1 A threesixty guide to July 2024 Manufacturers, distributors and co-manufacturers under the Consumer Duty threesixty
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3 Contents Introduction The Consumer Duty Terminology Who is a manufacturer? Who is a distributor? Who is a co-manufacturer? White labelling / co-branding Manufacturer responsibilities Distributor responsibilities Co-manufacturer responsibilities Data sharing Agent as client vs reliance on others Conclusion Appendix one - Co-manufacturer checklist 4 5 6 7 8 10 12 13 16 19 20 21 22 23
4 Introduction The purpose of this guide is to provide some clarity on the roles of manufacturers, distributors and co-manufacturers under the Consumer Duty. The focus of this guide is on investment business and specifically the relationships between discretionary managers and adviser firms / intermediaries. This guide is only a high-level summary of the regulatory requirements. Manufacturers and distributors should familiarise themselves with the detailed requirements.
5 The Consumer Duty The Consumer Duty aims to set higher and clearer standards of consumer protection across financial services. It requires firms to put their customers first and to evidence how they are doing this. The Consumer Duty comprises the following regulatory components: • Principle 12 for firms – A firm must act to deliver good outcomes for retail customers • Three cross cutting rules. Firms must: – Act in good faith toward retail customers – Avoid foreseeable harm to retail customers – Enable and support retail customers to pursue their financial objectives • Four outcomes: – Products and services To ensure all products are services are fit for purpose, designed to meet the needs, characteristics and objectives of a target group of consumers and distributed appropriately. – Price and value To ensure that all consumers receive fair value and that there is a reasonable relationship between the price paid for a product/service and the overall benefit a consumer receives from it. – Consumer understanding To ensure firms’ communications support and enable consumers to make informed decisions about financial products/services. – Consumer support To ensure firms provide a level of support that meets consumers’ needs throughout their relationship with the firm. The Consumer Duty applies to firms manufacturing products and services (manufacturers) and firms distributing products and services (distributors).
6 Terminology Under the Consumer Duty, the terms ‘manufacturer’, ‘co-manufacturer’, and ‘distributor’ are all defined terms and defined as follows. Manufacturer A firm which creates, develops, designs, issues, manages, operates, carries out a product. Distributor A firm which offers, sells, recommends, advises on, arranges, deals, proposes or provides a product. Co-manufacturer Same as for manufacturer. A firm which creates, develops, designs, issues, manages, operates, carries out a product. It’s important to note that under the Consumer Duty the definition of ‘product’ includes a service. A service is defined as ‘any service which involves or includes carrying on a regulated activity or an ancillary activity’. The reference to ‘product’ in the definitions of manufacturer, distributor, and co-manufacturer above therefore captures services such as advice propositions and discretionary management services.
7 Who is a manufacturer? A manufacturer will be any firm that develops, designs or creates a product or service. This means that the definition of manufacturer includes: • An adviser firm creating: – Its advice proposition and menu of advice services – A Centralised Investment Proposition (CIP) or Centralised Retirement Proposition (CRP) which may or may not include the use of a discretionary manager – An advised model portfolio service • A fund manager designing and operating a fund • An investment manager creating its menu of discretionary management services – Model Portfolio Service (MPS), tailored solution, bespoke solution • An investment platform A manufacturer will be a manufacturer of its own proposition. In ‘manufacturing’ its own proposition, it may also be a ‘distributor’ of third-party products / services. For example a discretionary manager will be ‘distributing’ the funds / financial instruments it includes when it ‘manufactures’ its discretionary management service.
8 Who is a distributor? The definition of ‘distributor’ is very widely drafted and is intended to encompass a wide range of scenarios. How distribution arrangements and chains operate may differ from sector to sector, for example distribution arrangements may apply differently in the investment sector from the payments sector. In the payments sector an e-money issuer may formally appoint a distributor to undertake activities on its behalf. In the investment sector, a firm may decide to ‘distribute’ (recommend) a product but there may not be a formal distribution agreement in place. In the investment sector, under the Consumer Duty, a distributor will be any firm that distributes a product or service. An adviser firm will be distributing the financial instruments, for example funds, it includes in its advice proposition or advised model portfolio service, if it provides one. A discretionary manager will be distributing its discretionary management services. It will also be distributing the financial instruments, for example funds, it includes in its discretionary management service. There may not be formal distribution agreements in place in these scenarios. Examples: Adviser firm / intermediary Manufacturer Distributor Adviser firm creating (‘manufacturing’) its own advice proposition and menu of services √ It is manufacturing its advice proposition √ It will be distributing products, for example, funds, through its advice proposition Adviser firm creating an advised model portfolio service (MPS) √ It is manufacturing an advised MPS √ It will be distributing products, for example, funds, through its advised MPS Adviser firm recommending a discretionary management solution as part of its Centralised Investment Proposition (CIP) √ The recommendation of the discretionary management solution will form part of the adviser firm’s CIP that it has ‘manufactured’ √ It will be distributing the discretionary management service
9 Who is a distributor? Discretionary Investment Manager Manufacturer Distributor Discretionary manager creating (‘manufacturing’) its discretionary management services (model portfolio service (MPS), tailored or bespoke solutions) √ It is manufacturing its discretionary management services √ It will be distributing products, for example funds, through its discretionary management services Discretionary manager creating a discretionary model portfolio service (MPS) √ It is manufacturing a discretionary MPS √ It will be distributing products, for example funds, through its discretionary MPS Investment platform Manufacturer Distributor Platform Service Provider creating (‘manufacturing’) its platform services √ It is manufacturing its platform services √ It will be distributing products, for example funds, via its platform
10 Who is a co-manufacturer? A firm which distributes products / services must consider whether they are also a comanufacturer of the product / service they are distributing. If they are, they must apply the manufacturing rules. Whether or not a co-manufacturing arrangement exists will depend on the nature of the arrangements in place between the respective parties, the extent of any collaboration, and what happens in practice. The FCA have provided several indicators that a comanufacturing arrangement might exist and commented as follows: ‘A firm would be considered a co-manufacturer where they can determine or materially influence the manufacture of a product or service. This would include a firm that can determine the essential features and main elements of a product or service, including its target market.’ Source: FG 22/5: Final non-Handbook Guidance for firms on the Consumer Duty (Para 6.10). The target market of a product or service is a specific group of people with shared characteristics at which the product or service is aimed. The process of identifying the group of people with shared characteristics, and assessing how a proposition and its distribution strategy aligns to the identified target market, is known as the target market assessment. Indicators a co-manufacturing arrangement might exist include the following: • Ability to determine a product’s / service’s: – Charges – Terms and conditions – Essential features and main elements, including target market • Decision making role on elements such as target market or investment strategy • Ability to determine or materially influence the manufacturer of a product or service • Ability to mitigate issues arising from the product / service • Ability to set the parameters of a product / service or commission other firms to build it Whether or not a co-manufacturing arrangement exists will depend on the firm’s role and the degree to which it can determine or materially influence retail customer outcomes. It’s also important to consider how the arrangement is branded or marketed and what the consumer will understand by how the arrangement is presented (see further below under white labelling / co-branding).
11 Who is a co-manufacturer? Scenario 1 • Adviser firm partners with a discretionary manager who runs a series of discretionary model portfolios designed specifically for the clients of the adviser firm • Adviser firm sets the mandate for each portfolio and has influence over asset allocation and fund selection • A joint Investment Committee is set up • Adviser firm agrees target market for each portfolio with the discretionary manager • Discretionary manager has an in built majority on the investment committee and power of veto on investment management decisions • Discretionary manager ultimately responsible for all investment decisions • Proposition co-branded This scenario is likely to be a co-manufacturing arrangement. Although the discretionary manager is ultimately responsible for the investment decisions, as it is the entity with the discretionary management permissions, the adviser firm is likely to have material influence over the investment strategy and target market. In effect, the adviser firm has ‘commissioned the service’ and is a co-manufacturer of that service. This type of scenario is often referred to as a ‘tailored’ or ‘bespoke’ solution as it is tailored or bespoke to the clients of the adviser firm. Scenario 2 • Adviser firm decides to recommend the discretionary model portfolio service of a particular discretionary manager • The portfolios are ‘off the shelf’ and not targeted specifically to the clients of the adviser firm • Arrangement is co-branded This scenario is unlikely to be a co-manufacturing arrangement because the adviser firm appears to have no influence over the investment strategy or target market. It is simply a co-branded solution. However, for further information on this please see below under white labelling / co-branding. White labelling or co-branding a proposition brings with it other regulatory issues which require very careful consideration. The checklist at Appendix 1 will assist firms to establish if a co-manufacturing arrangement exists.
12 White labelling / co-branding A white-labelled solution is a product / service produced by one firm (Firm A) that another firm (Firm B) rebrands to make it appear as if it has created it. From a marketing perspective, the solution appears to clients as belonging to Firm B’s brand. Co-branding is where the brands / logos / names of both Firm A and Firm B appear on a particular solution. With either a white labelled or co-branded proposition, the consumer must understand who is actually providing the service. How the consumer will understand the arrangement must be considered under the Consumer Understanding outcome. It’s also very important that firms are clear about their roles and responsibilities. To act as a discretionary manager or a platform service provider requires specific FCA permissions which typically an adviser firm may not have. The adviser firm should not hold itself out as being able to undertake an activity for which it does not have the requisite permissions. If the marketing / branding is such that the consumer believes the adviser firm is in some way ‘manufacturing’ the product/service, this will be a relevant factor to consider from a comanufacturing perspective. If an adviser firm has no material influence over the proposition, it may want to think carefully about the branding of the proposition and holding itself out as being the manufacturer of the solution, particularly if things go wrong. It may have no ability to mitigate consumer harms, for example. The positioning of the arrangement also needs to be considered under the clear, fair and not misleading requirement.
13 Manufacturer responsibilities The responsibilities of manufacturers include but are not limited to the following. Products and services outcome • Approval process Develop an approval process for products or services, which should be regularly reviewed to ensure it remains fit for purpose. The product approval process requires the manufacturer to take all reasonable steps to ensure that the product / service is distributed to the identified target market (see further below under Distribution Strategy). • Target market Identify a target market of consumers for whose needs, characteristics, and objectives the product or service is compatible. • Vulnerability Consider the needs of consumers with characteristics of vulnerability in the target market and take account of any additional or different needs of those consumers. • Testing Test the product or service and ensure it is designed to meet the needs, characteristics and objectives of the target market, with consideration of any groups of customers for whom the product may not be appropriate, or may cause harm. • Distribution strategy Develop a distribution strategy appropriate for the target market and provide adequate information to distributors to enable them to understand the product or service and the target market. Example: A discretionary manager may decide that its distribution strategy is such that its product or service can only be sold through advisers and not direct to the consumer. This would be made clear in its target market.
14 Manufacturer responsibilities As part of its distribution strategy, a discretionary manager working in partnership with an adviser firm will also need to consider what checks it should undertake on that adviser firm (distributor) before it onboards the adviser firm as a ‘distributor’ of its discretionary management service. • Regular review Regularly review the product or service and its distribution, and take appropriate action to mitigate the situation if it identifies circumstances that may adversely affect its customers • Information sharing Make available all appropriate information to distributors to allow them to: – Understand the characteristics of the product or service – Understand the identified target market – Consider the needs, characteristics and objectives of any customers with characteristics of vulnerability – Identity the intended distribution strategy – Ensure the product or service will be distributed in accordance with the target market – Obtain information from distributors on customer outcomes (see further below under Information sharing) Clients with characteristics of vulnerability In designing products and services, there is an obligation on manufacturers to consider the needs, characteristics and objectives of any customers with characteristics of vulnerability. Where the manufacturer has no relationship with the underlying consumer, characteristics of vulnerability will be considered at the product / service level. Any consumers for whom the product / service might not be appropriate will be set out clearly in the target market and negative target market. The distributor, for example the adviser firm, is typically the entity with the closest relationship with the end client and is consequently in the best position to determine whether a product or service has particular features that render it appropriate - or inappropriate - for individual clients with characteristics of vulnerability. Price and value outcome • Set charges to ensure that its product / service provides fair value • Undertake a value assessment on the product or service • Make the outcome of that value assessment available to firms distributing the product / service
15 Manufacturer responsibilities Consumer understanding outcome • Communicate in a way that customers can understand • Where a discretionary manager sets up a relationship with an adviser firm on the ‘agent as client’ basis, there is no direct contractual arrangement between the discretionary manager and the underlying retail investor. Instead, the discretionary manager normally classifies the adviser firm as a professional client. However, the ‘target market’ for the discretionary manager’s proposition is retail investors. It’s therefore important that the discretionary manager’s communications, for which the target market is retail investors, are appropriate for that target market i.e. retail clients. Customer support outcome • Offer appropriate customer support standards
16 Distributor responsibilities Distributors must have distribution arrangements in place for each product or service they distribute. The distribution arrangements must: • Avoid causing and, where that is not practical, mitigate foreseeable harm to customers. • Support management of conflicts of interest. Firms should not make any arrangements that could provide an incentive to employees to recommend a product or service when an alternative would better meet a customer’s needs. • Ensure the needs, characteristics and objectives of the target market for the product / service being distributed are taken into account. • Understand the products or services they distribute. Firms should not distribute a product or service if they do not understand it sufficiently. An adviser firm distributing their solutions direct to consumer i.e. where there are no other distributors in the chain – will need to ensure that their own internal processes result in the service only being provided to the correct client segments / target market. That will be the ‘distribution strategy’. Before a distributor ‘distributes’ a product or service it will need to consider how the manufacturer’s target market aligns with its own assessment of the needs, characteristics, and objectives of its own clients. Source: FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty (Para 2.20).
17 Distributor responsibilities Products and services outcome • Obtain sufficient information from the manufacturer on the target market of the product / service to allow them to: – Understand the characteristics of the product or service – Understand the identified target market – Consider the needs, characteristics and objectives of any customers with characteristics of vulnerability. – Identify the intended distribution strategy – Ensure the product or service will be distributed in accordance with the needs, characteristics and objectives of the target market • Identify or create an appropriate distribution strategy which is consistent with the distribution strategy set by the manufacturer • Share information with manufacturers on customer outcomes (see further below under Information sharing) • Regularly review whether their distribution arrangements are appropriate and up to date and that products and services have been distributed to customers in the target market Clients with characteristics of vulnerability The distributor (adviser firm) is typically the entity with the closest relationship with the end client and is consequently in the best position to determine whether a product or service has particular features that render it appropriate, or inappropriate, for individual clients with characteristics of vulnerability. Price and value outcome • Obtain sufficient information from the manufacturer to understand the value assessment the manufacturer has undertaken • Ensure their own charges for distributing the product or service represent fair value • Consider the ‘total cost’ of the product or service Example: A discretionary manager is ‘manufacturing’ a discretionary Model Portfolio Service (MPS) which it distributes through third party adviser firms. In this scenario the discretionary manager is a manufacturer of the MPS, and a distributor of the funds included in the MPS. An adviser firm is recommending the discretionary manager’s MPS as part of its Centralised Investment Proposition (CIP). In this scenario, the adviser firm is a manufacturer of its CIP (which includes the discretionary manager’s MPS) and a distributor of the discretionary manager’s MPS.
18 Distributor responsibilities Discretionary Investment Manager • Takes account of the outcomes of value assessments from the fund managers for each of the funds included in the MPS. • Undertakes a value assessment on the ‘manufacture’ of the MPS. The value assessment on the MPS takes into account the value assessments from the fund managers (total cost). • Makes the outcome of the value assessment on the MPS available to distributors (adviser firms). Adviser firm • Takes account of the outcome of the value assessment from the discretionary manager on the discretionary manager’s MPS • Undertakes an assessment of value on the manufacture of its own CIP and advice proposition • Undertakes a value assessment on the ‘total cost’ of recommending the MPS including its own adviser charge Consumer understanding outcome • Communicate in a way that customers can understand • Where a distributor distributes products and services from a manufacturer, for example a discretionary manager’s MPS service - and uses marketing literature or communications from that manufacturer, it must ensure that the communications from the manufacturer are appropriate for its own target market of clients Customer support outcome • Offer appropriate customer support standards
19 Co-manufacturer responsibilities With a co-manufacturing arrangement, the roles and responsibilities of the ‘comanufacturers’ need to be very clearly articulated. There also needs to be a formal comanufacturing agreement in place which sets out very clearly which party is doing what. Being classified as a ‘co-manufacturer’ brings with it ‘manufacturer’ responsibilities. See section above. In any co-manufacturing agreement, the co-manufacturers need to be very clear about who is responsible for what under the Consumer Duty covering areas such as value assessments, data sharing (see below) and complaint handling. What is crucial with a co-manufacturing arrangement is that an adviser firm positions its role in the arrangements correctly, so that clients have an accurate understanding of which party is responsible for which elements of the service being delivered to them. As with any other business initiative, adviser firms should liaise with their PI insurers and gain their consent to the arrangement. Where adviser firms enter into a co-manufacturing arrangement and charge a fee for any additional activities they undertake in relation to that arrangement, for example a higher adviser charge to reflect their involvement in the arrangement, that additional fee needs to be factored into the adviser firm’s value assessment. In this guide we are looking at co-manufacturing mainly in the context of model portfolio services. However, advisers should also consider whether they are co-manufacturers of any products, for example funds, that they have material influence over in terms of their design and management. For example if a firm works with a fund manager to design a fund, and has a decision-making role on elements such as the target market or investment strategy, it would be regarded as a co-manufacturer under the products and services outcome and the price and value outcome. Source: FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty (Para 2.20)
20 Data sharing There are obligations under the Consumer Duty for manufacturers and distributors to share information. Manufacturers need to make available information to distributors on their products / services such as target market and value assessments. Distributors need to share with manufacturers information on customer outcomes such as sales into and outside the target market, information on cancellations and information on the regular reviews of their distribution arrangements. The FCA recognise distribution chains can be long and complicated and that this can cause issues particularly for manufacturer firms obtaining relevant information about customer outcomes. The FCA have commented as follows: ‘Some manufacturers do not have full visibility of the distribution chain or the end customers. Some fund managers, selling via platforms for example, will not know if other distributors are involved or if their funds are being sold outside the target market. In this type of scenario, firms should consider what is reasonable in the circumstances. For example, it may be possible to send a periodic survey to distributors, or ask the next firm in the chain for relevant information, including the identity of other firms in the chain or sales information. If other firms do not provide that information, the manufacturer firm should use any information it does have. But, where there is a complete lack of information and no ability to find it, manufacturers may not need to take any further action.’ Source: FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty (Para 2.23). Manufacturer firms should use all reasonable efforts to obtain the requisite information. Distributor firms are required to share information to support manufacturers when reviewing products or services. Distributors need to co-operate and should reply to all data information requests they receive from relevant parties in the distribution chain, for example platform or discretionary manager, in a timely manner. As a minimum, distributors may need to share information confirming that the product or service has been sold into the correct target market together with details of any sales outside the target market with an appropriate explanation. Where appropriate, distributors must inform other relevant parties in the distribution chain if they identify consumer harm or take remedial action following a review of distribution arrangements.
21 Agent as client vs reliance on others An adviser firm recommending the use of a third-party discretionary management solution can set up the arrangements with the discretionary manager on the Agent as client (AAC) or Reliance on others (ROO) basis. See our separate guide on the structure of these arrangements which is available from the authors. The structure of these arrangements does not change with a firm’s classification as a manufacturer, distributor, or co-manufacturer. However, as part of their Consumer Duty implementation plan, each party will need to ensure that the structure of the arrangements meets the Consumer Duty requirements, particularly in terms of the Consumer Understanding outcome.
22 Conclusion Firms may play different roles in different distribution chains. What’s important is that roles and responsibilities for each of the parties in any distribution chain are very clearly defined, articulated and understood and that each party in the chain meets their own Consumer Duty responsibilities.
23 Appendix one - Co-manufacturer checklist Co-manufacturer checklist – Discretionary management product / service This checklist is designed for adviser firms who are seeking to establish whether they are a co-manufacturer under the Product and Services / Price and Value outcomes of the Consumer Duty. A co-manufacturing proposition may exist where two or more parties collaborate to manufacture a product or service. Examples of this could be a discretionary management service tailored to specific client segments of an adviser firm or a white labelled platform proposition. Whether or not a co-manufacturing arrangement exists will depend on the nature of the arrangements in place – including the ability of each party to influence client outcomes and make decisions. The questions below could be the starting point for firms to ascertain whether they are likely to be a co-manufacturer. You need to answer all the questions. 1. Have you set the parameters for. or commissioned, a product or service which you have then passed to another entity to design? Yes - indicates a co-manufacturing arrangement No 2. Do you collaborate with another entity to produce a product / service targeted at your own clients? Yes – indicates a co-manufacturing arrangement No 3. Are you involved in any way in the design of a product / service with another party? Yes – indicates a co-manufacturing arrangement No If you answered ‘Yes’ to any of the above questions, continue working through this document. The FCA guidance states ‘A firm would be considered a co-manufacturer where they can determine or ‘materially influence’ the manufacture of a product or service. This would include a firm that can determine the essential features and main elements of a product or service, including its target market’. Source: FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty (Para 6.10). Whether or not a co-manufacturing arrangement exists will also depend on how decisions are made by the respective parties.
24 Appendix one - Co-manufacturer checklist The table below lists some of the factors that might indicate that your firm is a comanufacturer where you set up an arrangement with a discretionary manager. For each factor you should detail exactly what your involvement is in each step. Obligations should be interpreted reasonably, in a manner that accurately reflects the firm’s role in the arrangement and the degree to which it can determine or materially influence retail customer outcomes. When deciding whether a co-manufacturing arrangement exists, it may be a combination of factors listed below that moves a firm from distributor status to co-manufacturer. Factors to consider when assessing whether a comanufacturing arrangement is in place Describe what your firm’s involvement is in relation to the factor listed in column 1. This description should be as detailed as possible and explain exactly what your firm is doing Assess your role against the following key indicators and record the result here: • What is your level of influence? • Do you have a decisionmaking role? Target Market Is the firm involved in helping the manufacturer set the target market for the product / service itself? This is a different step from assessing the target market of a client bank / client segments although clearly the target market of the product / service should align to the client segmentation / client target market. Setting the mandate Is the firm involved in setting the mandate for the product / service, for example an investment mandate for a discretionary management service? An investment mandate is a set of rules laying out how a pool of assets should be invested. Mandates may include guidelines on priorities, goals, benchmarks, risk, and types of funds to be either chosen or avoided.
25 Appendix one - Co-manufacturer checklist Factors to consider when assessing whether a comanufacturing arrangement is in place Describe what your firm’s involvement is in relation to the factor listed in column 1. This description should be as detailed as possible and explain exactly what your firm is doing Assess your role against the following key indicators and record the result here: • What is your level of influence? • Do you have a decisionmaking role? Investment strategy Is the firm able to influence the investment strategy of the product service? Signs of influencing the investment strategy might include one or more of the following: • Involved in discussions around strategic and tactical asset allocation • Involved in fund selection (this could be research, due diligence, proposals to the discretionary manager) • Involvement in the investment committee Costs and charges Can you help set the third party’s product / service charges? This is different from your own adviser charges Remuneration Is there any form of fee sharing arrangement in place? Terms and conditions Do you have a role in setting the product / service terms and conditions?
26 Appendix one - Co-manufacturer checklist Factors to consider when assessing whether a comanufacturing arrangement is in place Describe what your firm’s involvement is in relation to the factor listed in column 1. This description should be as detailed as possible and explain exactly what your firm is doing Assess your role against the following key indicators and record the result here: • What is your level of influence? • Do you have a decisionmaking role? Marketing and co-branding How is the proposition marketed to investors and is it co-branded? A co-branded proposition of itself would not necessarily indicate a co-manufacturing arrangement. Some of the other factors highlighted in this checklist would also need to be present. However, how the consumer views the arrangement must be considered under the Consumer Understanding outcome. If the marketing / branding is such that the consumer understands the adviser firm is in some way ‘manufacturing’ the product / service this will be a relevant factor to take into account Agreements How are the arrangements between you and the discretionary manager described in any legal documentation? Are you described as a ‘distributor’ or as a ‘co-manufacturer’?
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