The year ahead brings a unique combination of challenges – and with them some opportunities – (see Figure.1) for the investment and wealth industry:

Figure 1: the challenges and opportunities faced by the investment management industry this year

Consumer protection: a relentless focus

In the UK the implementation of the Consumer Duty (the Duty) has created a new landscape where firms need to demonstrate they are delivering good outcomes for their customers. Firms need to focus on two areas: the treatment of vulnerable customers and fair value assessments for products.

The Financial Conduct Authority (FCA) has stressed it will focus on the protection of customers in vulnerable circumstances and has made clear that the wealth management industry continues to be an outlier.¹ The FCA has stated that firms need to be more pro-active to recognise vulnerability and address potential harm. In our view, board members and senior executives of wealth management firms should challenge the status quo to ensure the firm’s vulnerable customer journey is high on the agenda. Firms should consider scenarios where vulnerable customers are likely to receive poor outcomes, design and implement ways to support them effectively, and empower staff to adapt processes where appropriate. Firms also need to determine how to evidence they are delivering fair outcomes to vulnerable customers and, more importantly, what actions they have taken to remedy instances where they have fallen short.

On the other hand, asset managers with no direct contact with end clients should also focus on how to tackle vulnerability in an environment where data sharing between manufacturers and distributors is at various levels of maturity. At the very least, they should seek to understand the level of maturity of their distributors’ treatment of vulnerable customers and ensure that additional support is clearly signposted on their websites and marketing materials.

The other key area of regulatory focus within consumer protection is product value. Asset managers have five years of experience under their belt since fund value assessments were implemented in 2019 (under COLL rules)². This is not the case for wealth managers, which have only been subject to product value rules since July 2023. We believe there are long-standing practices of UK wealth and advice firms that may affect product value and attract supervisory scrutiny in 2025. Examples include: significant fee variations for the same service, material use of in-house funds in vertically integrated firms, varied levels of services for smaller clients and ongoing advice charges without appropriate records of the relevant service being delivered. Firms need to assess whether these practices can be justified in a fair value framework. As a starting point, firms should understand the degree to which their business model relies on these practices and the impact of phasing them out or reducing their use if they cannot justify them. Firms that identify commercial practices that carry greater conduct risk and assess what they mean for their business and strategy will be better able to respond to scrutiny.

Value for money is also an increasing concern for EU policymakers. Political agreement on the EU’s Retail Investment Strategy is due in 2025 – it will set out value assessment requirements for asset managers and distributors. In our view, firms operating in the EU should engage boards early in the value assessment process so that they are able to provide challenge and insights to analyse the commercial and strategic implications of the new regime around products, pricing and distribution practices.

The regulatory backdrop is one of increasing expectations and demands on firms to deliver good outcomes for retail customers which will increase operational and compliance costs. However, the Government and FCA are also looking to narrow the advice gap in the retail investments sector and provide confidence to those consumers who would be better off investing to do so.

Last year, the FCA published a consultation (without rules) on a Targeted Support model for pensions,³ which could open the door to a new advice model. This is aligned to the Government’s growth mission and the need for increased risk taking to achieve it. We expect a similar model to be proposed in a further consultation from the FCA and HMT covering retail investment in the first half of 2025. The changes could open the door to a new advice model and more opportunities for growth in the industry. To make the most of this opportunity, firms will need to invest in technology and innovation to recommend appropriate products to the right customer segments. But first, getting the basics of consumer protection right around product value and vulnerable customers are a must to provide a solid foundation on which to build the infrastructure to attract new customers under the new Targeted Support model.

Clearly, having the right data will be crucial for firms to demonstrate they are delivering good customer outcomes. The FCA’s increasing number of data requests over the last year is evidence of the need for high quality conduct data in the sector to manage increasing regulatory expectations.

Sustainable finance: opportunity or minefield?
 

Both asset and wealth managers face strategic questions about whether to participate in the sustainable funds/products market where increasing regulatory requirements and unpredictable investment performance trends are posing new challenges. As per Deloitte’s recent Sustainability Disclosure Requirements (SDR) survey report,⁴ asset managers continue to face implementation challenges around choosing evidence-based standards for sustainability. This has led to some firms not fully disclosing a product’s sustainability characteristics ("greenhushing") as a way of managing the risks of disclosure. Firms which understand a product’s sustainability characteristics will need to satisfy themselves that the resulting disclosure is fair, clear and not misleading. 

A lack of appropriate sustainability related key performance indicators (KPIs) continues to be a significant obstacle to measuring and reporting sustainability performance, and firms wanting to market SDR labelled products or products with sustainability related terms in their names should first consider whether they have access to robust KPIs. The FCA intends to extend the SDR to wealth and other portfolio managers – but firms are concerned that the extended rules do not fully account for the nuances of wealth management which may result in detriment to clients. For example, it is not clear how a label would work for bespoke portfolios where the asset allocation may have to change frequently to accommodate clients’ circumstances.

Firms should focus on ensuring a consistent understanding of sustainability related terms in-house, upskilling risk and control functions, and having strong governance frameworks that can support SDR labels and the use of sustainability-related terms in fund names.

Greenwashing risk is also an ongoing threat to firms and is exacerbated by the complexity of disclosures and slow progress on regulations for environmental, social and governance (ESG) ratings and data. In the UK, the FCA’s anti-greenwashing rule took effect in May 2024 and has led to firms carrying out large scale reviews of documentation. Although the FCA has been largely silent on the rule in its public statements since May, we expect this to change in 2025, so firms should be ready to respond to supervisory scrutiny. For example, firms should be able to articulate where greenwashing risk sits in their existing risk framework and why, identify whether and how their green products and firm level claims could be open to greenwashing claims, and ensure that end-to-end controls are in place that include design, marketing and performance reporting of sustainable funds and products.

Geopolitical instability: navigating an unpredictable world

In the year ahead firms should consider the impact of heightened geopolitical risk on their asset valuation processes and controls, and potential harm to retail investors driven by short-term volatility in investment markets. In August 2024, the European Supervisory Authorities (ESAs) published a report highlighting the uncertainty financial markets face due to multiple wars, elections, and ongoing military tensions.⁵ We expect supervisors across the EU and UK to keep a watchful eye on how firms treat consumers in stressed market conditions. Where firms expect such events to affect the valuation of funds or portfolios, they should consider how to develop effective communications to reduce the harm resulting from retail customer taking poorly considered decisions in response to market volatility.

Limited progress on global nature- and climate-related goals at the Conference of the Parties 16 (COP) and COP29 respectively and changing Government attitudes towards supporting the transition to net zero following elections in several countries have made the outlook for firms offering sustainable investments more complex and difficult to navigate. In the past six months, differences between individual countries’ strategies for tackling (or not) the sustainability transition have arguably become starker. This has made it more difficult for firms offering or managing sustainable investments to navigate an increasingly complex landscape. Firms will need to consider how to satisfy ongoing demand across countries which have either a supportive or unsupportive policy environment, and adapt their communications, marketing and engagement strategies accordingly. Firms should pro-actively discuss and, if required, agree changes in investment mandates to ensure investment strategies remain fit for purpose and they meet their fiduciary duties effectively.

Making the most of a challenging period
 

We expect these challenges to put pressure on firms’ ability to maintain profit margins while managing risk. Many firms are starting to explore how advances in technology such as Artificial Intelligence (AI) can be harnessed to generate growth, create operational efficiencies and optimise their cost base.⁶ For example, AI can be used to facilitate the collection and analysis of suitability information, demonstrate the delivery of good customer outcomes via communications mining and facilitate ESG reporting. To make the most of these opportunities, firms will need to build the necessary guardrails to ensure new technology deployment does not result in harm to consumers and can be monitored over time. Such guardrails need to facilitate compliance with existing regulations as both the FCA and European Securities and Markets Authority (ESMA) set out in detail in recent months.⁷

Conclusion
 

With the increasing focus on consumer protection, significant questions hanging over complexity around SDR, and ongoing geopolitical tensions driving increased volatility, firms face a steep risk and reward curve in 2025. Assessing the risks and opportunities clearly and robustly is a must for charting a successful pathway through the challenges.

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