Nature of the Consumer Duty
The Consumer Duty will come into effect on 31 July 2023 for new and existing products, which includes shares of listed investment companies available to UK retail investors.
The Duty requires in-scope firms whose activities affect retail customers to act in good faith towards retail customers, avoid causing them foreseeable harm, and enable and support retail customers to pursue their financial objectives. These principles apply in relation to four “customer outcomes” which are the subject of specific FCA rules and guidance:
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- governance of products and services;
- price and value;
- consumer understanding; and
- consumer support.
Application to investment companies
Most investment companies admitted to the London Stock Exchange are not themselves authorised by the FCA (notwithstanding that they comply with some FCA rules such as the Listing Rules). The Consumer Duty rules therefore will not apply directly to the majority of investment companies. However, the Consumer Duty will still have an impact as it will often apply to their investment manager or investment advisor, as well as to intermediaries and platforms which distribute their shares. The nature of the Duty rules means that investment companies will need to consider the rules to some degree because they will form a key link in the manufacturing and distribution of its shares.
Although the FCA has been clear that proportionality and reasonableness are at the centre of how firms should approach the Consumer Duty, and that in scope firms are responsible only for their own activities, the Duty is a significant development in FCA regulation. Generally, investment company boards should understand how any service providers who are FCA authorised, particularly investment managers or advisors, plan to comply, and bear this in mind as part of continued oversight of those providers.
To assist investment managers and advisors in complying with their own obligations, investment companies may want to review their own processes and communications. They might also want to set out in writing how responsibilities will be allocated and information flows for anyone required to comply with the new rules.
Value assessments
FCA regulated distributors of investment company shares will be required under the Duty to understand that such shares provide fair value to their retail customers. Distributors can rely on a value assessment that has been made by a company for these purposes, and a new version of the European MiFID Template, EMT 4.1, has been developed to allow investment companies to provide platforms with a fair value confirmation (in addition to the information they will already be providing).
If an investment company does not provide a fair value confirmation we expect that distributors will withdraw the relevant shares from their platforms. They may alternatively choose to undertake their own value assessment, taking this outside the control of the investment company. As an investment company is most likely in the best position to form a comprehensive view on value, the downsides of not making a value assessment (and the resulting impediment on retail investment) most probably outweigh the risks involved in making a determination.
As such, investment companies are strongly advised to complete the updated EMT 4.1, including the confirmation as regards fair value. Value in this context is more than just being about costs. The FCA and the AIC have provided rules and guidance on how to approach the assessment, including a helpful FCA clarification that investment companies need not consider factors outside of their control, which includes the discount or premium at which their shares may trade. As with other aspects of the Duty, the rules relating to value assessments should be applied on a proportionate basis; as the Consumer Duty will apply to almost all investment products that are available to retail investors, some of its requirements are not entirely relevant to investment companies.
Market practice on the format and content of value assessments by investment continues to evolve. EMT 4.1 only requires companies to confirm the outcome of their value assessment – a yes/no confirmation either that the company is expected to provide fair value for a reasonably foreseeable period or that significant changes would be required in order to provide fair value.
EMT 4.1 does allow companies to include links to further information regarding their value assessments, and some investment companies may wish to take this opportunity to provide some narrative explanation to help others make suitability assessments in relation to the shares. Whilst not required under EMT 4.1, market practice amongst distributors could evolve to expect such additional narrative explanations as standard. We are also aware of platforms sending additional information requests to investment companies to gather more detailed information on their value assessments, and approach to compliance with the Consumer Duty more generally, than is required under EMT 4.1.
The value assessment does not need to be made public, although boards should consider whether an RNS announcement should be issued confirming that a value assessment has been completed and concluded that the company’s shares are expected to offer fair value. While in some quarters a regulatory announcement is being strongly encouraged, investment companies may wish to adopt a ‘wait and see’ approach to see how market practice develops before making any voluntary announcement.
Next steps
Investment companies should ensure that they complete a value assessment which enables them to complete EMT 4.1 to the extent required by the platforms which host their shares, to ensure that their shares remain available to retail customers.
In addition:
- Boards should enquire of their affected service providers how they plan to comply.
- They should also, given the indirect impact, consider whether their communications comply with the Duty’s rules on customer understanding (which build on existing financial promotions and other rules which investment companies need to follow already) and if their processes provide adequate “consumer support” for the Duty.
Investment companies and their advisors should continue to monitor developments, including market practice amongst distributors as regards information requests relating to the Consumer Duty which go beyond what is required under the revised EMT.
Authored by James Alder and Amelia Stawpert.
