At a Glance
Boards of investment managers in scope of the FCA’s Consumer Duty (”the Duty”) are expected to sign off on implementation plans by the end of October 2022. Since the Duty rules are wide-ranging and firms will have little time to implement them, firms will need to have a robust approach, including on governance, scope, gap analysis, key deliverables, budget and resourcing. In our view, Boards should pay particular attention to:
- how the scope of the Duty applies to the firm’s business, and how the firm understands its roles and responsibilities;
- having effective governance arrangements, including an appropriate committee structure and clear lines of responsibility;
- ensuring that the implementation plan is realistic and sufficiently resourced, including how the actions have been prioritised given the short timeframe for implementation;
- the need for the plan to allow the Board sufficient time to shape the management information (MI) report that it will receive to demonstrate compliance with the Duty;
- the need to engage early with third parties to prepare for the Duty;the impact of the Duty on the firm’s business strategy; and
- how they can satisfy themselves that the firm’s culture promotes good customer outcomes.
Overview
The FCA’s new Consumer Duty rules and guidance, which are intended to create a “paradigm shift” in the way consumers are treated by the financial services industry, are top of mind for in-scope investment managers. The FCA expects that, by 31 October 2022, Boards should have scrutinised and challenged their firm’s implementation plan to ensure it is deliverable and robust enough to meet the new standards. The FCA has said that firms should expect to be asked to share implementation plans, Board papers and minutes with supervisors. In practice, many asset management groups will have more than one regulated legal entity, and each regulated entity Board will need to approve its own plan.
The FCA does not necessarily expect firms to have fully scoped all the work required to embed the Duty by October, but expects firms’ plans to be sufficiently developed to provide Boards with assurance that the Duty will be fully implemented on time. In our view, the October Board report should set out how the scope of the Duty applies to the firm, the governance framework that will be applied to implementing the Duty and subsequently monitoring compliance with it, a gap analysis of the new requirements against existing arrangements, key deliverables, budget and resourcing.
Boards need to satisfy themselves that the plan is robust enough to deliver good customer outcomes rather than simply being a “tick-box” compliance exercise. In this blog we set out some of the key issues that Boards of investment management firms may want to consider.
Key Considerations for Boards
Scope
The Duty applies to those products and services through which the firm can materially influence customer outcomes. The scope can be complex to determine, especially where firms do not have a direct relationship with retail customers and there are multiple entities in the distribution chain. Boards will need to ensure that firms have a clear view on:
- which products and services are in scope;
- whether the firm is a product manufacturer, co-manufacturer or distributor; and
- for indirect relationships with retail clients, the extent of the firm’s responsibilities under the Duty, which will depend on its role and impact on retail customer outcomes.
Boards should scrutinise and challenge their firm’s conclusions on how the Duty applies to its business. Defining the scope too narrowly could leave firms open to conduct risk, while a very wide scope could be costly. Boards will need to satisfy themselves that any decision remains within their risk appetite. It is also important that firms agree up front with other entities in the distribution chain who is responsible for what under the Duty - Boards will need to be informed if there are any disagreements with other entities on this, and will need to ensure they are resolved in a way that is consistent with the firm’s risk appetite.
Governance
As noted in oursurvey, investment managers are giving responsibility for overseeing their compliance with the Duty to a range of different committees, including the Board Risk Committee, Product Governance Committee, Conduct Risk Committee, or a new committee specifically set up for the purpose. In some cases, terms of reference and membership have had to be reviewed to align the remit of the committee with the scope of the Duty. We think that it is essential for the plan to be clear on which committee will take primary responsibility for the Duty, which other committees will provide reports and MI to that committee, and what reports that committee will provide to legal entity Boards and the Group Board.
In addition, firms need to ensure that senior individuals are held accountable for delivering the Duty in their areas. As part of this, we think firms should set out clear lines of accountability early on. For enhanced scope SM&CR firms, this will include updating their responsibilities maps. Firms also need to ensure that individuals are incentivised to deliver good customer outcomes, so should review their people and incentive policies.
Boards will also need to appoint aDuty Champion, preferably an independent non-executive director. While the Duty Champion is not responsible for the firm’s implementation of the Duty, they are responsible (alongside the Chair and CEO) for ensuring that the Duty is raised in all relevant Board discussions and that the Board is challenging the firm’s management on how it is embedding the Duty and focusing on customer outcomes. We think it would be best to appoint the Board Champion early so that the individual can play an active role from the start in discussions about implementing the Duty, as well as broader discussions such as on business strategy and culture. Firms should consider what training will be provided to the Duty Champion and other Board members, as well as training for all conduct rules staff.
Gap analysis and key deliverables
Having reviewed firms’ gap analysis and key deliverables, Board members should scrutinise how firms are prioritising actions to implement the Duty. Given the short timeframe for implementation, we think firms should take a risk-based approach, prioritising those areas where there is a greater conduct or compliance risk. For many firms, the biggest gaps will include value assessments and customer communications testing. In our view, across each of the four outcomes firms should identify and prioritise the highest risk areas - such as which products could be at greater risk of causing customer harm, which communications are the most important to test etc.
We think it will be important for Boards to understand what MI will be presented to them to demonstrate compliance with the Duty so that they have sufficient time to shape the MI report. The MI needs to be sufficient to demonstrate good customer outcomes, which goes well beyond demonstrating compliance with policies or processes. Our paper on Improving Customer Outcomes Testing provides some practical advice on this. Boards should ensure that their implementation plan allows sufficient time for them to shape the MI report.
Boards will also want to understand the process and timeline for how the firm will review its risk appetite statements. Firms will need to decide how to apply subjective concepts under the Duty, such as “foreseeable harm”, “acting in good faith” and “reasonableness”. They will also need to consider their risk appetite under each of the four outcomes - for example, which customer communications should the firm test and how, and what actions should it take based on the results, given that financial literacy levels amongst retail investors are typically relatively low.
Since the FCA has emphasised the importance of having a culture that is conducive to good customer outcomes, Boards should consider how they can satisfy themselves and regulators that they have embedded such a culture within the firm. Our paper on Culture in financial services provides more detail on how Boards can go about this, including consideration of the firm’s purpose, the “tone from the top”, diversity and inclusion, and psychological safety.
Boards may also wish to ask whether the impact of the Duty on other change projects has been fully considered. For example, if a firm is creating a new digital platform or updating its marketing communications, these projects need to be in line with the Duty’s requirements to prevent further work being needed in a few months’ time.
Engaging with third parties
The FCA has said that firms should ensure their plan allows enough time for any work needed with third parties to prepare for the Duty. We think that investment managers should engage early with both outsourced service providers and distributors to discuss what information they need to obtain from them. Where information from third parties is difficult to obtain (e.g. information from distributors on end client data trends), investment managers will need to be prepared to exert commercial pressure.
Investment managers will also need to plan when they will share information with third parties. The FCA has said that firms should share relevant information with distributors by April 2023, but sharing information as it becomes available might be preferable to avoid a very busy period between April and July. It is in the interests of investment managers to give distributors sufficient time to review the information on their products, to minimise the risk that distributors decide to stop distributing their products e.g. if they cannot demonstrate compliance with the Duty.
Firms will also need to consider how to comply with the new requirements to notify the FCA if they become aware that another firm in the chain is not or may not be complying with the Duty, and to notify another firm in the chain if they think the firm has caused or contributed to harm to retail customers. Boards will need to ensure that their firm considers from both a legal and process perspective how it will collate information it receives about what other firms are doing and what information will be notifiable.
Resourcing and budgeting
Boards should scrutinise estimates of how much resource and budget are needed for implementation, including staff, processes and systems, and ensure that the resources allocated are sufficient to deliver the project in line with the firm’s implementation approach. Implementing the Duty is likely to be an iterative process so Boards may want to consider how much budget should be earmarked for the medium term, in case costs increase. Many firms are facing resource stretch so Boards may need to provide a view on whether any other projects need to be de-prioritised in order to dedicate resources to implementation.
Impact of the Duty on business strategy
The requirements of the Duty will have implications for firms’ business strategy. For example:
- the results of value assessments may affect firms’ pricing, product design or distribution strategy;
- firms may need to adapt their customer communications or products and sales processes if customers do not understand their communications;
- firms will need to review the design, target markets and distribution strategies of their products and services in light of the products and services outcome requirements (including its focus on vulnerable customers); and
- firms will need to decide how much to invest in customer support in view of the Duty requirements, including the fact that they will not be allowed to give preferential treatment to new or prospective customers.
Boards will need to ensure that the implementation plan allows sufficient time for them to review and challenge the firm’s approach to these strategic issues.
Conclusion
Given the short timeframe for implementing the Duty, it will be crucial for firms to have a robust, realistic and adequately resourced implementation plan with well-prioritised actions. We think Boards should focus on ensuring that the firm’s implementation approach is robust enough to deliver good customer outcomes and that the firm prioritises those areas where there is the greatest risk of customer harm. To support this, there needs to be strong governance with clear lines of responsibility. Whilst meeting immediate regulatory deadlines will understandably be a priority for Boards, they should also pay attention to the firm’s culture, as this will be essential to deliver lasting results.
Further insights
For more insights on how the Duty will affect investment managers, please see our other blogs:
- How will the FCA’s proposed Consumer Duty affect asset and wealth managers? (here)
- Results of our Investment and Wealth Management Survey on the impacts of the FCA's Consumer Duty (here)
- FCA finalises Consumer Duty rules (here)
