Experts have questioned the move, revealed by Investment Week, that EEA-based funds would not be required to comply with the Duty, arguing it could create an additional and costly regulatory burden for UK firms.
Mona Christensen, head of client outcomes at Hargreaves Lansdown, argued the exemption of Consumer Duty requirements offered to the OFR was a “misalignment within the principles of the Duty and the expectations on UK firms”.
Although she suggested the devil will be in the “secondary-legislation-detail”, she argued the decision could have a significant impact on UK asset managers and distributors.
Europe-domiciled funds exempt from Consumer Duty requirements under Overseas Funds Regime
Christensen explained this was due to the requirement for UK houses to comply with the Duty in full and, as such, raises the potential of a future expectation on distributors to “assess EEA funds’ alignment with the principles of the Duty”, a requirement she argued could be “prohibitively expensive”.
Additionally, UK firms would need additional support from the regulator in doing so or face the “burden of liability”, with the potential consequence of “limiting access to EEA funds”.
“The Overseas Funds Regime is an opportunity to cement the UK’s position as a safe place for retail clients,” she continued.
“Requiring EEA firms to comply with the principles of the Consumer Duty when targeting UK retail clients would retain choice for clients, with the security and clarity the Duty offers, and preserve access to the UK market for EEA firms.”
Mike Ringer, financial services partner at law firm CMS, said the UK Government cannot make an equivalence determination when it comes to a jurisdiction unless it is satisfied it provides sufficient consumer protections.
Treasury facilitates long-term UK market access for European fund managers
He noted the FCA has described Consumer Duty as setting higher and clearer standards for consumer protection in the UK, adding this raises the “interesting question” of whether the government considers that, prior to the introduction of the Consumer Duty, the EEA states offered superior standards of consumer protection for financial services to the UK.
Sumit Indwar, financial regulation partner at law firm Linklaters, argued the move was “consistent” with the UK having a “relatively liberal approach” to the provision of financial services by overseas firms.
He added the Treasury’s decision represents a lower barrier to access for EEA-domiciled funds seeking UK retail investor capital but noted overseas strategies will still need to comply with disclosure obligations and the laws and regulations local to their domicile.
Indwar continued: “While it is unlikely that such local regimes will mirror exactly the protections afforded under the Consumer Duty, the EU will be rolling out onerous investor protection provisions under its Retail Investment Strategy, which in some ways goes even further than the Consumer Duty.
“So, while the playing fields for authorised UK firms and EU funds might be different, they are not entirely divergent.
“We do not see the OFR developments as driving a wholesale coach and horses through this.”
Divergence in Consumer Duty application could push asset managers out of UK retail market
Evelyn Partners managing director Jason Hollands said UK distributors and intermediaries would still need to abide by Consumer Duty, along with the UK financial promotions regime, when it came to marketing such funds.
Additionally, Linda Gibson, director and head of regulatory change, EMEA, at BNY Mellon’s Pershing, explained that while EEA-domiciled funds will not be required to submit assessment of value reports, the FCA will review their cost and charges as part of its decision on equivalence to establish whether they expose investors to harm from undue costs.
The Duty also requires a flow of information between manufacturers and distributors, Gibson highlighted, with UK distributors likely already requesting information from EU funds to meet the Duty’s obligations.
Consumer Duty and what it could mean for asset managers
“Divergence between the UK and EU regulatory regimes is already causing complexity for EU funds and could be a disadvantage if they are unable to provide the information required by their UK distributors,” she argued. “The time and effort are factors, and it remains to be seen whether the OFR will simplify requirements.”
OFR aims to ensure a “level playing field” with UK funds, Gibson added, including “at least” equivalent investor protections. This could translate to the UK Government imposing additional requirements on certain jurisdictions when granting equivalence.
Investment Week revealed some of the potential dangers in the divergence of the application of Consumer Duty in November, when it reported there was a possibility that asset manager could recede from the retail market as a result.
OFR is currently under consultation, with feedback submissions open until 12 February 2024.
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