The Consumer Duty and UK Regulated Funds

Books hero photo
Tim Cornick photo
Tim Cornick

The FCA’s Consumer Duty obligations go live on 31 July 2023. The Duty applies across retail financial services and this will include providers of UK regulated funds (unit trusts and open ended investment companies) to the extent that they are distributed to retail customers. In what follows, the terms “customer” and “consumer” are used interchangeably.

As a reminder, the Duty comprises a new FCA Principle that firms should act to deliver good outcomes for retail customers. This supplements the existing Principle 6 - that firms should pay due regard to the interests of their customers, and treat them fairly.

The new Principle is underpinned by three “cross‑cutting” rules requiring firms to:

– act in good faith

– avoid causing foreseeable harm

– enable and support retail customers to pursue their financial objectives

Those first two rules seem an odd addition in that, if a firm did not act in good faith or led its clients into foreseeable harm, it would likely face legal consequences anyway, even if those rules were not there.

Finally, FCA wishes to see four outcomes, representing “key elements of the firm‑consumer relationship which are instrumental in helping to drive good outcomes for customers”. These outcomes relate to:

products and services – products must be fit for purpose and designed to meet the needs of consumers;

price and value – products must provide fair value to consumers;

consumer understanding – firms must support consumer understanding by means of communications which meet consumers’ information needs in an understandable way and enable them to make effective, timely and properly informed decisions;

consumer support – firms must provide support to consumers which meets their needs, and enables them to use a product as anticipated and to communicate with the firm during the life of the product.

So what does this mean for firms providing UK regulated funds to retail customers?

The FCA’s Finalised Guidance (FG 22/5) states that a firm must develop each fund to meet the needs, characteristics and objectives of a target market of customers. It must develop an appropriate distribution strategy and set charges to provide fair value to customers. The firm must also communicate in a way that customers can understand and offer appropriate customer support. It must review each fund regularly to assess whether it meets the needs of the target market, offers fair value and has been distributed appropriately.

As regards the products and services outcome, compliance with the Product Intervention and Product Governance Sourcebook (PROD) is important. FCA notes that PROD sets similar requirements on the design, approval, marketing and management of certain products throughout their lifecycle. If a firm’s product is subject to the rules in PROD, the firm must continue to comply with those rules and the new rules in relation to the Duty do not apply to the firm for that product. Most providers of UK regulated funds should already be complying with PROD and FCA states that this “will demonstrate that the firm is not in contravention of the products and services outcome”.

Similarly, in relation to the price and value outcome, compliance with the Collective Investment Scheme Sourcebook (COLL) on assessment of value is important. FCA states that firms which meet those rules will meet the price and value outcome. Providers of UK regulated funds must, of course, carry out an annual assessment of value under COLL.

The consumer understanding outcome builds on FCA’s existing Principle 7, that firms must pay due regard to the information needs of their clients, and communicate information to them in a way which is clear, fair and not misleading. But the new rules go further by requiring firms to support their customers’ understanding by ensuring that their communications meet customers’ information needs, are likely to be understood by customers, and equip them to make decisions that are effective, timely and properly informed. Firms must tailor communications, taking into account the characteristics of the intended customers. Firms must test, monitor and adapt communications to support understanding and good outcomes for customers.

The obvious action point here is that firms need to review fund literature and the content of websites. Of course, firms should already be doing this routinely. The guiding principle will remain “clear, fair and not misleading”.

As to the consumer support outcome, the FCA expects firms to design and deliver support that meets the needs of customers; to ensure that customers can “use” their products as reasonably anticipated; to ensure they include “appropriate friction in customer journeys” to mitigate the risk of harm and give customers sufficient opportunity to understand and assess their options; to ensure that customers do not face unreasonable barriers during the lifecycle of a product or service; to monitor the quality of the support they are offering, and act promptly to address shortcomings; and to ensure they do not disadvantage particular groups of customers.

It is not entirely easy to assess what this means in practice in the context of a regulated fund. This is not a complicated product. You buy it; you hold it; you can redeem at any time.

So in the context of regulated funds, it may be that in practice firms’ obligations will not change significantly. But firms will need to be able to demonstrate that they have taken on board the new Duty. In this regard it is helpful that FG 22/5 includes a list of key questions which firms can expect to be asked by FCA in relation to achieving the four outcomes. Obviously, firms would do well to have answers to these questions before the FCA knocks on the door.

A difficult issue for fund providers is, of course, identifying who the ultimate customer actually is. The retail funds business is heavily intermediated – fund provider; platform; advisor/wealth manager; end investor.

The FCA recognises that distribution chains for retail market business can be “long and complicated”, and that fund managers selling via platforms will not know if other distributors are involved or if their funds are being sold outside their target market. FCA floats the thought that fund providers could send a periodic survey to distributors, or ask the next firm in the chain for relevant information, including the identity of other firms in the chain. But FCA recognises that, where there is a complete lack of information and no ability to find it, providers may not need to take any further action. But that is no excuse for not trying.

For the record, the final rules implementing the Duty can be found in Appendix 1 to FCA’s Policy Statement PS 22/9.