On July 31 2024 it will be one year since the Financial Conduct Authority introduced the consumer duty regulation.
This date also marks the introduction of consumer duty rules to closed products.
The milestone provides an opportune moment to reflect on the progress made in the asset management industry’s consumer duty journey to deliver “good” outcomes to consumers.
As an industry, we must assess what we have learned so far, evaluate the challenges, and determine whether the regulation has had its intended effects of increasing transparency, ensuring good outcomes, building consumer and regulator trust; and ascertain whether the consumer duty regulation is reaching a regulation-market fit.
Similar to product-market fit, regulation-market fit focuses on aligning a product or service with the regulatory environment and compliance requirements within a specific market.
For consumer duty, has the regulation resulted in managers developing a robust consumer duty strategy roadmap?
Can managers track the progress – in other words do they have quality data, and is it actionable?
Finally, can outcome success metrics be defined for all principal stakeholders, and what does 'great', 'good', and 'not-so-good' look like?
Consumer duty strategy
As a reminder, the FCA's consumer duty regulation came into effect on July 31 2023.
This regulation prioritised positive customer outcomes, with expectations that retail investors will receive fair value, suitable products, adequate support, clear communication, and proactive prevention of harm.
The FCA’s guidance was thoughtful, and its expectations have evolved around three key themes:
- Consumer duty strategy: Is the consumer duty strategy embedded within the overarching business strategy of asset management firms?
- Data: Is all reasonably available internal and external data being identified, reviewed, and evidenced to determine customer outcomes?
- Alignment: Are consumer duty outcome decisions reasonably aligned with the underlying data and do they support the decisions reached?
Besides a clear consumer duty strategy roadmap, implementation plans, identification of gaps and mitigation plans, there is also a focus on consumer vulnerability and an expectation that good outcomes should be monitored and delivered over the lifetime of products.
As the regulators and market participants learn, both the proposition and implementation guidelines need to evolve.
For example, on July 31 2024, we are about to see the second wave of implementation, focused on closed products.
The regulator naturally expects a higher level of compliance after a year of implementing for open products, even though closed books of legacy business were designed years ago under different rules and expectations and as such may have added complexity.
The FCA’s expectation is that firms should already have identified products and/or operational areas where consumer harm could occur on both open and closed products, and have plans in place to remediate the gaps.
Additionally, firms will need to demonstrate how good outcomes are being created and delivered for customers, especially with products that may historically have had potentially unfavourable terms or opaque fee structures.
Sourcing quality data
A recent Broadridge market survey identified that the biggest data challenges that asset managers face are around sourcing data from distributors and translating the myriad of data into actionable insights.
The FCA has highlighted that it would like to see improvements in sharing of relevant data across the same distribution chain between distributors and asset managers.
