The FCA released the final guidance on its consumer duty at the end of July 2022. Initial industry reaction was mixed, with some taking the view that it is more work to achieve the same results as existing regulations like treating customers fairly.
However, now that several months have passed and we have all had time to digest the guidance, it is has become clear that this has been created to bring about significant change.
The consumer duty includes some nuanced language, which some felt was lacking in clear direction, but it is a regulation that aims to do good and help companies account for social risks.
And when you consider what it is trying to achieve – the betterment of outcomes for retail customers and the evolution of culture in the industry – its alignment with the social element of environmental, social and governance can be seen.
The FCA and ESG
At the end of 2021 the FCA shared its ESG strategy and headlined the release: A strategy for positive change. As may be expected, it mainly covered in detail its approach to environmental issues. However, there were several mentions of the importance of recognising the role of social issues in ESG.
In the strategy, the FCA says: “We will leverage the extensive work we have already done recently, and over the year, on governance and diversity, culture and purpose. This is essential as listed companies and the financial sector respond to society’s evolving expectations on environment and social matters.”
Considering it in that context, the link between the consumer duty and the social element in ESG, does not seem too much of a leap. Indeed, when translated into operational language it is a tool to support the management of social risks.
We will leverage the extensive work we have already done on governance and diversity, culture and purpose. This is essential as listed companies and the financial sector respond to society’s evolving expectations on environment and social matters FCAThere is no strict definition of what constitutes a “social” risk, but the UN-backed Principles for Responsible Investments has one, and says they are “Issues relating to the rights, well-being and interests of people and communities, identified or assessed in responsible investment processes”.
By applying this definition to the consumer duty, managing social risk will mean all companies will need to operate in a way that aims to maintain the well-being of customers and acts in the “interests of people”.
This behaviour is also very much aligned with the consumer duty’s consumer principle, and should then help them meet the expectation of delivering “good outcomes for retail customers”.
So what does this mean for advisers and investment providers?
By aiming to minimise the negative outcomes for retail customers and raise the bar for culture in the financial services sector, the consumer duty goes some way to regulate for the ‘S’ in ESG. However, there remains the question of exactly how companies best meet the guidance.
The consumer duty applies to all companies. It is clear that it represents a significant regulatory step aimed at getting market participants to not just integrate it into their daily operations, but also evidence how they are doing this.
Focus on three actions
The vast majority of advisers, platforms and investment providers (including discretionary fund managers) will most likely have been culturally and propositionally aligned with the intent of consumer duty for some time.
An immediate challenge for many is likely to be one of ensuring how they clearly evidence and document in a structured and logical fashion. Focusing on three actions in particular should help to meet the demands here.
First, putting a plan in place that is built to ensure that any project planning and key obligations are linked to the consumer duty’s deadlines and also support the development of the minimum requirement to annually assess how they are delivering on their obligations.
Second, to ensure there is clarity on roles and responsibilities, particularly board or senior manager accountability – because senior managers are responsible for the customer outcomes. For example, the board should ensure minuted discussions on their company’s approach to consumer duty are documented in their meetings.
All companies should also ensure they evaluate if they are classed as a distributor or a manufacturer under the consumer duty. This is very important, as the precise requirements under the consumer duty partly depend where a party sits on the distribution chain – most notably, if they are a product’s manufacturer or its distributor.
An example would be if an adviser designs an advisory portfolio, and then reuses it for a number of clients, there is a chance that this would mean the adviser falls into the manufacturer category.
If so, they would have to meet all the governance demands associated with this role, such as setting target markets and carrying out scenario analysis of the product, to confirm it meets the needs of its target market.
And if using any outsourced providers (including multi-asset funds, or model portfolio services), ask them for documentation outlining how they can evidence conformity to the consumer duty.
This is because the FCA is clear that where a company outsources aspects to a third party, it is the firm’s responsibility to make sure the support provided meets the guidance of the consumer duty.
Third, document how your proposition(s) deliver on the four key consumer duty outcomes. These being the governance of products and services, price and value, consumer understanding, and consumer support.
Clarity is the key theme
The key theme across all the outcomes is clarity, on both the nature of a product and its intended target, as well as evidence of robust governance processes being in place across a product’s lifecycle.
The FCA also wants companies to maintain a good understanding of the meaning of value. It is not purely about price, but instead about assessing if the price the end-customer pays is reasonable given the products benefits. This means that companies need to be clear on whether or not they can set out the benefits associated with the product in question.
Consumer duty at its heart is a desire to protect end retail investors, with the ultimate goal of enhancing their future outcomes – which must surely be viewed as a positive.
William Marshall is chief investment officer and head of tailored model portfolios at Hymans Robertson Investment Services.
