1st March 2024

Consumer Duty – Playing Chicken is not an option

During a roundtable discussion on Consumer Duty implementation with fund managers last week, we learned that some fund managers were playing a game of chicken with the regulator.  Many firms are postponing their implementation until they know how the FCA will enforce Consumer Duty.  Fund managers stand to win if the fine for non-compliance is lower than the cost of implementation!

However, that game comes with new risks, as the regulator may have unintentionally opened a Pandora’s box by awakening normally inert investors to the potentially poor outcomes they may be experiencing.  A prime example of this is what happened to St James Place only months after being brought to task by the regulator for high fees and exiting charges.  The SJP share price fell by 30% at the end of February, and The Telegraph ran the headline ‘St James’s Place to pay overcharging victims up to £426m’.  When your customers are referred to in the national press as ‘victims’ you know you’ve made a wrong turn!  We would argue that non-implementation of the Duty is akin to playing a game of chicken with end-customers too. 

Once fund managers finally engage in full implementation of the Duty, there should be some sympathy as it isn’t as clear cut for them.   This is because, except for fair pricing, there is still ambiguity in the minds of fund managers around the interpretation of having a material influence on the customer outcome (work to be done there for the FCA).  There are also significant methodological challenges in the way in which fund managers measure and monitor customer outcomes. Before Consumer Duty, the world seemed a lot simpler.  Fund managers were responsible for manufacturing investments across the asset classes that intermediaries then used to create portfolios to meet their client’s investment needs, with the intermediary being responsible for the outcome. 

However, Consumer Duty, which came into force last July, has changed everything.  Under the Duty, fund managers are now deemed to have a material influence on end-customer outcomes.  As such they are now ‘duty bound’ to understand the intermediary's target market and measure and monitor the impact their products, communications, and post-sales support have on end-investors.

In the Finalised Guidance FG22/5, the FCA recommends fund managers measure and monitor outcomes as well as understand vulnerable customer outcomes through surveying end-investors.

Unfortunately, this isn’t as simple as posting a survey on a nationally representative research panel. Only 37% of UK adults hold an investment product, and a significant proportion of these will know very little about what they hold. Many investors will confuse their cash ISA with an equity ISA, and only the ‘hobbyist’ investor will know which fund managers they have in their portfolio and will be able to comment on fee structure, communications, and any support.  

The reality is that fund managers cannot reliably research end investors through conventional market research platforms.  Sampling consumers from the general population will only result in unreliable data – they won’t be able to identify the channel they use (Wealth Manager, Holistic Financial Planner, Appointed Rep, Platform, etc) or even what type of solution (Managed Portfolio, Mixed Assets, individual stock selection, etc).  Similarly, interviewing end-investors through an investment forum, will only provide the views of the hobbyists, not the full target market. 

The easiest approach would be for fund managers to send surveys directly to end-investors they know hold their funds. However, because the relationship with end-investors sits with the intermediaries, this is not possible.

The solution seems to lie in a mutually beneficial collaborative approach, whereby fund managers and intermediates come together to generate accurate and reliable feedback from end-investors.  Fund managers and distributors are already collaborating to meet other Consumer Duty requirements, through work done on fair value assessments and through the Distributor Feedback Template initiative.  Coming together to generate customer feedback should be the obvious next step.

FWD Research and Panacea Adviser are working with fund managers and intermediaries to make this happen.

Business Development, Regulation, Panacea Comment