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The UK Consumer Duty Value Assessment Vs EU Undue Costs Rules… finding the leverage

This blog is aimed at the Investment Management and Wealth sector. This blog follows a previous blog on EU manufacturers in the post-Consumer Duty UK fund distribution market, which can be found here.

At a Glance

  • Post the UK Consumer Duty implementation deadline in July this year, UK distributors are required to gather all relevant information they need from manufacturers to assess the value of the products they distribute to the end clients. Whilst the principle-based Duty rules themselves only stipulate that manufacturers need make the outcome of their value assessments available to distributors, in reality, distributors are seeking something slightly more prescriptive to ensure they meet their own obligations.
  • The UK market is calling not only for an updated European Mifid Template (EMT+), which includes details regarding the output of manufacturers’ value assessment, but we are seeing movement towards distributors expecting additional qualitative information and collateral documentation to fully understand the underlying methodologies, characteristics and benefits of the product.
  • Non-UK domiciled FCA recognised funds may face additional challenges in providing comparable information to their UK distributors and find themselves competitively and commercially disadvantaged. They may face additional cost of compliance whilst trying to adhere to both local as well as more onerous UK value assessment standards.
  • In order to support funds recognised in the UK but domiciled in Luxembourg, Deloitte London and Deloitte Luxembourg have considered how areas of regulatory overlap in the UK and EU regimes could be leveraged to facilitate the viability of offshore fund distribution in the post-consumer Duty world.

Finding the Leverage

In both the EU and the UK, funds are required to assess their funds’ charges and pricing at least annually.

Whilst the UK stipulates an annual review of charges and pricing, amongst other more detailed requirements on fair value assessments, there are potential overlaps in the regime with the current requirements applicable to EU domiciled funds which EU firms could leverage.

Notwithstanding the movements towards greater costs and pricing disclosure and transparency being proposed under the EU Retail Investment Strategy, currently, funds are expected to assess and mitigate any undue costs being charged to investors, including double charging, market pricing comparators and cost objectives.

Going beyond – the higher UK Consumer Duty Fair Value Standard

In addition to the above outlined, UK firms must also integrate other criteria when assessing the value of their funds, including quality of service and economies of scale. Under COLL, AFMs must consider the range and quality of services provided to fund investors when assessing whether fees and charges can be justified, including for example the quality of portfolio management (whether delegated or not), call centres, website/app services as well as assessing whether minimum quality standards have been met in areas like complaints, breaches, delays and compliance with SLAs for delegated or outsourced services. The FCA also expects firms to consider economies of scale and whether any potential savings and benefits can be passed onto investors.

The UK’s new Consumer Duty requirements go even further and prescribe that fund managers must make available to distributors ‘all necessary information to understand the value that the product is intended to provide to their retail customer’ (PRIN 2A.4.15). We’ve observed the industry widely adopting the use of updated information sharing templates (the EMT+) to share information on the outcome of their fair value assessments, however, firms are finding that these templates only go so far in fulfilling all Consumer Duty information sharing obligations. In addition to the standardised data shared via the EMT+, some distributor firms are also expecting to receive additional qualitative information and collateral documentation to fully get to grips with the products’ characteristics, benefits and underlying methodologies to assess value, to comply with their own Duty obligations.

The Consumer Duty price and value rules are not prescriptive in the methodological requirements of value assessments, therefore, in order to mitigate inconsistencies and allow distributors to assess comparable products’ value, the data alone in the EMT+ is often not enough.

Additional complexities arise in relation to the UK distribution of non-UK domiciled FCA recognised funds, who may find themselves on the back foot having to provide equivalent information to their UK distributors whilst being subject to competing jurisdictional regimes on the assessment and disclosure of their funds’ costs and fees all bringing an additional cost of compliance. Therefore, not adhering to the more detailed U K standards in terms of value assessments and the information sharing requirements could leave them competitively disadvantaged.

Final Thoughts

Meeting the UK distributor Duty needs can often be facilitated by leveraging existing activity conducted in response to other jurisdictions’ regulatory requirements.

The leverage and read across points within UK and EU costs, pricing and value regimes mean that UK value assessments can be created and maintained together covering both local and UK regulatory requirements in one go.

To assist firms combining regulatory requirements, Deloitte has developed a Deloitte multi- jurisdictional value assessments solution. This consists of a bespoke UK value assessment methodology which incorporates local EU rules, and conducts your value assessment annually, using our reporting capabilities to share the necessary data with UK distributors provides an ongoing data led review and dissemination of the output to the UK distributor market.

To find out more about how Deloitte could help your firm with its UK Value assessments, please. contact Jessica Castellino in the UK or Beate Twellmeyer in Luxembourg.