Just over a month ago, the FCA published their final guidance on the upcoming rules that comprise their new Consumer Duty. These rules are being put in place to set higher and more precise standards of consumer protection across the financial services world, requiring firms to put their customers’ needs first.
This is another step forward on the FCA’s journey to becoming a more data-led, effective regulator.
While the requirements and timeline for its implementation have not deviated substantially from their original rule proposals at the start of the year, we will take a look at some of the most pertinent information and dates all asset management firms need to be aware of as these new rules come into effect.
What is the FCA Consumer Duty Exactly?
The new rules put forward by the FCA for the Consumer Duty are aimed at protecting consumers of financial services. The main emphasis is on financial service firms taking responsibility for providing a higher standard of care and protection for their customers. This means, for example, consumers should receive communications they can understand, products and services that meet their actual needs and offer fair value, and that they have access to the customer support they need when they need it.
Sheldon Mills, Executive Director of Consumers and Competition, said:
‘The Consumer Duty will lead to a major shift in financial services and will promote competition and growth based on high standards. As the Duty raises the bar for the firms we regulate, it will prevent some harm from happening and will make it easier for us to act quickly and assertively when we spot new problems.’
The FCA has stated that there is no fixed or ‘one size fits all’ approach to monitoring by a firm for determining if it is compliant with the new Consumer Duty requirements. On this journey, they are encouraging firms to use their own judgment.
The Consumer Duty is predominantly made up of 3 core elements:
- Principle 12
- The Cross-Cutting Rules
- The Four Outcomes
Principle 12 speaks to the new high standard of behaviour required of firms by the FCA.
The Cross-Cutting Rules outline the FCA’s expectations for firms to deliver good customer outcomes, by applying the following requirements:
- Firms must act in good faith toward retail customers
- Firms must avoid foreseeable harm to retail customers
- Firms must enable and support retail customers to pursue their financial objectives
The above are then supported by the Four Outcomes – Rules and Guidance with more detailed expectations in four areas:
- Governance of products and services
- Price and value
- Consumer understanding
- Consumer support
What is the timeline for the FCA Consumer Duty to be implemented?
- End of October 2022 – Firms’ boards (or equivalent management body) should have agreed on their implementation plans and be able to show evidence they have scrutinised the plans and meet the new standards.
- End of April 2023 – Manufacturers should aim to complete all the reviews necessary to meet the Four Outcome Rules for their existing open products and services, and have shared these with distributors to enable them to meet their obligations
- End of July 2023 – Firms are required to implement the rules for open products and services
- End of July 2024 – The Consumer Duty will come fully into force, and apply to all closed products and services.
How will this affect Asset Management firms?
Many industries within financial services have been working for years on improving their customer service and protections while digitising their offering to give an impressive customer experience. Asset management firms, however, have fallen behind in this respect. There are plenty of tech-focused, data-led, consumer-oriented asset management firms, but they are playing catch up. The FCA is hoping to nudge them along with their Consumer Duty rules.
Sheldon Mills further lays out the expectation on firms, “the new duty will drive a change in culture at firms. We expect firms to step up and put consumers at the heart of what they do, and we’ll be holding senior managers accountable if they do not.”
As well as having to review their product offerings, asset management firms will need to reimagine how they actually understand their consumers and revisit the entire journey they take their customers on. From the initial marketing to onboarding and beyond. They will then need to be able to measure and report on these steps, showing how they are staying compliant with the new rules.
What are the biggest challenges asset managers will face with the new rules?
- Defining, monitoring, and reporting on ‘Good Customer Outcomes’
Creating a system for monitoring and reporting on what good outcomes are for customers is definitely going to be a challenge. Firms that have the correct data governance procedures in place, and the means to identify and action any issues, will find this easier than those that don’t.
- Interpreting subjective FCA terminology
Some of the rules put forward by the FCA leave room for interpretation, and it will be up to firms to use their judgment when it comes to interpreting those rules.
- Determining who is accountable
Firms will need to determine who is accountable for ensuring that everyone is fulfilling their obligations and that all staff is trained in the nuance of these new rules.
- Managing customer data
While the FCA expects firms that hold data about customers’ protected characteristics to use this as part of outcomes monitoring, where possible, this must be done in line with their pre-existing legal obligations under the Equality Act 2010 and data protection laws.
How will Asset Management firms become compliant?
As with any regulatory change, there are opportunities for those that can get ahead and take early advantage of the new rules.
Firms that can both consolidate and make the best use of the data available to them when it comes to assessing the risks associated with any given product, will find it easier to map out the customer journeys and adapt their offering to ensure positive outcomes for their customers.
But as with any regulatory change, there will need to be a lot of attention paid to governance and oversight.
The Consumer Duty is designed to force a huge cultural shift on firms, one that puts the consumer at the forefront of their thinking. Any such shift will need to come from the top down. Those that can embrace the changes laid out by the FCA, and make the best use of data available to them, will be set up to take advantage and reap the benefits of providing a better consumer experience.
Discover how the Fundipedia platform makes staying compliant easier by Booking A Demo.