Response to FCA Letters – Consumer Investments sector

The FCA portfolio letter on Consumer Duty implementation for firms in the Consumer Investment sector is split into two main parts:

• Annex 1 focuses on the application of the Duty to different businesses in the Consumer Investments sector.
• Annex 2 provides more detailed feedback on the FCA’s concerns and expectations grouped by the relevant Consumer Duty outcomes.

Some of the interesting points and key takeaways raised are:

• Supervisory approach and next steps - Unlike other portfolio letters (for example the FCA portfolio letter on Consumer Duty implementation for firms in the Retail Banks and Building Societies – read or summary here) the FCA does not expressly set out any specific check points as to when it plans to engage with firms on Consumer Investment. It does however note that:
  • the areas in this letter are likely to be the primary focus of future supervision. Firms should therefore be able to evidence the changes they have made under the Consumer Duty and in light of this letter; and
  • the FCA will continue to support firms on embedding the duty before July 2023 and will shortly be sending a short anonymised survey to a sample of firms to understand progress to date.

• Unfair charging structures– the FCA are concerned that some customers of wealth or advice firms are paying unfair prices and receiving poor value for money, whilst high net worth and other customers of the firm receive significant discounts on standard fees without appropriate justification or clear parameters to ensure consistency.

• Use of unregulated introducers – firms should have oversight and additional scrutiny over this.

• Fees paid elsewhere in the value chain- The FCA expresses concern that some firms may be levying fees that do not take into account the fees elsewhere in the value chain.

• Acquisitions- where firms acquire other firms, they need to consider whether the clients of the target firm are receiving fair value as part of the acquisition strategy and associated processes eg when being placed in default solutions.

• Culture change/ remuneration – firms are unlikely to act in good faith if they have incentives, performance management or remuneration structures which can cause detriment to customers eg by having sales targets which provide an incentive to employees to recommend a particular product/service when an alternative would be more suitable.

Four areas of focus

The FCA has set out four areas where particular focus is needed in light of their Consumer Investments strategy and the harms in the sector:

1. Mainstream investments:

• The FCA considers that consumers are especially at risk of receiving services that don’t meet their needs or represent poor value. This may be due to the nature of the service(s) they are receiving and/or the underlying charging structure.

• The FCA will be paying attention to how Platforms, Wealth Management firms and Financial Advisers deal with the price and value requirements of the Duty.

• They also consider that more needs to be done to speed up transfers between investment platforms and to improve the support provided to non-advised consumers (see here for more from the FCA on their concerns with fair value for financial advisers).

2. Higher risk investments:

• Consumers continue to be invested in unsuitable high risk investments.

• Firms’ products and services need to be appropriately designed for the needs and objectives of their target market, and be promoted and distributed effectively.

• The FCA are particularly concerned that the design of trading apps may lead to poor consumer outcomes (see here for more from the FCA on gaming trading: how trading apps could be engaging consumers for the worse).

• The FCA expect firms to have effective oversight of introducers, with additional scrutiny of any unregulated introducers.

  3. Scams and frauds:

• Firms need to act to avoid causing foreseeable harm to their customers and take appropriate action to help stop consumers falling victim to scams and fraud.

4. Consumer redress:

• The FCA expects firms to act in good faith when they identify they have caused harm (either though action or inaction), and to take appropriate proactive action to rectify the situation, which may include redress.

• Redress needs to be paid promptly when it is due.

Annex 1 – How the Duty applies to firms

1. Application to different types of firms

How a firm implements the Duty is likely to vary depending on the scope of its business and its size.

• Larger firms might set up a dedicated project team to lead the necessary reviews and updates.

• Smaller firms may decide to use the services of a compliance specialist to help them understand how the Duty will impact their business; or set aside some time to review the Policy and Guidance and other supporting materials to create a gap analysis and implementation plan.

When monitoring outcomes, smaller firms will generally have simpler business models and may not need to apply the same processes as a larger, more complex firm. In general, the FCA would expect firms with more sophisticated data strategies to have a more detailed approach.

In relation to Appointed Representatives, if you are a Principal firm, you should ensure that you have appropriate controls in place to effectively oversee your ARs’ activities and ensure that your ARs comply with the Duty.

2. The distribution chain

The FCA recognises that investment distribution chains are complex and relationships can be challenging. However, it makes it clear that it expects firms to invest time and commitment to meet the April and July 2023 regulatory deadlines.

Firms should consider their role as a manufacturer and/or a distributor. In particular, the FCA note:

• Firms can be manufacturers of services as well as products eg where a wealth management firm offers discretionary management services, they would be a manufacturer of that service.

• Where distributors are working with other firms to co-manufacture products and services: (eg, bespoke Discretionary Managed Portfolio Services / fund ranges and white-labelled platforms), the firms are likely to be classed as co-manufacturers and will need an agreement setting out their respective roles and responsibilities.

3. What the Duty doesn’t do

FCA clarifies what the Duty does and does not do:

The Duty doesn’t…

• protect insistent customers from making poor decisions or acting in a way is against their interests.
• mean consumers can or will be protected from all harms. Firms don’t need remedy the effects of all risks inherent in a service or product.
• create a fiduciary relationship (unless one already exists) or go beyond the scope of a firm’s regulatory requirements (eg provide advice unless that is the service being provided).
• apply retrospectively to actions by firms before the Duty came into force.
• require firms to ensure customers always receive good investment returns. Firms need to protect customers from risks that they reasonably believed the customer understood and accepted. (Whether such a belief is reasonable depends on the nature of the product, and the adequacy of the firm’s product design and distribution, communications and customer services).

The Duty does require firms to….

• pro-actively act to deliver good outcomes, put customers’ interests at the heart of their activities.
• focus on the outcomes customers get, and act in a way that reflects how consumers actually behave and transact in the real world.
• ensure they have sufficient understanding of customer behaviour and how products and services function to be able to demonstrate that the outcomes that would reasonably be expected are being achieved by those customers.
• where they identify that good outcomes are not being achieved, act to address this by putting in place processes to tackle the factors that are leading to poor outcomes.
• consistently and regularly challenge themselves to ensure their actions are compatible with delivering good outcomes for customers.

Annex 2 – Key things for firms in the Consumer Investments sector to consider

To assist firms, the FCA have listed their concerns and expectations grouped by the relevant consumer outcomes.

Products and services

FCA Concerns

• consumers are being exposed to unsuitable high risk investments¹.
• the FCA’s research on trading apps identified that the design on some apps may lead to poor consumer outcomes, particularly for vulnerable customers.
• adequacy of due diligence carried out on the investments firms provide consumers with.
• use of unregulated introducers and how this can lead customers being in unsuitable or fraudulent investments.

FCA Expectations

• identifying clear target market for products and services at a sufficiently granular level. This is particularly important for non-mass market products or products that pose an increased risk of harm.

• design of products and services meet the needs characteristics and objectives of the target market, including vulnerable customers.

• intended distribution strategy for the product or service should be appropriate for the target market and regular reviews should be carried out.

• demonstrate adequate due diligence is done on investments they provide.

• oversight of introducers, with additional scrutiny on any unregulated introducers.

Price and value

FCA Concerns

• Clients of financial advisers may be getting ongoing services that do not meet their needs or represent value for money².
• unfair charging structures that disadvantage particular customer groups, for example:
  • a high fixed fee is unlikely to represent fair value to a platform customer with a small investment value; and,
  • some customers of wealth or advice firms are paying unfair prices and receiving poor value for money, whilst high net worth and other customers of the firm receive significant discounts on standard fees without appropriate justification or clear parameters to ensure consistency.
• Levying fees which do not take into account fees elsewhere in the value chain.
• High charging and/or low quality investment solutions due to firms placing them in inappropriate default solutions – this is a particular risk for firms who acquire clients following an acquisition of another firm.

FCA Expectations

• review charging models including whether different groups of consumers are paying reasonable prices. Where firms charge different prices to different groups, they should consider this within each pricing group, having regard to vulnerable customers.
• consider fees which may be paid elsewhere in the value chain:

As a manufacturer, a firm should consider the total price customers will pay including all applicable fees over the lifetime of the relationship between customers and firms.

As a distributor, firms must carry out a value assessment to understand the outcome of the manufacturer’s assessment of value and ensure distribution arrangements are consistent. Firms should also consider their own charges when combined with other charges the customer is paying i.e. the total cost of the solution.

• where firms acquire clients from other firms, consider whether the clients are receiving fair value as part of the acquisition strategy and associated processes. Relevant factors are likely to include any differences in the products/services recommended and the associated level of charges, as well as the frequency of transactions and charges borne by clients prior to and following the acquisition process.

Consumer understanding and support

FCA Concerns

• cost and impact of poor advice is too high and borne by consumers or passed through other firms through the FSCS levy.
• high FOS uphold rates.
• significant number of consumers who may be due redress that is being challenged or delayed by firms.
• firms refusing to acknowledge that liabilities might arise, and so failing to adequately prepare.
• scams and fraud.
• charges not being explained clearly.

FCA Expectations

• firms should act in good faith when they have identified and caused harm and take appropriate action, which may include redress.
• consider wider implications of individual complaints and whether a more holistic approach is required.
• objective view towards potential liabilities including proactively considering whether remedial action such as redress is appropriate where firms have identified it caused customer harm.
• having in place systems and controls to prevent transfers and fraudulent investments.
• present information in a way the consumers can understand at the right time.
• reduce platform switching times.

Cultural change

For many firms, the Duty will require a cultural change. Firms should consider how they can ensure employees are acting in ways that support good consumer outcomes in accordance with the cross-cutting rules. A key area will be remuneration policies – a firm is unlikely to act in good faith if it uses staff incentives, performance management or remuneration structures which are likely to cause detriment to their customers eg by having sales targets which provide an incentive to employees to recommend a particular product/service when an alternative would be more suitable.

Senior management need to clearly demonstrate to employees what putting good customer outcomes at the heart of business means in practice.

¹ In the FCA’s Consumer Investment Strategy 1 year update, the FCA identified that 5.7m of UK adults hold high risk investments, and over half of this group demonstrated one of more characteristics of vulnerability or had a low appetite for investment risk.
² In its 2020 evaluation of the impact of the Retail Distribution Review (RDR) and Financial Advice Market Review (FAMR), the FCA found adviser charges were clustered at a small number of round price points, and that more expensive advice services did not have noticeably different features to cheaper services.