Evolution, not revolution:

This blog is aimed at the Investment Management and Wealth sector.

At a Glance 

• Since the introduction of COLL value assessment requirements in 2019, firms’ ability to demonstrate that their products provide fair value to retail customers has been high on the FCA’s regulatory agenda. 
• The Consumer Duty, which came into force on 31 July 2023, requires firms to assess, monitor and demonstrate the outcomes their customers are receiving. As such, the evidentiary obligations for firms to collect appropriate data and management information (MI) to evidence the delivery of good customer outcomes has increased. 
• Whilst the FCA has confirmed that compliance with existing COLL value assessment rules can be read as equivalent for the purposes of the Consumer Duty Price and Value outcome, from an efficiency perspective and to ensure alignment with regulatory expectations, firms should consider their existing COLL frameworks in light of other aspects of the Consumer Duty requirements, the new Principle 12 and the cross-cutting obligations. 
• Our recent IMW Consumer Duty survey highlighted Price and Value as the most difficult outcome to implement, despite many of the survey respondents already compliant with existing COLL requirements. 
• Regulators’ emphasis on the importance of demonstrating fair value across both the UK and EU is increasing. The FCA’s latest feedback published in August 2023 centres around the strength of firms’ methodologies and data, and has a strong focus on good and poor practice within the COLL value assessment. Our previous blog talks about the findings in greater detail. In addition, the EU is also looking to introduce new value for money requirements for product manufacturers as part of their Retail Investment Strategy proposals.
• In this blog, we provide considerations for firms in relation to integrating the Consumer Duty and the latest regulatory focus areas in existing COLL value assessment frameworks.

COLL Compliance and the Consumer Duty

Authorised fund managers (‘AFMs’) will be familiar with the concept of carrying out detailed annual assessments of value (‘AoV’) for their authorised funds based on seven criteria under existing value assessment rules introduced in 2019, following the Asset Management Market Study. However, as the interpretation of COLL rules has varied across firms, consistent implementation of the requirements is still challenging with firms having taken a variety of different approaches when conducting value assessments. 

Our IMW Consumer Duty survey conducted throughout August and September 2023 highlighted that firms found Price and Value the most difficult outcome to implement, despite many of the survey respondents already having existing COLL compliant frameworks in place. For products and services not subject to COLL value rules, firms noted that building out the methodology and associated data capabilities required significant effort and time. Look out for our Consumer Duty survey results we will publish in due course, where we explore this in more detail. 

Whilst under the Consumer Duty, the FCA have confirmed that meeting COLL value assessment rules means firms meet the Price and Value requirements, this exemption relies on AFMs being compliant with COLL and the FCA’s expectations. As part of their latest review findings of firms’ compliance with COLL fair value rules (published in August 2023), the FCA has also emphasised that the Duty is broader than the Price and Value outcome, and firms need to consider the interaction of between fair value and other elements of the Duty requirements.

Whilst many firms will be relying on existing COLL AoV frameworks to meet the Price and Value outcome, the introduction of the Duty brings further into the spotlight the robustness of firms’ existing assessment methodologies. To ensure efficiency and alignment with regulatory expectations, firms should consider their existing COLL frameworks with an outcome-focussed lens and assess whether any uplifts could be made to appropriately incorporate other aspects of the Consumer Duty, the new Principle 12 and the cross-cutting obligations.

Key considerations for integrating the Consumer Duty in existing COLL frameworks

Cross-cutting obligations

A central theme of the new Consumer Duty and its cross-cutting rules is the appropriate consideration of potential foreseeable harms, including paying appropriate regard to customers with characteristics of vulnerability throughout the entire product lifecycle. As such, firms should be able to evidence how their value assessment process takes into consideration client vulnerabilities and ensure that the product represents fair value to all groups of customers, including those with vulnerabilities. Whilst the FCA’s expectations for the fair treatment of vulnerable customers is not new (see existing FCA guidance), we have observed that for manufacturers without a direct relationship with end customers (i.e. fund managers), collecting and integrating data on end client vulnerabilities into their fair value and wider Consumer Duty frameworks presents a challenge in many cases.  

Firms without direct customer touchpoints will still need to ensure that their client vulnerability policies and processes are robust, that they collect appropriate data (i.e. from distributors, third party research) to assess key vulnerabilities in the target market and consider how these activities may impact fair value conclusions. For example, whilst advisers and wealth managers will have the most visibility and day-to-day touchpoints with vulnerable customers in the end customer base, fund manufacturers should consider the practical steps they can take where they identify a high proportion of vulnerable customers in their actual target market (i.e. accessibility of product literature/documentation as part of quality of service) and integrate these considerations into their existing COLL assessment of value frameworks.

Manufacturers should also ensure that their oversight and due diligence processes of their distribution network is robust enough to get comfortable that their distributors appropriately consider and mitigate potential foreseeable harms for customers with vulnerabilities. Firms should identify these activities and potential points of MI and assess whether there are any gaps to sufficiently evidence Consumer Duty compliance. Firms should consider how such data points may need to be reflected in existing value assessment methodologies, and for example, how any issues identified as part of these activities will impact the quality of service provided to customers and ultimately impact fair value conclusions. 

Data and MI 

The Consumer Duty has emphasised the need for firms to have adequate evidence to back up conclusions made around fair value. Firms should be prepared to demonstrate, monitor, and challenge their assumptions on what provides value to retail customers. The new requirement for firms to demonstrate good customer outcomes under the Duty brings into light additional data points that could be considered as part of existing COLL frameworks. 

Feedback published by the FCA to date¹ point to key weaknesses in some firms’ methodologies such as relying on intangible or unevidenced arguments around ‘trust in the brand’ and that their business models or ethos are inherently fair value, rather than a critical assessment of more quantifiable measures and contextual factors to consider the fairness of their pricing structure. The regulator also repeatedly called out the lack of articulation in some firms’ assessments of what data will be used to demonstrate and monitor fair value, what the potential limitations of the data are, and how identified issues or data gaps would be remediated. 

In line with good practice outlined by the FCA’s latest feedback, firms should consider the interaction between fair value and other elements of the Duty more broadly, including how additional data collected to monitor good customer outcomes could be integrated into existing value assessment frameworks. For example, many firms will already be using metrics in relation to the level of customer support (i.e. service levels) as part of quality of service. However, as part of the new requirement under the Duty for firms to test their customer communications, firms should consider how any additional MI and metrics as part of their testing of consumer understanding may impact on quality of service assessments and feed in applicable results. Firms should consider how their additional and improved MI in relation to the outcomes delivered to retail customers feeds into and their existing value assessment methodologies more broadly, and how they may impact fair value conclusions. 

Distribution Costs

Whilst the concept of a comparison between the costs and benefits of a product under the Price and Value outcome is not new and is already embedded in existing COLL fair value rules, the Consumer Duty prompts firms to scrutinise the total costs to retail clients resulting from their distribution strategies more broadly. This includes consideration for how the selection of distribution channels aligns with providing fair value to the end customer in the target market. 

Firms should consider the practical steps they could take to understand their distributors’ fees and the financial impact those have on the end customer, and assess whether a fund can fulfil its performance objectives net of all fees, including those levied further down the chain. For example, this may include additional focus to ascertain distributors’ charges as part of distributor due diligence processes. Firms could also consider conducting ex-post cost analysis to identify any additional distribution costs or undertake sample reviews of key distributors charges to assess how additional charges stack up with the overall value received by retail customers.

Latest communication from the FCA

Given the FCA’s recent focus on a more interventionist style of supervision, it is even more important for firms to maintain robust data to evidence compliance with both sets of requirements, have effective fund assessment methodologies, and demonstrate stronger links between their fund assessment results and fair value outcomes ultimately delivered for investors. 

This is an ever-moving space, and we expect best practice approaches will evolve over the coming months, possibly years. The FCA has published their latest feedback of their assessment of value multi-firm review, which will inform firms of any lessons learnt and the FCA future regulatory expectations. Our recent blog explores this in more detail. 

The concept of ‘value for money’ has gained momentum in the EU as well – recent proposals as part of the EU’s Retail Investment Strategy signal additional requirements to be introduced for product manufacturers to assess whether all costs and charges related to the product are justified and proportionate, in addition to existing requirements to assess and mitigate any undue costs being charged to investors.

Conclusion

To ensure a consistent and efficient application of requirements, firms in scope of the Consumer Duty should also ensure their COLL value assessment compliance tilts towards and appropriately incorporates the Duty expectations. The regulatory focus remains ever pointed to firms' assessment and demonstrative capabilities of assessing value in their funds and communicating that to their investors and other parties in the distribution chain. As regulatory regimes continue to shift towards being outcome-focused, firms could benefit from reviewing the robustness of their evidentiary provisions when complying with COLL.

To find out how Deloitte can help ensure you remain compliant in a post-Consumer Duty world, please contact Paul Fraser or Jessica Castellino and visit our dedicated Fair Value Assessments webpage.

Read our other insights on the topic

We have published a series of blogs on the topic of Consumer Duty and value assessments:

• FCA finds fund managers’ value assessments improved but more work still needed
• The UK Consumer Duty Value Assessment Vs EU Undue Costs Rules… finding the leverage | Deloitte UK
• EU manufacturers in the post-Consumer Duty UK fund distribution market - leveraging local frameworks to create a UK compliant value assessment, Jessica Castellino (deloitte.com)
• Consumer Duty – A potential stalemate?, Jessica Castellino, Bettina Horvath (deloitte.com)

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Reference

¹ Authorised fund managers’ assessment of their funds’ value (July 2021); Consumer Duty: Findings from our review of fair value frameworks (May 2023); Authorised fund managers’ assessments of fund value 2023 (August 2023)