The FCA is introducing a new consumer duty, which is intended to provide higher standards of consumer protection across the financial services sector by requiring firms to embed consumer outcomes in all aspects of their businesses. It will have wide reaching application and may be relevant to firms even where they do not have direct contact with retail customers.

The policy statement setting out the final rules (PS22/9) was published in July 2022. The consumer duty will comprise of three components:

The new rules are being phased in, applying to open products from 31 July 2023 and in respect of closed products, from 31 July 2024. Prior to this, an in-scope firm's consumer duty implementation plan must be signed off by its board or equivalent management body by 31 October 2022. Firms will need to be able to evidence that boards have scrutinised and challenged those plans and may be asked to share implementation plans, board papers and minutes with the FCA upon request.

This 31 October milestone has come as a surprise for firms, in particular those that were waiting for the final rules before kicking off their scoping analysis and implementation plan. It is therefore crucial that all asset managers undertake an initial review to determine whether or not they will be in scope of the new duty and, if so, to start planning what needs to be done to meet the 31 October deadline for board reporting.

For firms that conclude they are completely out-of-scope of the rules, there is no specific requirement to take any steps ahead of this deadline. However, we would generally recommend that UK regulated firms document their conclusions and report this to the board (or equivalent management body) at the next board meeting.

In this note, we consider the key scoping questions that are likely to be relevant to asset managers in determining if they will be in scope of the new rules.

For an overview of the consumer duty, see Practice note, Hot topics: New FCA consumer duty.

The new rules will apply to the "retail market business" of UK FCA regulated firms, irrespective of which retained EU law regime they fall under (that is, MiFID/UCITS/AIFMD).

Retail market business is defined as the carrying on of regulated activities by a firm as part of a distribution chain which involves a retail customer, but only insofar as the firm is responsible for determining or materially influencing outcomes for retail customers.

It is important to note that the firm itself does not need to have direct contact with retail customers to be in scope of the rules. For example, a manager that manufactures funds that are ultimately sold to retail customers, but who does not have any direct contact with retail customers, may still be in scope to some degree.

A retail customer is generally defined by reference to the relevant chapter of the FCA Handbook that governs the relevant regulated activity. For example:

As such, where a UK asset management firm is carrying on regulated activities in relation to a UCITS fund, AIF or OPS, it will need to "look through" the fund vehicle, to identify any retail customers who are invested in the fund. It will not be sufficient to simply say that the firm provides services only to the fund vehicle (which would likely be classified as a professional client).

In each case, "professional client" includes individual persons who have been properly opted-up to elective professional client status. This requires firms to follow a qualitative and (if applicable) quantitative assessment process and provide required documentation.

In its recent Dear CEO letter to the alternatives sector, the FCA identified misuse of the elective professional client opt-up process as an area of supervisory concern.

As such, firms wishing to rely on the opt-up as a way of falling outside of the consumer duty may wish to re-examine their opt-up procedures. Firms should re-confirm that they adhere to all applicable regulatory requirements when performing the opt-up.

Activities carried on in relation to non-retail financial instruments are excluded from the scope of the consumer duty. This will include funds where either:

The exception for non-retail financial instruments will be very important in practice for certain alternative fund managers. It is common in the alternative funds industry for:

The application of the consumer duty turns on the activities conducted by a UK firm from within the UK, not the location of the product. For example, a UK firm that manages an overseas fund (either as the management company or on a sub-investment basis, as discussed in Are sub-investment management activities in-scope?) that is marketed to UK retail customers will still be in scope of the new rules.

Marketing to non-UK retail customers will generally be out of scope on the basis that it does not constitute retail market business, provided that you are not conducting any regulated activities on the ground in the UK. However, if a firm is managing funds sold to non-UK retail customers then the firm may still be in scope in respect of those management activities.

Conversely, non-UK firms that market funds to UK retail customers under the national private placement regime, or that provide managed account services to UK customers from outside the UK, will not be in-scope of the rules on the basis that they are not conducting regulated activities in the UK.

Where a UK firm enters into an agreement with a third party for the purposes of enabling that third party to distribute funds to retail customers, this is likely to constitute retail market business, notwithstanding the fact that the fund manager does not have any direct contact with retail customers.

In this scenario, the manager has appointed a distributor to distribute funds to retail customers, so could not later claim that they have taken reasonable steps to ensure that the fund is only promoted to non-retail customers. This will generally follow the PRIIPs analysis and managers will likely already be providing PRIIPs key information documents (KIDs) for such funds.

To avoid being in scope of the consumer duty, the minimum subscription amount for underlying retail customers would need to be £50,000. Similarly, where a fund accepts investments from aggregator vehicles pooling contributions from retail customers to meet minimum eligibility, we would recommend ensuring that contributions to such vehicles exceed £50,000 on an individual basis to avoid bringing the fund in scope of the consumer duty.

Provided that the manager/distributor has taken all reasonable steps to ensure that the fund is not marketed to retail customers and the fund terms/marketing materials make it clear that the fund is not intended for retail customers, then such funds should constitute non-retail financial instruments. This is even where a retail customer has invested at their own initiative.

We note that the industry view taken under the PRIIPs Regulation (1286/2014) was that retail customers investing at their own initiative should still be provided with a KID. However, the application of the PRIIPs Regulation turned on funds being "made available" to retail customers whereas application of the consumer duty turns on funds being "marketed to" retail customers. We consider that marketing requires active involvement on the part of the manager/distributor to promote a fund which would not happen in the case of a genuine reverse enquiry.

The application of the rules to activities in relation to pension schemes remains unclear.

The final rules included a new limb to the definition of "retail customer" to capture, in respect of activities in relation to OPS, any person who is not a client of the firm but who is (or would be) a beneficiary in relation to investments held in that OPS.

PS22/9 explained that the new limb was added to the definition to bring within scope FCA authorised firms creating products and operating pension schemes for OPS trustees, where they can determine or materially influence retail customer outcomes. While acknowledging that firms would ordinarily view the trustee as their (professional) client, the FCA states that, in practice, FCA firms are likely to have a role in ensuring good outcomes for the scheme members.

The rules and guidance appear to limit application to services in respect of trust-based OPS, where services are provided directly to a trustee. However, there remains a requirement for the firm to be able to materially influence outcomes and it may be the case that where a firm manages only a sleeve of the overall pot, along with a number of other managers, that it does not have the ability to materially influence outcomes.

It is also unclear whether the FCA views defined contribution and defined benefit schemes in the same way. Arguably, the manager of a defined benefit scheme has less ability to materially influence outcomes for scheme members, whose pension entitlement is guaranteed.

Further guidance is needed from the FCA to determine the intended scope of requirements in this space.

Application of the consumer duty turns on the ability to materially influence outcomes for consumers, taking into account the extent of influence that firms have over matters such as:

Where firms are acting as sub-investment managers, they will typically not be able to materially influence the above outcomes and are instead operating within a mandate determined by another firm. Where this is the case, our view is that such firms would not be in scope of the consumer duty in their capacity as investment manager. If, however, they separately play a role in marketing funds they sub-advise, then they may still be in scope in the capacity as a distributor of those funds, where the funds are marketed to UK retail customers.

The exception to this is where both:

In this scenario, the manager clearly plays much more of an influential role in the matters listed above and would likely need to apply the consumer duty in this capacity.

The application of the consumer duty is not directly related to a firm's permissions, but instead turns on whether a firm is providing regulated activities as part of a distribution chain that has retail customers at the end of it.

It is possible for funds to be sold to retail customers without direct involvement from the investment manager. Whilst the investment manager will be carrying on a regulated activity (for example, managing an AIF or managing investments), the fund may be distributed to retail customers via third party intermediaries (for example, financial advisers or private banks). Although such third parties would require permission to deal with retail customers, the investment manager would not, but it would still be conducting regulated activities in a chain that has retail consumers at the end and would therefore be deemed to have the ability to influence outcomes for such customers.

Investment managers may permit employees to invest in the funds managed by the firm and it will not always be possible for such employees to be opted-up to elective professional client status. Whether or not this brings a firm in scope of the consumer duty is likely to turn on the circumstances in which the employees came to be invested in the fund. If, for example, the firm has actively marketed the opportunity to employees to participate in the funds, then such activity would likely take the fund out of the non-retail financial instrument definition and in scope of the consumer duty. This is in contrast to situations where an employee has initiated a request to invest in a fund on an exceptional basis, or where relevant remuneration laws require a portion of an employee’s salary to be paid out via units in a fund.

There are of course broader reasons why firms would not typically want to be deemed to be marketing funds to their employees who are retail customers (for example, because they do not have retail permissions, do not want to trigger AIFMD marketing rules and/or do not want to trigger the requirement to produce a PRIIPs KID).