Consumer Duty for Discretionary Fund Managers: What the FCA Expects

A discretionary manager runs a Balanced model for 4,000 underlying clients. It has a contractual relationship with roughly 200 advice firms and none at all with the 4,000. Ask that manager who its client is and the answer will usually be the adviser.

Ask the same question of PRIN 2A and the answer is different. The Duty follows the retail client through the distribution chain, whether or not the firm at the end of it has ever spoken to them.

That gap is where most Consumer Duty problems in discretionary management sit. Not in bad intent, but in a firm applying obligations that stop at its contractual counterparty when the rules do not.

Which role the firm is actually playing

The first question a DFM has to answer is whether it is a manufacturer, a distributor, or both. Most are both, in different parts of the same service.

Activity	Role	What it brings
Designing and running an in-house MPS or bespoke mandate	Manufacturer	Target market definition, fair value assessment, outcomes monitoring, information to distributors
Selecting third-party funds inside a portfolio	Distributor	Acting on manufacturer information, distributing within the stated target market, feeding back
Providing a service accessed through advice firms	Manufacturer with a distribution chain	Sharing what distributors need to meet their own obligations

Getting this wrong produces a specific failure pattern. A firm treats itself as a pure distributor because it never faces the end client, so it never produces a target market statement for its own strategies. The advice firms downstream then have nothing to assess suitability against, and both ends of the chain end up relying on the other.

The PRIN 2A rules set out the obligations for each role, and the drafting assumes firms know which one they are in for each product.

Fair value: the assessment that has to include other firms’ fees

The price and value outcome is the one that catches discretionary managers, because a DFM only controls a fraction of the cost stack.

A client in a discretionary service typically pays four or five separate charges: the advice fee, the platform fee, the discretionary management fee, the underlying fund OCFs, and transaction costs. Custody and FX may sit on top. The DFM sets one of those and influences two more.

Assessing only your own line is not a fair value assessment. The Duty asks whether the client receives value from the product they actually buy, and the client buys the whole stack.

That has three practical consequences.

The assessment has to be done at total cost. Even where the firm does not set the other components, it needs to know what a typical client pays in aggregate and be able to justify its own contribution within that total.

Value has to be tested at each price point, not on average. A tiered fee scale that offers good value at £2m and thin value at £250,000 fails for the clients at the bottom, and an average across the book conceals exactly that.

Small portfolios in bespoke mandates are the standing problem. A bespoke service priced for £1m portfolios, holding a tail of £180,000 accounts inherited from an old relationship, is the single most common fair value issue in UK discretionary management. Those clients pay bespoke pricing for what is functionally a model portfolio. We set out how the charging structures compare in our guide to DFM charges.

Target market, and the drift nobody notices

Target market statements are written once, at launch, and then the book moves.

Drift is rarely dramatic. A cautious strategy gradually accumulates clients with fifteen-year horizons because advisers like the manager. A strategy designed for accumulation fills with clients drawing income. A £500,000 minimum quietly becomes £150,000 for the right introducer.

None of those decisions is wrong in isolation. Together they mean the population invested in a strategy no longer resembles the population it was designed for, and the firm cannot demonstrate otherwise because nobody measures it.

The test is straightforward and almost nobody runs it: take the current client population of a strategy, profile it against the target market statement, and report the exceptions. If more than a small minority sit outside the stated market, either the statement is wrong or the distribution is.

The MI that actually evidences outcomes

Consumer Duty asks firms to monitor outcomes, not activity. Discretionary managers tend to produce a great deal of the latter.

Activity MI, which is not enough on its own: assets under management, net flows, number of portfolios, adviser satisfaction scores, response times.

Outcomes MI, which is what the rules ask for:

• Dispersion within a strategy. How widely did individual client outcomes vary around the composite? Wide dispersion in a supposedly systematic strategy is an outcomes finding, not a performance one.
• Objective achievement by cohort. Did income clients receive the income the mandate described? Did capital preservation strategies preserve capital over the stated horizon?
• Client population against target market, as above.
• Complaints with root cause analysis, including complaints made to the adviser and never escalated, which requires asking distributors for them.
• Vulnerability indicators, which for a DFM working through advisers usually means agreeing with the advice firm who holds what and how it is communicated.
• Cash drag and unexplained holdings, the two things clients most often find in a portfolio they did not expect.

For advisers on the other side of this, our ongoing DFM oversight framework sets out the same territory from the advice firm’s point of view.

Who is the client, contractually and under the Duty

The agent as client and reliance on others structures produce different answers about responsibility, and firms sometimes assume the contractual answer resolves the regulatory one. It does not.

Under agent as client, the advice firm is the DFM’s client, and the underlying investor may not be treated as a retail client of the DFM at all. That structure changes obligations, but it does not put the end investor outside the Duty’s reach across the chain. Under reliance on others, the underlying investor is the DFM’s client and the manager relies on the adviser’s suitability work, which requires the manager to be satisfied that work exists.

We covered the mechanics of both in agent as client versus reliance on others. The Consumer Duty point is narrower: whichever structure applies, the firm has to be able to explain what it does to support good outcomes for people it does not deal with directly.

What good looks like on the file

A discretionary manager that can produce these five things is in a defensible position:

1. A target market statement per strategy, dated, with the client population profiled against it at least annually.
2. A fair value assessment at total cost, tested at each price point, with the small-portfolio tail explicitly addressed.
3. Outcomes MI that measures client results rather than firm activity, reviewed by a committee that minutes what it decided and why.
4. A distributor information pack that gives advice firms what they need to meet their own obligations, refreshed when anything material changes.
5. Evidence of action taken when the MI showed a problem, which is the item most often missing. Monitoring that never produces a change reads as monitoring that was never used.

The FCA’s Consumer Duty pages remain the primary reference, and the regulator’s published reviews have consistently found the same weakness across sectors: firms that can describe their framework in detail and cannot show a single decision it changed.

For advisers selecting a manager, the question to ask in a due diligence meeting is deliberately blunt. Show me something your outcomes monitoring made you change in the last twelve months. The quality of the answer tells you more than the framework document ever will.