It will soon be a year since the introduction of the Consumer Duty and this year another regulatory change in the form of the new sustainability and disclosure requirements (SDR) will start to come into effect from May. With significant regulatory changes, the challenge is continuing to consider ongoing implementation. We discuss here three key challenges that authorised fund managers (AFM’s) face in the ongoing implementation of the Consumer Duty. 

How does the Consumer Duty apply to authorised funds?

There are two significant carve-outs AFMs benefit from in relation to the Consumer Duty, which are as follows:

  1. The first is where an AFM follows the PROD 3 guidance, it can comply with this instead of the Consumer Duty Rules relating to products and services. This exception exists as the guidance is broadly equivalent to the Consumer Duty rules. 
  2. The second carve-out for AFMs applies where a product is subject to the Assessment of Value (AoV) rules under COLL. Where this is the case, the rules in PRIN 2A.4 of the Consumer Duty do not apply. 

However, despite these carve outs AFMs still need to consider the Consumer Duty as the FCA view it as the “golden thread” in their regulatory approach. Therefore, here we look at three key areas where we have seen challenges and complexity in the implementation of the Consumer Duty for AFM’s. 

SDR and Consumer Understanding 

The SDR regime is starting to be implemented from May 2024 and will impact authorised funds in relation to anti-greenwashing rules, fund labelling and disclosures. In the SDR policy statement published by the FCA in November 2023 they specifically referenced the Duty and confirmed that the new rules are consistent and that even where a firm is not in scope of the Duty they expect the SDR rules to be applied whilst keeping the Duty in mind. One example where the Consumer Duty and SDR are consistent is with the focus on consumer understanding which is a key outcome of both policies. 

For AFMs the implementation challenge is ensuring they are considering consumer understanding and the Duty more broadly at the design, delivery and disclosure stages of ESG and sustainable investment funds. This will include ensuring investors are given information in an appropriate form, at the right times and that it is not misleading which in turn allows investors to make decisions that meet their objectives. 

Price and Value 

Whilst the carve-out exists for many AFMs where a product is subject to the AoV rules the Consumer Duty is still relevant to price and value as the Duty reinforces governance expectations and provides a broader framework applicable to firms. In the FCA’s report published August 2023 they highlighted the importance of considering the Consumer Duty throughout all stages of a product lifecycle. This in turn means that if firms are not carrying out AoV properly they are also unlikely to be complying with the Duty. Firms need to ensure they have the correct processes in place to complete the annual AoV to the standard required by the FCA and consider whether this also meets the requirements under the Duty. 

Information Sharing 

In the December webinar the FCA highlighted how critical effective sharing of information is to product governance. To adhere with the Duty the management information systems need to be robust. Industry bodies have developed new templates to facilitate the sharing of data up and down the distribution chain. These templates include the EMT version 4.1 and the Distributor Feedback Template (DFT). There are, however, concerns with the extent to which distributors are adopting the DFT and providing the information required by AFMs to complete their annual board reports. AFMs need to utilise the templates and work with distributors to ensure effective information and data sharing, as without this it will not be possible to comply with the Duty and measure consumer outcomes. 

The Consumer Duty is not a “once and done” exercise and AFM’s will continually need to consider at all stages of a product lifecycle how the Duty applies and continue to consider this whilst implementing other significant regulatory changes such as SDR. 

For further UK financial services regulatory updates, please visit the Burges Salmon blog.    

Written by Beth Jewell, Trainee Solicitor