How to ACT on Consumer Duty and SDR as deadline looms

While many members of the UK investment industry are off on their summer jaunts, there is a significant date on the horizon with far-reaching impacts

On 31 July 2024, the UK investment industry will ‘celebrate' one year since Consumer Duty, the Financial Conduct Authority standard to enhance the level of care provided to all consumers, came into play, but also it will mark Consumer Duty rules being rolled out to closed products/services. 

Further, the date will also mark a further phase of the Sustainability Disclosure Requirements, with fund providers being able to adopt one of four fund labels in order to improve transparency and client understanding. 

With these new legislations, the regulator has sent a clear message to the industry to up its game on accountability, transparency and fair value.

Greenwashing and simply saying "we did not know" is not good enough and the FCA has promised to "act swiftly and assertively where we find evidence of harm or risk of harm to consumers". 

At City Hive, we have long emphasised the importance of good corporate culture for the long-term prospects of a firm, and understanding how values are embedded in a way that ensures fair outcomes.

As some recent high-profile cases have demonstrated, toxic internal culture can be extremely damaging for the firm, its clients and the industry as a whole. 

Regulation appears to be catching up. It has prioritised transparency and open communication with Consumer Duty and SDR. 

Whether your business is small or large, in order to future proof it is imperative to bake good culture into its DNA. 

Our partners and Stewardship Council tell us the ACT Framework and Standard has focused their conversations on culture and transparency, and demonstrates a firm's willingness and commitment to assess, act, evolve and grow.

The ACT Framework aims to allow a firm to articulate, assess and demonstrate how its external and internal cultural values on diversity, equity and inclusion align. 

We wanted to demonstrate how this fits in with Consumer Duty and SDR, and teamed up with leading global law firm Simmons & Simmons to map how the ACT Framework can support investment firms in complying with those. 

Let us first take a look at Consumer Duty. 

Consumer Duty is a standard created to enhance the level of care provided to all consumers, especially those who are in vulnerable situations.

It focuses on the shared goal of ensuring that all consumers, regardless of their circumstances, receive equal outcomes.

As part of the ACT Framework, we ask firms their position on culture and values and how they promote these, and also assess whether they are living by them.

This is in line with Consumer Duty's ‘cross-cutting obligations' to have a standard of conduct characterised by "honesty, fair and open dealing", as well as ensure their "culture supports and is conducive to staff acting in good faith".

ACT would show how firms are demonstrating the impact of their corporate values. 

Further, from a diversity and inclusion (D&I) perspective, Consumer Duty is closely aligned with efforts to promote D&I within the financial sector.

It recognises a diverse and inclusive industry is crucial for achieving the desired outcomes in financial services and, these outcomes encompass fair value, fair treatment, suitability, confidence and access for all consumers.

ACT asks firm's to share their targets and objectives for diversity, as well as how D&I is embedded into its values.

Alignment with the ACT Framework would allow firms to support the drive in achieving a diverse and inclusive industry, which the FCA also sees as a central part to Consumer Duty. 

These are just a few examples of where ACT can help align with Consumer Duty. 

Now, let us explore SDR, investment labels and the UK's Task Force on Climate-related Financial Disclosures (TCFD) rules, where there are several areas where the ACT Framework can support compliance and highlight overlaps. 

In the FCA's UK ESG disclosures, it asks firms to share sustainability-related information in relation to Pillar 1 focused on ‘Purpose, Vision and Values'.

The ACT Framework encourages firms to build a statement that includes their commitment to DEI within their core values.

This aligns with the FCA's SDR, which requires firms to disclose how their products meet environmental or social characteristics or sustainable investment objectives as well as focusing on a firm's governance processes.

Similarly, the TCFD and SDR entity level reporting rules require firms to disclose their governance around climate-related risks and opportunities, which could include their commitment to DEI as part of their broader ESG strategy.

There is also an emphasis on sustainability and culture within the firm's values, and whether this resonates with aspects of ESG in terms of where firms are expected to manage relationships with employees, suppliers, customers and communities, as well as the leadership and internal controls within the firm.

The ACT Framework emphasises the importance of these public commitments and targets, and how firms are held accountable for these. 

We could continue with other regulatory requirements - ACT can also help firms comply with SMCR and potentially the FCA's proposals on diversity and inclusion - but we will save that for another article. 

We know first-hand that firms of all sizes are time pressured when it comes to reporting resources so when we built the ACT framework we did it in a way to make it as efficient as possible.

The framework has a dual purpose.

Firstly, it enables firms to respond to requests for disclosure in a structured way, describing how their actions and behaviours match up against their own stated values.

Analysts and fund buyers can access comparable information that supports various stages of their due diligence process and helps them make better decisions.

At the same time, the structure creates a snapshot for the reporting business which can then see what is working and where to focus resources, ultimately supporting the business to progress and change.

The framework helps asset managers become more aware of blind spots and heads off complacency. 

This approach was designed to enable clients to drive change; by ensuring resources and responsibility are appropriately allocated and that progress is signposted and monitored.

It is not an additional set of activities that firms should be carrying out, it is intended to help transform companies to be more connected and effective. 

Sharing the responsibility and the accountability avoids the risk of gambling your firm's reputation and hands control to the actual expertise of your organisation.   

As demonstrated, the ACT Framework does not only help ensure firms are doing what is fair and right by their staff, clients and supplies, it also can help firms meet their regulatory objectives.