Consumer Duty – A potential stalemate?

At a Glance

The expectations around information sharing up and down the distribution chain is a key pillar to implement the new Consumer Duty requirements. Quality data and Management Information plays a fundamental role to support firms to monitor, assess and evidence that they are delivering good customer outcomes.

However, we have observed varied levels of engagement between firms both up and down the distribution chain to ascertain information requirements and expectations. The industry is still getting to grips with the inherently challenging issue to provide enough qualitative information whilst also trying to create sustainable and standardised ways of sharing information. As a result, the industry might find themselves in a stalemate if they don’t receive the data they expect and need to comply with their own obligations come the 30 April 2023 deadline.

We have observed a real diverse interpretation of requirements and approaches to information sharing adopted across the industry. As we get closer to the April deadline, firms have started to question themselves and reassess whether the approach they have taken aligns with their peers to allow manufacturers and distributors to satisfy their responsibilities under the Duty.

Information down the chain

By the end of April 2023, the FCA expects manufacturers to complete all reviews necessary and share relevant information in relation to their products and fair value assessments, to enable distributors to conduct their own value assessments and assess the distribution strategy of their services by the July deadline.

The FCA has made it clear that manufacturers and distributors need to work together and share information, to enable them to perform their own roles and responsibilities. However, different interpretations and varied engagement across the distribution chain to confirm approaches may in some cases result in a stalemate following the April deadline.

While UK trade associations have developed information sharing templates to incorporate Consumer Duty requirements (the ‘EMT+’), some firms are finding that this only goes so far to satisfy the information sharing needs under the Duty. The EMT+ serves only to facilitate data transmission down the chain in a standardised way, rather than to fulfil all Consumer Duty information sharing obligations.

As manufacturers are preparing to feed down quantitative information via industry templates firms should also consider additional qualitative data they may need to prepare sitting alongside this data (and consider areas not addressed on the templates, such as client vulnerabilities).For example, some firms are choosing to signpost additional data on their websites or send additional collateral via email.

Distributor expectations and the feedback loop

Distributor firms will also need to ascertain what information they will get, how this will be obtained and in what format, in order to prepare themselves to fulfil their obligations within the distributor feedback loop.

While the Duty now places a more explicit obligation on distributors to share relevant information back up the chain, obtaining information from the distributors still presents challenges to the industry, and the potential mismatch between manufacturer and distributor expectations in relation to data flows might lead to an information sharing impasse, fast approaching following the April 2023 deadline.

Information shared from manufacturers down the chain might not meet the expectations or needs of the distributors to assess their distribution strategy and fair value assessment. This could lead to the subsequent upward feedback from distributors failing to satisfy manufacturers’ Consumer Duty requirements. Without appropriate prior engagement and communication across the distribution chain to establish information sharing expectations and standards, distributors and manufacturers alike may find themselves in limbo.

Diversity of approaches

We have observed a real diversity in interpretation of the Duty’s requirements across the industry, which is exemplified by a number of firms using different methodologies for data sharing. With the April deadline looming, we have observed firms revisiting their initial interpretations and the extent to which their approach and methodologies of data sharing align with their peers.

For example, firms in the sector are revisiting the scope and robustness of their existing distribution and other contractual agreements, as well as reassessing whether current due diligence processes are fit for purpose and stand up to the increased monitoring and evidentiary burden introduced by the Duty. Whilst best practice approaches to information sharing are still evolving, some firms are also choosing to provide additional collateral via email or directing parties in the distribution chain to supporting information on their websites to supplement the data shared via standardised templates.

Due to many different approaches adopted in the industry, firms should ensure they are prepared (and sufficiently resourced) for questions coming in following the dissemination of information, especially around the quality and integrity of the data itself. We believe best practice will start to evolve over a number of months.

An unintended casualty of the Stalemate – Will wrapped products be caught short?

The extended scope and definition of products under the Duty means distributors have to assess their own fees against the quality of their services and ensure their charges do not result in a product ceasing to provide fair value to retail clients. There is also an expectation that where products and/or services are intended to be sold as part of a package, firms consider the value of each component as well as the overall value of the package.

Additional complexities arise where firms package external products. Firms will not have visibility of fair value assessments of the underlying individual products until after the April deadline, while at the same time they are also required to share the outcome of their own assessments further down the distribution chain. Firms in this position may be caught short, trapped between the reliance on underlying product manufacturers AoVs, and bound by the needs of their onward distributors.

A nod to prioritisation – Practical steps for ‘eating the frog’

In their more recent messaging, the FCA has reinforced the concept of substantive compliance and as the deadline is looming, firms need to take a pragmatic, risk-based approach and prioritise the implementation work that is likely to have the biggest impact on consumer outcomes.

A key activity is prioritising appropriately, focusing on reducing the risk of poor consumer outcomes and assessing where they are likely to be furthest away from the requirements of the Duty. This should be supported by a clear rationale, capturing appropriate explanation of risk, proposed mitigation strategies and pathways to compliance.

Firms may wish to consider the impact of consumer harm through the lens of a potential stalemate, the risks attributed to non-compliance from others in the distribution chain and whether that may cause detriment to firms’ Duty implementation plans.

Conclusion

Speed is of the essence when it comes to information sharing. Whilst the 3-month grace period allows distributors to ascertain the fair value of their distribution arrangements off the back of manufacturers sharing information relating to their products and value assessments, unless that information is fit for purpose, and distributors are adequately prepared to ingest it, the industry risks squaring up to a stalemate across the chain.

What next…

Firms that have not yet engaged with their distribution chain should do so to avoid further bottlenecks in Consumer Duty implementation, especially where there are clear dependencies on information feeding up and down the chain to meet requirements.

For more information on how to navigate a potential stalemate, please contact Jessica Castellino and Bettina Horvath.

Read our other insights on the Duty

We have produced a wide range of thought leadership on the Duty. Our previous blogs which are relevant to the sector include:

• The Extra Territorial Scope of the Consumer Duty
• Implementing the Consumer Duty across the product lifecycle - key considerations for asset managers
• Consumer Duty implementation plans: what do Boards of investment managers need to focus on?
• How will the FCA’s proposed Consumer Duty affect asset and wealth managers?