Implications of FCA's new Consumer Duty on private funds

On 31 July this year the Financial Conduct Authority (FCA) is introducing its new Consumer Duty (the Duty) primarily through the introduction of a new FCA Principle (Principle 12 - “a firm must act to deliver good outcomes for retail customers”).

Broadly this requires FCA-authorised firms which have retail customers, or which are part of a distribution chain which provide products or services to retail customers, to:

• Observe the Consumer Duty Principle to deliver good outcomes for retail customers;
• Act in good faith towards customers, avoid foreseeable harm to customers and enable and support customers to pursue their financial objectives; and
• Meet four outcomes in relation to (i) products and services; (ii) price and value; (iii) consumer understanding; and (iv) consumer support.

The requirements have a phased implementation with the rules coming into force for new or open products from 31 July 2023 and for closed products from 31 July 2024.

Given the reference to “consumer” in its title, private fund managers may not think they are in scope because of their predominantly institutional investor base. However, this may not be the case where a manager has indirect exposure to retail investors. The Duty also has some indirect implications when opting up individual investors / clients to professional status.

Below is a brief overview of where the Duty may be relevant in the private fund context.

Where an FCA-regulated firm does not directly interact with retail customers, it may fall within the scope of the Duty if (i) its products are distributed to retail customers (i.e., it forms part of a distribution chain to retail customers) or (ii) it provides separately managed account services to occupational pension schemes. In addition, where a firm has elective professional clients which have opted-up to professional status, there will be additional considerations.

Distribution chain

In the case of (i) above, consideration must be given to whether services provided to a professional client which itself has retail customers are in fact part of a distribution chain. The firm is likely only to be in scope of the Duty where there is a connection between the services provided to its client and the client’s distribution of fund interests to retail customers. Situations where this may be relevant include offerings to friends and family or the engagement of third party distributors to target the private wealth investor base.

SMA services to occupational pension schemes 

In the case of (ii), the FCA has clarified that a firm which can determine or materially influence the outcome for the beneficiaries of the scheme through the provision of services to the scheme trustees would fall within the scope of the Duty in respect of this relationship. Any managers providing services to OPS should carefully consider their mandates and the Duty.

Where a firm falls within the scope of the Duty by providing such services, it must ensure that it delivers good outcomes for retail investors and avoid foreseeable harm to them. The impact of the Duty on such a firm will depend on the extent of its role when determining or materially influencing outcomes for retail customers. Factors to consider when implementing the Duty in these circumstances include:

• Services. The SMA services provided should be designed with the underlying retail customers in mind. The firm will have a greater level of responsibility to avoid foreseeable harm to retail customers and promote their financial objectives. This is on the basis that the SMA services must be tailored to the target market.
• Fees. To provide fair value to the trustees of the scheme, and by extension the beneficiaries, the fees must be assessed against the services provided. The amount paid must be reasonable relative to the benefits of the product.
• Communications. Where communications are made to the customer (both financial promotions and updates on the services provided), these should be pitched at a level that is appropriate to the recipient. This will vary depending on whether the communication is targeted at the trustees of the scheme as the direct customer or the beneficiaries, as beneficiaries may require more simplified information.
• Information flow. The trustees of the scheme will be required to disclose information to the beneficiaries, and this should be made available to the trustees so enable an efficient and clear flow of the required information to retail customers. In this way, the firm will be meeting the consumer support outcome of the Duty.
• Ongoing review. The firm will need to assess its services regularly to ensure that it continues to meet the needs of the beneficiaries.

Professional client opt-up

The FCA has clarified that retail customers which have completed the opt-up process to professional status will not be retail customers for the purposes of the Duty. However, the opt-up process itself will fall within the scope of the Duty and firms should consider the requirements of the Duty when conducting this process. For example, firms should consider whether a customer opting-up to professional status is in their best interests.

As a result, in the future the FCA may more closely scrutinise firms’ opt-up processes and documentation in line with the expectations of the Duty.

Next steps 

Whilst it is unlikely the Duty will apply to private fund managers or advisers, you should consider whether it is relevant and document the rationale for why it isn’t (assuming this is the case). The FCA will expect this to be done ahead of the 31 July deadline and also assessed on an ongoing basis.

If the Duty does apply you will need to consider in detail the impact it has on your business and the steps you need to put in place to ensure compliance by 31 July.

If you opt up investors to professional status, it would also be sensible to consider this process in advance of the 31 July deadline.