This is due to the disparities between the domestic regulation and regimes in other countries, which may force asset managers to pivot their product strategies away from the retail segment as a result.
On 7 December 2021, the FCA coined the term ‘Consumer Duty' but it took the regulator approximately seven months to release the full rules, in July 2022.
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When it did, it set out a seismic shift in the way financial services would operate in the future: everything would need to be approached from a ‘consumer lens' in a bid to increase transparency, accountability and value for money.
Firms were given a year to prepare for the implementation date - 31 July 2023 - with periodic check-ins with the FCA to assess progress ahead of the Duty coming into full effect.
The Duty is based on four overarching principles, reflecting their respective outcomes: products and services; price and value; consumer understanding; and consumer support.
Over the year to the go-live date, several regulatory consultancies noted the focus from the FCA had been primarily on businesses with a consumer-facing function: financial advisers, wealth managers, platforms and any other type of distributors.
Several consultancies told Investment Week this was due to the fact they not only have more touchpoints with the end consumer, but were also in possession of extensive data about them and were more aware of their specific needs and circumstances.
Yet Consumer Duty does not apply solely to consumer-facing businesses but to the whole financial services ecosystem, including manufacturers and, as such, asset managers. Even if they hold ‘professional only' permissions, they will still need to be compliant with the Duty, as their products could filter through the supply chain and end up marketed and sold to retail clients.
Preparations for asset managers comprised an overhaul of their existing frameworks under the previous regime, as a result.
These included: a complete review of any marketing material, websites, factsheets or supporting documents to ensure they were clear, transparent and easy to understand for the end consumer; enhanced data collection from manufacturers; product testing, via focus groups, for example, to ensure their new products were easy to understand and suitable for a retail audience, if applicable.
Some of the objectives - such as products and services and price and value - had already been addressed to a certain degree by the FCA in previous market studies and reviews, including the implementation of the Assessment of Value regime in 2019, requiring managers to publish an annual comprehensive review of whether their funds delivered value and, if not, what mitigating steps they will take to remedy the situation.
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MiFID II and product oversight and governance (PROD) have already addressed issues surrounding product suitability and governance, which asset managers should have already had in place as a result, but many consultancies argued the Duty has solidified those expectations into a much more far-reaching regime.
"A number of the issues which were raised through the asset management market study [in 2017 and subsequent policy statement in 2018], have really been issues which formed the main challenges for the asset management sector going into the Consumer Duty," argued Andrew Jacobs, partner and head of regulatory consulting at DWF.
He noted the vast majority of the findings in the 2017 study "neatly overlay" onto the FCA's expectations under the Duty.
Maurice McDonald, director of wealth management and capital markets at consultancy Cosegic, agreed, adding the subsequent review into asset managers' application of MiFID II in February 2021 was an "early warning" to address the gaps identified, such as insufficient target market considerations within product design, reduced cost disclosure, insufficient disclosure of information from distributors and conflicts of interest.
Some ten months later, Consumer Duty was announced.
"While some asset managers would suggest that the FCA implementation deadline was too short, in reality, they could have gone some way to satisfying the requirements in 2018 with MiFID II and, certainly, if they started to address the findings set out in the FCA review," McDonald noted.
"This would have given them a head start in meeting the ‘products and services' and ‘price and value' pillars under the Duty."
But as with any piece of regulation, there are some more ‘obscure' aspects requiring greater scrutiny and, arguably, greater clarity and support.
Divergence
Consumer Duty has already presented practical challenges for the sector, especially for asset managers, which will have to figure out how they can keep offering products globally while considering duties that are only applicable to their UK-regulated entities.
Especially after Brexit, the UK has been somewhat slow at releasing proposals regarding what financial services will look like now it is no longer part of the European Union, and with passporting no longer in place, noted DWF's Jacobs.
However, with Consumer Duty in full force and the Edinburgh Reforms looking to repeal some legacy legislation from the EU, there is a real danger of divergence.
The Duty impacts all asset managers but compliance with the regulation will weigh more on those with global businesses and offerings, due to the sheer amount of jurisdictions they operate in.
Jacobs argued some asset managers might "take a view" the Duty's impact on their global strategy will be of such significance "they may pull out of retail markets" as a result.
He added: "There will be divergence in relation to jurisdictions that do not have Consumer Duty, [as the regulation] may expect greater requirements than is required of them in other areas".
"There will likely be a slight reshaping of the market to avoid some of the repercussions of Consumer Duty in the UK," Jacobs said.
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There is also the danger that such requirements could lead to a smaller pool of products and services to choose from for retail customers.
"You are starting to see that already," Jacobs said. "As a result of Brexit, it is difficult to access non-UK domiciled funds now."
But others took a softer, more optimistic stance.
Warren Low, director within the financial services compliance and regulation practice at Kroll, said other jurisdictions have taken similar approaches to the Duty, such as the EU's Retail Investment Review or the Securities and Exchange Commission's private fund adviser rules - all focused on greater disclosure, appropriate cost allocation and value for money.
Yet he did argue "there is always a risk" Consumer Duty - like any other additional regulation - will lead to greater costs of doing business in the UK.
"But as long as people want to access the UK, then that is a cost that will probably be borne by the consumer through the cost of doing business and the charges of the funds," he noted.
Low highlighted that Consumer Duty has created "additional hoops to jump through", but reiterated the UK "is still a very big and attractive market for financial services and distribution".
Linda Gibson, director and head of regulatory change EMEA at BNY Mellon Pershing, followed suit, adding there are "early indications" that some global asset managers have started applying elements of the Duty across their businesses.
Additionally, the FCA is set to introduce its Overseas Funds Regime - which will outline how EU-domiciled funds will be able to be marketed and sold in the UK - set to come into effect from April 2024.
Investment Week understands the final rules for the OFR will be revealed before the new year.
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However, while Gibson highlighted instances of equivalence for Consumer Duty principles, there has already been evidence of divergence for some global businesses, supporting Jacobs' argument.
When wealth giant St James's Place announced a complete overhaul of its controversial ‘exit fees', following pressure from regulators, our sister publication International Investment revealed the company would be scrapping such charges only for its UK customers, while maintaining them for clients in Asia and the Middle East.
SJP has created a precedent for financial services companies to differentiate their approach to compliance, product offerings and services according to the jurisdictions they operate in, potentially leading to regulatory divergence for those areas.
However, Simon Turner, financial services partner at EY, argued there was "no intention" for Consumer Duty to become a "hindrance to choice and product development".
DWF's Jacobs said some companies may decide to take a "best of both worlds" approach, where they might take some elements of specific regulations - such as Consumer Duty, MiFID, PRIIPs, for example - and abide by a "core set of regulatory principles" in a " more risk-selective basis", as this would make it easier for them to centralise standards, costs and resources.
While there is no consensus on whether asset managers and other financial services providers will opt for equivalence or divergence for their global businesses, the consultants agreed that as the Duty is still in its infancy, only time will tell.
Vulnerability
In its guidance, the FCA acknowledged that every person at some point in their lives will find themselves in a vulnerable situation. That may be temporary vulnerability - such as bereavement or divorce - or permanent vulnerability, for example, regarding a person's health.
As such, considerations surrounding vulnerability are paramount to fulfil Consumer Duty objectives, especially when it comes to the ‘consumer support' pillar.
Several of the regulatory consultants told Investment Week this area is much more straight forward for those financial services businesses with a direct relationship with the consumer - including financial advisers, banks and lenders - as they are able to assess customers' needs and vulnerabilities, as well as notice or being told of any changes in their circumstances that may put them at risk.
At the same time, the consultants argued this aspect was much more difficult to grasp and to apply from an asset management perspective. When asked about how asset managers are supposed to embed vulnerability considerations into their product design, none were able to identify a straightforward approach that could make this possible.
EY's Turner said: "With vulnerability, it depends where the asset manager is in the [distribution] chain. If they are in the direct chain for the retail customer, then they know where the product is going and it is all linked to the design of the product, [which] should have vulnerability at its heart."
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But things get trickier the further asset managers are from the distribution chain.
Kroll's Low argued the "notion of vulnerability in asset management is somewhat different", especially when compared to the retail side of financial services.
According to Turner, some of the issues asset managers should address focus on transparency, simplicity and clarity, which are "all the thing that you would imagine help when you are considering vulnerability with a client".
But most of the information on vulnerability - whether the client was advised to do the right thing or to pick the right products for their circumstances; whether it was explained to them in a clear and easy-to-understand way; whether the products were too complex or the fees were too difficult to understand - sits with the distributors.
DWF's Jacobs distilled the issue into a single element: trust.
Asset managers need to trust and rely on the information their distributors give them to be able to assess whether vulnerability has been taken into account.
"It is a very difficult and challenging objective for asset managers to have control across the distribution chain," he added.
This means that asset managers need to have a high level of trust in the relationship they have with their distributors, but also trust that the data they are being provided is comprehensive enough to meet the Consumer Duty's requirements.
"They really cannot do a great deal more than that," Jacobs continued.
If they are aware of any clients in a vulnerable position, asset managers should take every possible step to "do something about it", said Kroll's Low, including contacting the distributors, or even the client themselves, if they are able to do so.
In the event distributors fail to communicate effectively with asset managers, Low said one of the more extreme ways they can take to protect themselves is to notify the FCA under SUP 15 - a report of regulatory breaches which could result in disciplinary action.
Guidance
Issues remain around the practicality of adopting Consumer Duty principles across global asset management businesses, as well as their feasibility and cost effectiveness, along with the level of compliance that is expected of asset managers when there is little involvement with the end consumer.
That is why BNY Mellon Pershing's Gibson advocated for greater sector-specific guidance from the FCA.
She said greater clarity, especially on the more complex requirements of the Duty - such as considerations around vulnerability - would significantly benefit the sector.
"The gap in sector-specific guidance has resulted in wildly different approaches to the implementation of Consumer Duty," she noted.
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Gibson also highlighted how areas such as assessing whether firms have ‘material influence' over consumer outcomes, or what to do when asset managers are faced with the inability to obtain information from distributors, remain grey areas.
Ultimately, she added, all firms "need to realise that all communications with the FCA going forward will be through the lens of Consumer Duty".
EY's Turner echoed her: "Consumer Duty is shining a light on our industry in a much clearer way. It is time to act.
"If there was ever something that, as a firm you were thinking could be done a bit better or differently, the Consumer Duty is giving you the little push and reminder that now is the time."