by Dewi John.
The FCA’s Consumer Duty is a fundamental step-change from the existing “treating customers fairly” regime. Attempting to deliver good client outcomes, while setting a higher standard of care and expectation than the existing rules.
The Duty applies throughout the lifecycle of products and services, this encompassing an expectation of greater supervision, driven by the FCA’s data-led and outcomes-based approach.
Better data is at the core of evidencing better outcomes.
According to the FCA: “The proposed Duty sets clearer and higher expectations for the standard of care firms give customers. Our proposals would require firms to act in good faith, avoid foreseeable harm to their customers and support and empower them to make good financial decision.”
To facilitate this, says the regulator, financial services firms must ensure that:
The Consumer Principle will become Principle 12 within the FCA Principles for Businesses (PRIN) sourcebook. Principle 12 imposes a higher standard of conduct than the existing Principles 6 and 7. As a result, Principles 6 (customers’ interests) and 7 (communications with clients) will be disapplied for retail businesses where Principle 12 applies.
The rules apply from 31 July 2023 for new and existing products and services, and 12 months after for closed products and services. By 31 October 2022, firms’ boards must have agreed implementation and oversight plans for the Duty.
The Duty applies to four consumer-orientated outcomes:
The regulator will require an objective test that these aims are being met for the average retail customer. It therefore advises that firms should:
The key word here is “objective”—implying quantitative and measurable. For example, in relation to the fair value outcome, firms will be expected to assess whether the total price paid is reasonable relative to the benefits. However, the FCA has not stipulated detailed requirements for this assessment, instead setting out minimal levels to allow this. Firms themselves therefore have the ability to identify and adopt best practice.
Consultancy KPMG states the Duty creates “the need to form an overarching pricing and assessment of value framework to be applied as consistently as possible across all products and services, with a broad range of inputs from across product, brand and marketing, operations, digital, and claims.”
Likewise, PwC advises that this means firms need to clean up their data: “Assess what data is needed to monitor and evidence outcomes against these good outcome definitions. Analyse what data the firm already has, clean it up, and identify what additional data the firm will need to gather. It’s also worth identifying any relevant learnings or frameworks that could be built upon, from the monitoring requirements under the FCA’s vulnerable customers guidance.”
Firms will therefore need to create a framework for monitoring customer outcomes, based on appropriate data, one which is able to quantify subjective FCA concepts, such as “foreseeable harm” and “fair value.”
How can asset managers show that they are doing this?
We believe that the Lipper Leaders methodology and scoring provides industry best practice for evidencing many of these metrics, offering a scoring system, from 1 to 5, that encompasses charges and three different performance metrics, presented in a way that is designed to be intelligible to retail investors.
Taking fair value as an example: this hinges on the charges of investment products. Industry-standard charging metrics such as total expense ratio and ongoing charges figure, independently validated, will therefore be crucial to evidencing this.
Fortunately, no wheels need to be reinvented to get firms from A to B on this journey. Asset managers can display Lipper Leaders scores for expense, capital preservation, total return, and consistent return on their key fund documentation in the confidence that this is:
As such, it has been relied on by institutional investors for decades.
The four pillars of the Lipper Leaders system—Total Return, Consistent Return, Preservation, and Expense—set the results of the respective funds in relation to their relevant peers (all funds registered for sale in the UK) and allow Lipper customers to focus clearly on their achievements with regards to their investment objectives: for example, capital preservation over total return. This allows asset managers to objectively and clearly communicate the character and purpose of their products—and demonstrate this to the regulator—in a way that is not possible for a “one size fits all” rating. For example, a relatively expensive fund (eg, 2) may be deemed fair value for Client A prioritizing capital preservation, where the fund scores a high of 5, as distinct from Client B, whose objective is total return, where the fund only scores a 3. The ability to evidence this will be of increasing importance to the advisory market, for example.
Lipper Leader ratings has direct relevance for advisors, wealth managers, and fund selectors generally. “For advice firms and wealth managers,” notes KPMG, the Duty “means considering the total cost of ownership of platforms fees and fund charges (rather than just focusing narrowly on their own adviser charge).”
Fund selectors will therefore need to ensure they comply with the requirements, and the Lipper Leaders ratings provide a methodologically robust, institutional-standard, way of doing this. For example, by creating a universe of funds scoring no lower than 4 on the basis of Lipper Leaders Consistent Return, which incorporates fund charges into the overall performance measures, a fund selector can demonstrate adherence to fair value principles via an established and respected measure.