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Consumer Duty, so much more than a tick-box exercise: An interview with Mikkel Bates

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Read below for the transcript 

How is the Consumer Duty different from Treating Customers Fairly?

After about 15 years of Treating Customers Fairly being in place, the FCA clearly felt it wasn’t working well enough for consumers and has possibly even become a bit of a tick-box exercise in some cases.

So the Consumer Duty took it further with policy statement PS22/9 last July.  Before I tell you how onerous it will be, remember that it is principles-based regulation and should be adopted in a way that is proportionate to the firm.

So, coming back to what is expected, I like to think of it as something akin to “TCF on steroids”, as it’s not just about treating customers fairly, but about seeing things more from the consumer’s point of view, and it is anything but a tick-box exercise, as the FCA has made clear.  I’ve even heard it described as moving from treating customers fairly to treating customers well.

As well as introducing a new Principle of Business – Principle 12, which says: “A firm must act to deliver good outcomes for retail customers”, the Consumer Duty includes three cross-cutting rules – firms must act in good faith towards retail customers, they must avoid causing foreseeable harm, and they must enable and support retail customers to pursue their financial objectives.

Then there are also four outcomes the FCA expects to see.  These cover having the right products made available to the right customers; at the right price for the benefits they aim to deliver; communicating with customers in a way they can understand – not just, as before, in a way that is clear, fair and not misleading – and finally giving ongoing support to those customers throughout the relationship with them to help them pursue their financial objectives.  To achieve all of these, as I say, they need to make a real effort to understand their customers, their financial objectives, any vulnerabilities, and so on.

I think the safety net underlying the whole thing is the rule I mentioned about “avoiding causing foreseeable harm”, which is definitely more demanding than just treating them fairly and communicating in a way that is clear, fair and not misleading.  It requires whoever is working with the customer to be aware of all the possible implications of the advice being given and whether the products or funds really are the right ones for them.

So, in summary, it’s definitely not business as usual for those who think they already treat customers fairly or provide good outcomes for their clients, as they also need to show evidence of compliance with the four outcomes.

What particular challenges do asset managers face?

The biggest challenge, as is so often the case, is that asset managers have no sight of the retail customer at the end of the chain, but they need to consider the different customers who might use their fund.  Delegating responsibility to advisers and saying that they provide the fund but don’t know who the end customer is won’t be good enough, as that definitely isn’t “acting to deliver good outcomes for consumers.”

But even without knowing the end client, asset managers can ensure that they don’t put any unreasonable barriers in the way of switching out of a product that may no longer be appropriate, and they make all their literature clear and understandable for the type of investor they have identified as being in the possible target market.

They will need to ask distributors and advisers for feedback to help with their product governance, and they can’t simply rely on distributors to take the initiative and tell them what they think they should know.  As part of asset managers’ Consumer Duty plans, their product development and product governance processes need to include going out and asking for the necessary feedback.  Logistically, this can’t all be bespoke or the industry will grind to a halt, but if it is needed for product governance, it needs to be obtained.

And it’s more than just about the data on the measurable or quantifiable things like the target market and the value for money, as the two other outcomes are more qualitative – communications that are provided at the right time and in a way that the consumer can understand, and ongoing support for the duration of the client relationship.

Finally, don’t forget the need for a Consumer Duty Champion as well, who is expected to be a board member, not just someone responsible for collecting TCF data each month or quarter.  The FCA’s policy statement made it clear that it wants Consumer Duty to be raised regularly and it even set out the sort of questions it will want answered when it comes knocking.

How will the various parties in the chain pass information between each other?

The industry has been pretty good at distributing quantitative data over the years, be that for Solvency II, PRIIPs, MiFID II or workplace pension disclosures, through the use of standardised templates, usually supplied through the European industry initiative that is FinDatEx.

Of the 4 outcomes, one of them – identifying the target market – is already on the European MiFID Template, or EMT.  An assessment of the value provided by the product has recently been added in a UK-specific section of what is known as the EMT V4.1, which was devised by a combined working group of all the relevant UK trade bodies and produced through FinDatEx, because the obligation under the Consumer Duty is much wider than just the AFMs that are caught by the need to produce Assessment of Value reports, and includes investment trusts, structured products and non-UK products marketed to retail investors in the UK.

But the real challenge comes with the two outcomes that can’t be boiled down to standardised pieces of data on a spreadsheet in the way the target market is or to a binary Yes/No as with the value for money conclusion.

With these other outcomes – producing communications that are appropriate and understandable, and providing ongoing support – the parties in the chain need to work together to understand the profiles of the end-consumer for whom the product or service is intended and how best to deliver good outcomes for them, although there are service providers, including one that we have a joint venture with, who help to satisfy these two outcomes. 

This is what makes the Consumer Duty so much more than the tick-box exercise that TCF has become for many.

Can you give us some more details on the EMT version 4.1?


The industry across the UK and Europe already uses the EMT to supply information on costs and charges and the intended target market for a fund or product.  So, because it’s part of the way there already, it formed the basis of the additional quantitative outcome under the Consumer Duty, ie whether the product provides good value.

There have been 10 new UK-specific fields added to what was the EMT V4.0 to include the decision by the provider on whether or not their product provides value, although it really boils down to two pieces of information that are needed – does the provider believe the product provides value or not, and where can a distributor find the details behind that conclusion if they want to drill down further?

The reason it runs to 10 fields is because there are providers who need to produce an Assessment of Value report under the COLL sourcebook and, as I’ve said, other providers caught by Consumer Duty who don’t produce an AoV report, so are caught by the PRIN sourcebook instead.  And then there are the non-UK domiciled products that may be out of scope of either of those, but who will need to tell platforms and advisers whether their products provide value so they can be considered for sale or advice.

And then there are fields that indicate when the last review of a product’s value was, and when the next review is due.

What will happen to a fund or product if it is assessed as not providing value?

The first thing for a distributor or adviser to do is to drill down into the reasons why.  For most funds, this can be done through the AoV report, which is why there is a field in the updated EMT with a link to that.  Or if there is no AoV report, that field can be used for either a URL where supporting information can be found, or the email address where they can get further details.

However, the new rules in PRIN are pretty clear when it comes to the obligations on providers and distributors around the price and value outcome.  They say: “A manufacturer must ensure that its products provide fair value to retail customers in the target markets for those products”, and “A distributor must not distribute a product unless its distribution arrangements are consistent with the product providing fair value to retail customers.”

So if the product is in scope, which all funds sold to retail investors are, and the provider doesn’t think it provides value to its own identified target market, then a distributor has a big decision to make around whether or not it can still make that fund available to retail investors, or an adviser needs to think very hard before recommending it unless they have a very particular market segment for whom they are confident they can justify it.

The next question that may need to be asked is whether an adviser could or should leave existing investors in a fund that, at least for the time being, is not felt by the fund group itself to provide fair value.  If they don’t raise the issue with existing investors, or at least show evidence in their internal discussions that the reasons why it doesn’t provide value don’t affect the original advice to invest in it, I can’t help wondering if the FCA might have something to say next time they come to visit.

Which brings us full circle to the need to have evidence to show that they have considered all four outcomes; in this case delivering the right products to the right market at the right price and providing ongoing support throughout the lifetime of the relationship with the client.  Because if a product doesn’t provide fair value, it is unlikely that it will help a client pursue their financial objectives.