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In less than three months, manufacturers of funds with end retail investors must have reviewed their products against the Consumer Duty outcomes and shared key information with distributors.
April 30th is the next Consumer Duty checkpoint for fund manufacturers. By this date, firms must have completed a review of their existing open products against the consumer duty outcomes rules. They will also need to have shared important information with their distributors regarding how their products meet the requirements.
Many firms are assuming that their current compliance with elements of the Product Governance sourcebook (PROD) and the Collective Investment Schemes sourcebook (COLL) will get them over the line. There is certainly overlap between the rules, but there are also numerous gaps. We would recommend all firms, even those confident in their current PROD or COLL compliance frameworks, perform a review against the new standard and identify any gaps while there is still time to address them
Consumer Duty outcomes
The most important outcomes for the majority of funds at this stage will be the Products and Services and Price and Value outcomes. These are what you really need to focus on when performing your product assessments for the April deadline. You should be confident of the following:
- You have accurately identified the product target market with sufficient granularity, and the needs, objectives and characteristics of the target market.
- You have considered what vulnerabilities might be present in the target market.
- The product meets the needs, objectives and characteristics of the target market, and will not cause any foreseeable harm to any group of retail customers.
- The costs of the product are proportionate to the benefits provided by the product, and that ultimately the product provides fair value to customers.
- The distribution strategy and arrangements are appropriate.
Overlap with PROD and COLL
There are many similarities between the new requirements under the Products and Services and Price and Value outcomes, as set out in PRIN 2A.3 and PRIN 2A.4, and some of the pre-existing requirements in PROD and COLL.
PROD 3, which many fund manufacturers apply already, requires firms to:
- identify the target market for their products
- test whether these products meet the needs of the target market
- share relevant information with their distributors
- review their products on an ongoing basis.
These are all requirements under the new Products and Services Consumer Duty outcome rules.
COLL 6, which applies to authorised funds, requires firms to:
- perform an assessment of value at least annually; and
- consider the costs of the product and the benefits provided.
Again, these are requirements closely mirrored by the new Price and Value Consumer Duty outcome rules.
Recognising that there is considerable overlap between some of the new Consumer Duty outcomes rules and the existing rules in the Handbook, the FCA has stated that compliance with PROD 3 will be taken as compliance with the rules under the Products and Services outcome rules. Compliance with COLL 6 will also be taken as compliance with the Price and Value outcome rules.
Crucially, however, the FCA is quick to point out that the Duty as a whole is broader than these elements, and you must ensure you are compliant with all other applicable requirements.
Key points of difference
While the relevant Consumer Duty and PROD and COLL rules are broadly comparable, our gap analysis concludes that there are numerous points of difference, some of which will be key.
Customer vulnerabilities
The first of these concerns potential customer vulnerabilities. PROD and COLL do not explicitly require consideration of customer vulnerabilities; Consumer Duty does. Customer vulnerability is a cornerstone of the Consumer Duty. This is more than simply identifying a negative target market, and the FCA has been clear that firms must not simply exclude groups of potential vulnerable customers.
Fair value assessments
The second key difference is that Consumer Duty requires firms to perform a fair value assessment of products on a forward-looking basis, assessing how the product will provide fair value over a ‘foreseeable’ time horizon. This is a departure from the assessment of value requirements in COLL, which are silent on the reference period for these assessments. Most firms will currently assess on a backward-looking basis, often over the previous year, and report on how they have provided value over that period. Consumer Duty goes further and requires an assessment of why that will remain the case for the foreseeable future. It’s for you to define what is a foreseeable period depending on the nature of your funds.
Non-monetary benefits and costs
A third key difference, again regarding value assessments, is that Consumer Duty requires a consideration of non-monetary benefits and costs. COLL on the other hand, is very focused on fund performance as a benefit, and fund charges in terms of costs.
The potential pitfall
The reason why all of this matters is that, regardless of whether a firm is already complying with PROD and COLL, the overarching Consumer Duty principle (to act to deliver good outcomes for retail customers) and the cross-cutting rules will also apply. The cross-cutting rules require you to act in good faith, to avoid causing foreseeable harm to retail customers and to enable retail customers to pursue their financial objectives.
It will be very hard to demonstrate that you are taking all reasonable steps to comply with the overarching principle and cross-cutting rules, without:
- reviewing your product designs and target market assessments.
- considering how your products might adversely affect one of more particular groups of retail customers or potentially exacerbate vulnerabilities.
- looking at your fair value assessments in the round, considering non-monetary costs and benefits as well as fund performance and charges.
- considering how the product will continue to provide fair value for a reasonably foreseeable time period.
If you simply stop at the point of PROD and COLL compliance when considering how you meet the Products and Services and Price and Value outcomes under Consumer Duty, you may skip over these vital elements of wider Consumer Duty implementation.
For this reason, we would caution funds firms that already comply with PROD and COLL against being over-confident when it comes to Consumer Duty. Indeed, following its multi-firm review of Consumer Duty implementation plans, the FCA in January highlighted, as an example of poor practices observed, that some firms are insufficiently considering how they may need to uplift their existing frameworks to meet the new Consumer Duty standard. On the other hand, and as an example of good practice, the FCA noted that some firms have considered what they need to do to build, specifically, on their existing product governance and value assessment frameworks.
Prior compliance with the relevant PROD and COLL rules will undoubtedly stand many firms in good stead to comply with the new standard and should mean that the new regime is less of a leap, than if they were starting from scratch.
Nevertheless, with the April deadline for manufacturers fast approaching, it would be wise for all firms to review your products in light of the higher bar set under the Consumer Duty so you can make any necessary adjustments in good time.
How we can help
We regularly help firms prepare target market assessments and assessments of value and are supporting numerous clients with implementing the Consumer Duty.
If you manufacture funds and are unsure of what steps you need to take to review your products ahead of the April deadline – for example, if you are struggling to identify what vulnerabilities may be present in your target market or what non-monetary costs and benefits might affect your funds’ fair value – our funds specialists can help.
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