Raising asset management standards with the Consumer Duty

July 1, 2024

Key Takeaways

  • The Duty demands a higher standard of care for retail investors.
  • Implementation requires a cultural shift in asset management.
  • Proactive compliance mitigates the risk of regulatory action.

The Financial Conduct Authority (FCA) introduced the Consumer Duty in July 2022, marking a significant shift in expectations for asset managers. This new regime prioritizes consumer outcomes, demanding a higher standard of care for retail investors. Understanding the implications of the Consumer Duty is crucial for asset managers to navigate this landscape and ensure they are meeting the evolving needs of their clients.

Whilst the deadline for implementation in relation to new and existing products and services that are open to sale or renewal expired on 31 July 2023, the work for firms within its scope is not finished, according to the FCA’s “Not once and done” speech.

The situation is more pressing for firms with closed products and services that are no longer on sale to new customers or available for renewal by existing customers, as the implementation deadline of 31 July 2024 is fast approaching.

Core principles of the Consumer Duty

The Consumer Duty is built on three core principles:

  • A duty to act in the interests of customers, with an emphasis on putting the customer first and ensuring all decisions and actions contribute to positive outcomes for them.
  • A duty to avoid foreseeable harm by proactively identifying and mitigating potential risks that could harm customers financially or otherwise. This includes risks associated with product design, distribution practices, and communication.
  • A duty to enable customers to make informed decisions by providing clear, concise, and timely information tailored to their understanding and risk tolerance.

These principles translate into key outcomes the FCA expects asset managers to deliver.

Products and services meet the needs of identified customer groups, meaning asset managers must design and distribute products suitable for the target customer base. This involves thorough customer understanding and ensuring features and fees align with their investment goals and risk appetite.

Distribution must be fair and not misleading. The distribution process, whether direct or through intermediaries, should be transparent and avoid pressure selling tactics. Customers should be presented with all relevant information to make informed decisions.

The price must be fair and represent value for money. Fees should be transparent and justify the value proposition of the product or service. Asset managers must demonstrate the benefit customers receive for the costs incurred.

Customers should have access to effective communication channels and receive clear, responsive assistance with inquiries or complaints.

Impact on asset managers

Consumer Duty demands a more customer-centric approach at all levels of an asset manager’s business. Products should be designed with specific customer segments in mind, considering their financial knowledge, risk tolerance, and investment objectives. Existing products need to be regularly reviewed to ensure they continue to meet customer needs and deliver good value. Even if they don’t directly deal with retail clients, asset managers are still in scope if their products reach retail investors through distributors.

Asset managers must carefully select and oversee distributors, ensuring they are appropriately equipped to explain products clearly and avoid unsuitable recommendations. Fee structures must be transparent and linked to the value delivered, justifying fees and demonstrating how they benefit customers. Communication with customers should be clear, concise, and tailored to their level of understanding. Information covering product features, fees, risks, and performance should be readily available. Customer service channels should be easily accessible and provide timely assistance to inquiries and complaints.

Implementation and ongoing monitoring

The Consumer Duty is a principles-based framework that allows flexibility in implementation but demands a robust and documented approach. Asset managers need to establish a clear governance framework, including senior management buy-in, assign clear ownership of the Duty, and embed it within the firm’s culture. Regular reviews of products, distribution practices, fees, and communication channels are required, with ongoing evaluation to ensure they continue to deliver good outcomes for customers.

Identifying relevant customer segments and understanding target customer groups and their needs is crucial for tailoring products, communication, and support. Embedded data and analytics are essential to understanding customer behavior, identifying potential risks, and demonstrating compliance with the Duty. Asset managers must prioritize delivering good consumer results, not just follow procedures.

Implementing the Duty requires a cultural shift within asset management firms to assess their existing processes and potentially overhaul them to prioritize consumer needs. Disparities between regulations in different countries could make compliance complex for international asset managers, so thorough analysis and risk mitigation for this is vital.

Benefits of embracing the Consumer Duty

While implementing the Consumer Duty requires effort and potential changes to existing processes, it offers several long-term benefits.

A customer-centric approach fosters trust and loyalty, building a stronger brand reputation. Asset managers can develop stronger relationships and drive customer satisfaction by prioritizing customer needs and delivering good outcomes.

Proactive compliance with the Duty mitigates the risk of regulatory action and associated financial penalties, while focusing on long-term customer value cultivates a business model that can weather market fluctuations.

The Consumer Duty represents a significant step forward within the asset management industry. Those who embrace it will be well-positioned to build trust, navigate regulatory scrutiny, and achieve sustainable business growth.

ION Markets

Don't miss out

Subscribe to our blog to stay up to date on industry trends and technology innovations.