Despite five-plus years of detailed preparation to land a human on the moon, NASA’s Apollo 11 rocket on take-off in 1969 kept everyone on their toes with a sense of unease that things may still not work as planned.
Similarly, asset managers have been on a long five-year preparatory journey on the duty of care to consumers.
Despite investing significant resources, producing assessment of value reporting since September 2019, many continue to feel a sense of uncertainty on whether their management information and processes are mission-critical ready and if they have done everything reasonably possible to deliver a good outcome for their retail customers.
On July 31 the Financial Conduct Authority’s new consumer duty rocket took-off for existing products and services across all authorised firms who have a material influence over retail customer outcomes.
The new consumer duty regulation is a combination of principle, cross-cutting rules, and expected outcomes framework that is underpinned by the concept of reasonableness.
Furthermore, on May 31 the European Securities and Markets Authority published and highlighted the importance of periodic independent reviews of cost and fee structures to ensure that investors are paying fees commensurate to the returns and risk profile of the fund.
The time to deliver data effectively with an emphasis on price and value reporting frameworks that demonstrate value delivered to customers is becoming increasingly important.
What is consumer duty and why is it important?
The consumer principle sets an overarching expectation to deliver a good outcome to consumers, the cross-cutting rules set anticipated behaviours, while the four desired outcomes for products and services, price and value, customer understanding and customer support, provides the rules and guidance representing key elements of the firm-consumer relationship.
The duty is designed to protect retail consumers by putting an obligation on firms to act in consumers’ best interests.
The duty applies to all FCA-regulated entities that have a material influence over retail customer outcomes across the distribution chain and throughout the full lifecycle of products and services.
No doubt the debate and evolution will continue on classifications of fairness, good outcomes, and price and value peer groupings for benchmarking.Furthermore, it requires asset manager governing bodies to properly embed the duty by making senior managers accountable for the outcomes under the senior manager and certification regime.
Based on the broad summary of the regulation above, regulated firms and the FCA will have considerable challenges to monitor, supervise and enforce the new consumer duty regulation.
Moreover, ensuring success will require significant cultural and behavioural changes, for example, in addition to reactive tracking, firms will now have to undertake extensive proactive testing and tracking of outcomes for both existing and vulnerable customers.
The implementation challenge
The FCA required all firms to be substantially ready by July 31 and expects boards to take full responsibility for ensuring the duty is properly embedded and senior managers are fully accountable throughout the lifecycle of products and services.
This is not a straightforward process, for example the distribution chain for products may involve multiple intermediaries comprising of platforms, financial advisers, who then service multiple retail customer groups.
Identifying weakness gaps within this distribution chain and remedying to deliver a good outcome for all types of customers, including the vulnerable group, will be a huge communication and logistical challenge.
The implementation challenges for firms in terms of collecting the data, managing metrics and management information systems, to monitor and document assumptions, tests, customers’ outcomes will also require significant investment in resources and systems.
It would be naive to underestimate the additional effort needed to discharge the vulnerable customer responsibility, given the potential size of this segment and its multiple touch points throughout the lifecycle of the products and services.
According to 2020 Financial Lives survey data, 46 per cent of UK adults, equivalent to 24mn people, were found to show one or more characteristics of vulnerability.
As the FCA enforcement satellite orbits the duty, it will be equally challenging to supervise and enforce the outcomes on all regulated firms.
To assist firms to evaluate a fair value framework, the FCA, in May 2023, published its findings from its review of 14 fair value assessment frameworks.
Ensuring success will require significant cultural and behavioural changes.The areas it recommended for further considerations were:
- monitoring, evidencing and embedding requirements fully to cover all products and customer groups;
- clear accountability and effective prioritisation of mitigating plan; and
- clear documentation and presentation of fair value assessment reporting so decision-makers can assess and discuss delivery of value including limitations.
Based on the guidance expectations and the implied language, it is likely that price and value assessment reporting may become the centre-piece for monitoring fair value outcomes to customers.
This will consist of a combination of internal and external benchmarking of products, fees charged commensurate to costs, customer expectation of value delivered, and the risk of harm to vulnerable customers, including plans to address the risks.
What’s the message for consumer duty reporting in 2023 and beyond?
The UK’s consumer duty took effect from July 31, and no doubt through 2023 the debate and evolution will continue on classifications of fairness, what constitutes good outcomes, and price and value peer groupings for benchmarking.
Independent analysis and metrics validation will provide a meaningful common platform for the board and management to review, discuss, and determine if a fund is providing fair value to its customers.
This will mean that boards could be challenged on their convictions and beliefs when making choices on selecting benchmarking peers.
Regardless, each of us in the investment industry has a role to play and an obligation to build trust with our customers and strive for quality and integrity in delivering good outcomes for all our customers.
The key for us as an industry as we face scrutiny is not only if we are reasonably delivering good outcomes to our customers in 2023 and beyond, but at all times learning and reaffirming the effectiveness that what is being reported actually represents reality.
Delivering fair value to consumers is here to stay and will become extremely important across Europe given the recent announcements from the European Commission of their plans to also introduce fund cost and performance benchmarks.
Afzal Amijee is commercial director of Broadridge Fund Communication Solutions
