Top of the chain
The FCA has expanded the scope of its Consumer Duty so that it applies to the entire supply chain, extending the boundaries of responsibility to include fund managers, with retail investors as the end user.
However, it remains unclear how much responsibility lies with the fund manager and how much lies with the institutional investor to ensure the retail end user is sufficiently informed about the investment.
Speaking with Nneka Orji and Hassaan Noor, senior directors at Alvarez & Marsal, both shed light on the ways in which fund managers can ensure they are being fully compliant ahead of implementation of the update later this year.
Asking which type of pensions this change will affect, Noor replies: “The update is more related to defined contribution schemes as that’s where the retail pension holder will want to make sure that the right service is received. In the case of defined benefit schemes it will also apply, given that the end pension holder is retail, but it will not be as significant because the pension fund is responsible for ensuring that the retail pension holder earns the pension amount promised to them. But some of the main parts of the Duty, for example whether a pension scheme is suitable and making sure that the pension holder understands the product, will apply irrespective of the type of scheme.”
The key is to be able to demonstrate to the financial regulator, should it be necessary, that the GP firm has done its bit to ensure the Duty is complied with. While this may be open to interpretation, accountability really lies with ensuring the institutional investor, such as a pension fund, has delivered the correct and sufficient amount of information to the individual at the bottom of the chain, so they are fully aware of the product and what is being sold to them.
For Orji, one way to carry out this responsibility is to ensure pension providers are thoroughly reporting back to the PE house the ways in which the Duty has been implemented: “Fund managers need to be able to understand what the pension providers are doing with respect to consumer protection; they need a level of transparency to ensure there is full compliance with the Duty. So, pension providers being able to report and state exactly how they are complying with the Consumer Duty is really important, making sure that the language and relevant data are accessible to the fund managers and other stakeholders.”
Higher up in the supply chain, it is unlikely that GP firms will need to involve themselves with customer complaints and concerns. Despite this, the information intended to be distributed to the consumer will need to be accessible and at the correct level of detail, so it is understandable but not watered down.
For example, Noor provides further detail on how prospectuses detailing the ins and outs of funds can provide the correct level of granularity for the retail investor: “The relatively big change will be ensuring that consumers are provided the information in the right way and with the right level of depth, so that they can properly understand it. And if it's a mobile sale, will the caller speaking to the client talk through everything the product is trying to do, using the information provided by the fund manager?”
The acute challenge is achieving a balance of detailed fund information that is adequate for both the experienced and inexperienced retail investor, given that the range of consumers is so wide.
Another element worth considering is appointing a Consumer Duty champion at board level, or assigning this responsibility to an existing member of the team. This is something that managers can do when looking at their fund structures. Having a system in place with a key figurehead is a suggested way to ensure proper compliance.
Orji explains: “Firstly, although the reference to a ‘board-level’ representative may indicate a focus on corporate entities, it’s really important that this role and responsibility is also accounted for in the GP governance structure. Secondly, looking at portfolio companies where they provide retail financial services and fall within scope of the Consumer Duty, and making sure that they are able to demonstrate compliance, is equally important to consider.”
The member tasked with responsibility would do well to assess the suitability of the fund for the end user, particularly regarding the risk of the product compared to the risk appetite of the end consumer. If a product is deemed to be too high risk, this should not be something accessible to the everyday individual.
Noor sheds more light on the issue: “Both the manufacturer and the distributor of the product will now be responsible for complying with the Duty, affecting the entire supply chain. The main implication of this is understanding whether the fund that the pension investor is invested in is suitable and appropriate, i.e. not causing them any harm. Financial institutions within the chain will need to make it easy for the pension investors to be able to move into products that are more suitable for them, where they have inadvertently ended up in products that are not suitable – something to bear in mind when the future economic outlook is not the best.”