How Consumer Obligation Will Affect Product Design


The Financial Conduct Authority has published its policy statements and finalized its guidelines on consumer obligations. The new rules will come into effect for existing products and services from July 31, 2023.

What does this mean for advisors?

A new consumer principle will require regulated businesses to deliver good results to consumers by acting in good faith, avoiding foreseeable causes of harm, and enabling and assisting retail customers to pursue their financial goals.

The new rules build on the FCA’s fair treatment of customers and product governance requirements, raising the bar in terms of research, understanding and due diligence on the financial products they recommend to their customers.

While the rule changes are significant, we focus on what the upcoming rule change could mean for the investment landscape.

What does this mean for investment products and solutions?

We do not believe that the new consumer obligation rules will fundamentally change the landscape for the majority of investment solutions recommended by reputable advisers, such as model portfolios and funds, as long as companies are already meeting their existing obligations in product governance.

However, we see it as creating a bigger hurdle to being able to target, document and prove good results.

Where we see pressure coming is on more complex and speculative products where the investment payoffs are complex, and/or for services where the pricing structures are opaque.

Below, we examine how investment solutions could be impacted with respect to: the design and manufacture of financial products; fee structures; and product change.

In our view, examples that would not meet the new consumer rights requirements would include the design and manufacture of financial products.

The new rules on consumer obligations will force companies to take into account the interests of customers in the design and manufacture of financial products.

Unreasonably priced products that offer poor value for money will come under scrutiny. Distinguishing between price and value can be a challenge, but we believe that the new rules on consumer obligations require those involved in the design, manufacture or distribution of orange risk products to take it up a notch. at red risk.

Examples could include:

1) Regular high-cost index funds

Some providers, including Virgin Money, have rightly drawn criticism for offering standard FTSE 100 tracking funds with an OCF of 1.00%, despite holding substantial assets within the fund.

The cost has been gradually reduced and the The OCF is now 0.60%. However, this still seems high compared to a similar fund that has been tracking the same index for iShares, which only costs 0.07%.

The onus will now be on vendors who charge high fees for vanilla index funds to prove how the product is designed to act in the best interests of the client.

Their defense will be that their fund’s costs must cover the cost of customer service as well as the underlying product, but even taking this into account, the fund offers questionable value for money compared to its peers.


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