causing foreseeable harm. This includes thinking carefully about the range of products they allow customers to access through their services; the content of the information given to customers to inform their investment decisions and the ongoing support they provide.
For firms selling complex products, in addition to a robust appropriateness test, they also need to ensure customer journey into such a higher risk investment be built with appropriate risk warnings and positive frictions, in line with the recent changes to the financial promotion rules for Restricted Mass Market Investments and Non-Mass Market Investments.
4) On top of expected costs and charges, are your products or services still offer value when you take into account any non-monetary costs or benefits?
This goes beyond the requirements of being clear with your customers on your expected costs and charges. It requires a consideration of whether the benefits customers may gain, for example, from having access to a wide variety of products might be offset by the potential opportunity costs of some of the products being less liquid.
5) Are customers given the information they need to make informed investment decisions through all your communication channels?
This is more than about being clear, fair and not misleading. Under the Duty you need to make sure customers are given the right information at the right time to support their investment activity. It’s also worth noting the FCA warning to the industry on the use of social media influencers that target younger consumer with lower level of financial literacy or the use of design features which may be linked to consumer harm such as the use of trader leader board or falling confetti celebrating a stock trade.
6) What support is available for customers, especially those with vulnerabilities?
Among other things, this should tie back to the target market assessment. Firms need to take account of the level and nature of the customer support their target market needs, including how to deal with any identified vulnerabilities.
How we can help
We are currently working with firms across the broking space on their implementation efforts.
Our team of experts can help you with various aspect of Consumer Duty, from preparing target market assessment, carrying out a health check on your implementation progress to building an implementation plan from scratch for your FCA authorisation application.
Get in touch
