Update to the UK Financial Services regulation – UK Consumer Duty
5th October 2023

In changing fund distribution landscape, new UK regulation for open products and services, has come into force on 31st July 2023: “The UK Consumer Duty”.

Who must consider The UK Consumer Duty

The new regulation, introduced by the UK Financial Conduct Authority (FCA), applies to all new financial services products and all products and services currently available to customers.  The duty requires financial firms to act in good faith, avoid foreseeable harm and enable and support their retail customers to achieve their financial objectives.

Products that are available for purchase for both retail and professional clients, there is an exclusion where:

  • the marketing materials feature prominently that the instrument is only being offered to professional clients or eligible counterparties, and not retail clients and
  • the issuer or the distributor has taken reasonable steps to ensure that the offer and promotional communications are only directed towards professional clients or eligible counterparties. This exclusion broadly aligns with current practice, although firms should nevertheless confirm that their financial promotions are only addressed to professional clients and eligible counterparties.

The new regulation will provide the product manufacturers with an opportunity to improve their consumer trust which according to the survey published by the FCA in July 2023 found that just 41% of UK adults have confidence in the financial services industry. 

Product manufacturers have been working extremely hard over the past year to implement the duty in their processes, to complete all necessary reviews for open products and/or services and to share the relevant information with distributors all before the end of April 2023 deadline.

To comply with the new duty, all financial products and/or services available to customers must have gone through processes to ensure they are suitable for, and distributed to, their target markets. Financial firms must also ensure their services and products provide fair value.  Additionally, customer communications must be understandable, and customers can expect support that meets their needs. Plus, the product manufacturers will also need to consider the duty in customer complaints they receive and the Financial Ombudsman Service will be able to look at the duty in complaints for conduct.

The UK Consumer Duty comprised of the following measures:

  • Consumer Principle (Principle 12): provides a high-level expectation of conduct and associated outcomes. It requires product manufacturers “to act to deliver good outcomes for retail customers”.
  • Cross-cutting rules: the standards of conduct that the FCA expects under the Consumer Principle. The cross-cutting rules require firms to:
  • Act in good faith towards retail customers.
  • Avoid foreseeable harm to retail customers.
  • Enable and support retail customers to pursue their financial objectives.
  • The four outcomes: rules and guidance detail expectations for product manufacturers’ conduct according to the four specific outcomes.
  • Products and Services must meet the needs of target market.
  • Products and Services must provide value.
  • Firms must communicate in the way that is easy to understand.
  • Firms must provide support that meets the investor needs.

As the outcomes are linked to the product, manufactures must:

  • Review their current approaches to bring them in line with the UK Consumer Duty requirements.
  • Evidence the outcomes.
  • Review and monitor outcomes on an ongoing basis.
  • Remedied or mitigated and issues identified.

The introduction of the Duty is also accompanied by a new Individual Conduct Rule 6, as part of the Senior Managers and Certification Regime (SMCR), which requires senior managers and conduct staff to take personal responsibility for their actions and it permits the FCA to take action against individuals for failing to adhere to the Conduct Rules.

Operational and Process requirements:

Apart from the data, product manufactures will also need to create and disseminate the Value Assessment Report (via EMT 4.1, as hyper link or as a PDF) for onshore UK products while for offshore products this is not (yet) a strict requirement.

The Assessment of Value looks at costs charged to each fund and whether they are justified in the context of the overall service and value delivered to shareholders.

COLL 6.6.20R(1) provides that an product manufacturers must conduct an assessment “at least annually”, for each scheme it manages, of whether the payments out of scheme property set out in the prospectus are justified in the context of the overall value delivered to unitholders. This is the core value assessment obligation. Moreover, COLL 6.6.20R(2) states that product manufacturers should do this “separately for each class of units in a scheme”, meaning that this assessment should be done at a share class level for each fund.

In carrying out the value assessment, the product manufacturers must consider “at least” the seven criteria  set out in COLL 6.6.21R:

  • Quality of service
  • Performance
  • AFM costs – general
  • Economies of scale
  • Comparable market rates
  • Comparable services
  • Classes of units

As such, although the assessment involves considerations on a share class level, the report is on a fund level, which means that there is no strict requirement to report on each criteria at share class level. It is therefore for each firm to consider whether to report at fund level or share class level, but firms should at least highlight share class specific issues where these have been identified.

The onshore (UK) products must fully comply with the UK Consumer Duty rules and obligations while the offshore product, so far, are not covered by the regulation.

Acolin has conducted a review of the UK Consumer Duty requirement in case of an offshore product onboarding within our UK distribution network and the results vary from distributor to distributor:

  • All distributors require product manufactures delivery of EMT v4.1 either on onboarding phase or continuously via their selected data vendor.
  • While The Assessment of Value report is not required to be provided at this time, the distributors do encourage this delivery and if this is not possible then additional documentation will be requested.

Acolin collaborates with global, regional, and local platforms and distributors in more than 30 countries. We provide our clients (product manufactures) with legal, compliance and data management/dissemination knowhow and assistance to not only stand out but also to fulfil their distribution requirements and to faster and easier connect to their investors. Reach out to us for more information.