Consumer Duty, the regulator tells us, is a cultural shift. From board responsibilities to rewards and incentives, firms need to look at every aspect of how they work to ensure they are operating in the most customer-centric way.
No one running a business of any kind would dispute that centring the customer starts with knowing them. To devise a product, you start by thinking about who it is for and what they need. You gather feedback, you make enhancements, you ensure you can adapt as the need changes. The problem for those managing money for retail clients is they do not always know the customer. Even in a vertically integrated firm, it is not unusual for portfolio managers to be disintermediated from the end-investor.
With Consumer Duty, the FCA says that gap has to be filled. The duty applies to everyone who has a material influence over customer outcomes – from the product manufacturer to the distributor, via anyone providing customer communications or support along the way. To ensure that products – discretionary portfolios or funds – meet customer needs and objectives, information must be shared across the value chain.
Key 31 July milestone
An important milestone on the road to the 31 July implementation deadline falls at the end of April, when product manufacturers should have completed all reviews necessary to enable them to meet the outcome rules and shared the information with their distributors.
Since 2019, asset management firms have been required to evaluate whether their funds are delivering value for money, and to communicate their findings in an annual Value Statement. Since MiFID II, meanwhile, product manufacturers have also had to define and publish a target market for each product, providing information on how it should be distributed. Manufacturers might feel that this is enough. But in its evaluation of Consumer Duty implementation plans to date, the FCA found information sharing was an area in which firms needed to accelerate their implementation efforts.
Target market statements tend to be broad and generic – understandably so, since manufacturers do not want to limit the potential customers for their products more than is strictly necessary. Still, with the regulator indicating that identifying a target market will be central to meeting the products and services outcome of Consumer Duty, many firms may need to revisit the information they are providing.
According to the final Guidance, the target market will need to be defined at a sufficiently granular level, taking into account the characteristics, risk profile, complexity and nature of the product. The regulator suggests evaluating the definition by considering whether the outlined target market could include customers with whose needs, characteristics and objectives the product is incompatible.
Under Consumer Duty, the target market must also consider the needs of vulnerable customers. Customers can move in and out of vulnerable circumstances at any life stage, so the FCA highlights that any target market is likely to include some customers with characteristics of vulnerability, as well as those who will experience vulnerability over time. This should be reflected in product design, and firms should consider whether product features could risk harm to vulnerable customer groups.
The basis of a useful target market definition might be demographics (including vulnerability), wealth, investment experience, risk tolerance and sustainability preferences. These are all factors we know drive investor behaviour – the first four traditionally and the last increasingly so.
Targeting around the product’s objectives is also important – for example, if the product provides income, how willing should the target investor be to risk capital? How important is consistency of income? If the product is actively managed, how active should the target customer expect the product to be – a light hand on the tiller or the ability to de-risk completely in volatile markets? This level of detail is ultimately what determines the customer’s experience of the product.
To get these definitions right, managers need information flow in the other direction. The regulator is clear that product design must be based on ‘real consumer needs, characteristics and objectives’, not on theory or copies of other products in the market. The adviser is the closest to the end-customer and thus best-placed to identify and provide this information.
Areas highlighted by the guidance as relevant for the adviser to share include issues with the target market assessment and with distribution arrangements, as well as concerns related to customers with characteristics of vulnerability, sales outside the target market and holding periods that are shorter than the manufacturer specifies – for example, if customers are tending to sell too quickly out of a product that is intended to be held for five years or more. Advisers could also usefully identify where consumers are beginning not to achieve the outcomes they are looking for, or where product design does not align with preferred risk-adjusted benchmarks.
The ability to gather this information and use it to inform product design is invaluable – not only for meeting Consumer Duty requirements but for the good functioning of all businesses in the value chain.
Ben Goss is CEO of Dynamic Planner