We review firms approach to implementation and the next key steps
Consumer Duty: The beginning
Traditionally, the start of August is the point where you can relax and think about holidays, or a more relaxed spell with colleagues, clients, and the regulator taking a well-deserved break. Unfortunately, 2023 is different. The hard work for FCA’s Consumer Duty, which has been at the forefront of most firms’ agendas for over a year, has not ended… in reality, it starts on the 31st of July.
Like most consulting firms, Devlin Mambo has been very involved in helping asset managers become Consumer Duty ready, taking a practical and pragmatic approach to implementation activity. Here is what we've found...
What are our key takeaways from implementation?
- Price and Value – most firms with a retail focus already produced a Value Assessment document, therefore have either enhanced their process to include previously out of scope products, or continued ‘as is’. Some firms have not, however, revisited whether the Value Assessments remain fit for purpose, and whether this continues to meet investor and regulatory expectations.
- Products and Services – we have seen firms reconsider their arrangements with distributors, and the interaction with retail investors across their product lifecycles. We believe that the majority of firms are not yet in a robust position to be able to meet distribution governance requirements, and this is an area of weakness for the industry.
- Consumer Understanding – firms have generally considered their literature that ends up with end consumers. From our reviews, we have seen significant inconsistencies in readability metrics and use of jargon across literature types available for retail clients. Interestingly, we have found this most prevalent with ESG-related material vs. non-ESG related material.
- The direct book? These are investors who sit on your fund register and is often an area that gets less attention from firms. Despite this, these are the retail investors that have closest proximity, and therefore risk, from inadequate consumer duty implementation. Consumer support is a key focus. Firms will need to gain comfort on the systems and controls of their Transfer Agent, which includes consideration of vulnerable customers - effective oversight is essential. Firms must also provide the right information to meet the consumer understanding outcome, so investors can make decisions on the product they hold. Time to revisit your direct book if you’ve not given the right level of attention!
What is the industry saying?
In a survey of COOs by Armstrong Wolfe, toward the end of July, Terry Yodaiken (an Industry Advisor to Armstrong Wolfe and delivering Consumer Duty implementation with clients at Devlin Mambo) asked five questions on the key points of implementation. The results are below:
- Most asset managers have very well-resourced programs of work with senior (executive) level sponsorship and engagement.
- Most firms consulted are well advanced with their implementation plans with a small number of day-one items to close-out before or shortly after 31 July 2023.
- Where there is still work to do the consensus showed this was centred around the governance framework and MI/ information exchange.
- On MI/ information exchange the main area of focus was on vulnerable customers and complaints, with some firms needing to do work on distribution channels and target markets/marketing incidents/suspicious activity.
- Most of the asset managers consulted did not have a direct retail book, but consistent with the earlier observation on the limited focus by managers with direct retail investors, those that did have such a book had not considered proactive consumer duty specific engagement with these clients.
What’s next for the Consumer Duty?
While it may appear that the July effective date represents a “slow down”, this is not the case. The next deadline, albeit unofficial, is likely October where firms will present their progress from 31st October and recap the advances since the first anniversary of approving the implementation plan. Firms will be expected to show how they have successfully executed their implementation plans and any changes that were recommended during the initial Board presentation. Any gaps, and ongoing work, will be highlighted and affirmation that everything else is embedded into business as usual.
What are the 3 immediate focus areas from the 31st July?
- MI & Governance
- Firms are required across all outcomes to provide evidence to their Board and Consumer Duty Champion that the requisite actions have been taken in relation to the implementation plan for 31st This is across the in-scope Consumer Duty Outcomes and Cross-Cutting measures. Ongoing evidence will be delivered through effective MI to the relevant Boards and governance structures.
- Activity required: Firms should review whether appropriate MI is either available, or identified, to support the Champion, Committees, and Board. This will consider MI requirements aligned to the outcomes, and provide recommendations on what effective governance will look like under Consumer Duty from the 31st July effective date. Also, consider any impact to the Risk Management Framework, and new control requirements.
- Products & Services: Distribution oversight
- Within the Products and Services Outcome there is a requirement to consider the interaction with the distribution chain and the exchange of MI to support consumer duty adherence. It also appropriate to consider adherence to the FCA PROD Rules.
- Activity required: Firms should consider all distribution relationships, contractual controls, information exchanged, and what activities are undertaken on MI received back from distributors to ensure consumer duty alignment. Also, consideration should be given to retail investor considerations at each stage of the product lifecycle.
- A roadmap to October
- Ahead of the October Board meeting, firms will need to document the key milestones to provide the Board and Consumer Duty Champion comfort that the October 2022 implementation plan has been delivered.
- Activity required: Firms should conduct an assurance review considering their progress to date, outstanding actions and gaps. Firms should then document recommendations, and ongoing embedding considerations to ensure transparency with the Board and Champion. This is an ongoing process and it is likely that areas will still require work and embedding in 2023, and early 2024 as the industry aligns with Consumer Duty expectations. Note: Don’t forget the direct book!
What do we expect from the FCA?
Firms should aim to complete the majority, if not all, of this work by the 31st March 2024 when the regulator is expected to begin announcing plans for their thematic review of how firms have implemented the Consumer Duty.
How can we help?
The Devlin Mambo team have been working with a variety of clients on the Consumer Duty implementation and Day 2 planning, with a strong focus from 31st July to the end of October.
We have developed tools to help our clients address issues in Consumer Understanding, Distribution Governance, and enhancing the Direct Book experience.
For further information, please contact your relationship contact or a member of the team.