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The Financial Conduct Authority expects the Consumer Duty to lead to a major shift in financial services. Wholesale firms will need to ensure they are ready to implement the changes required to comply. By Elisabeth Øverland and Mark Kalderon of Freshfields Bruckhaus Deringer.
Under the Financial Conduct Authority’s (FCA’s) new Consumer Duty, firms will be required to act to deliver good outcomes for retail customers. The duty will apply to new and existing products and services that are open to sale (or renewal) from July 31, 2023 and to closed books from July 31, 2024.
The FCA wants firms to fundamentally improve how they serve consumers in the UK and ensure their needs are always put first. But while the application of the duty to firms dealing directly with consumers is clear, what does it mean for wholesale firms whose services and products only impact consumers indirectly?
The importance of the distribution chain
The application of the Consumer Duty to a wholesale firm is defined by reference to its presence in a distribution chain involving a retail customer. However, the firm’s responsibilities will depend on what is reasonable in the circumstances, taking into account the firm’s role in the chain. A retail customer includes any person who is the end retail customer in the chain, but who is not a direct client of the firm.
firms will need to carefully assess their role to determine the impact of the Consumer Duty
By referencing the ‘distribution chain’, the FCA intends to capture “all firms involved in the manufacture, provision, sale and ongoing administration and management of a product or service to the end retail customer”. This is extremely broad and wholesale firms will need to carefully assess their role in the chain to determine the impact of the Consumer Duty.
Material influence over customer outcomes
Where a firm designs a product that is sold to retail customers via distributors, the application of the duty seems clear. However, the application to the provision of an investment or payment service is not always evident.
Nevertheless, the provision of a ‘product’ under the duty is broadly defined and includes a service which involves a regulated or ancillary activity or payment service provided by one firm to another to enable the latter to distribute investments or provide a regulated activity to a retail customer.
Where the firm does not have a direct relationship with the retail customer, the duty is expressed to apply “only to the extent that the firm is responsible […] for determining or materially influencing retail customer outcomes”. Although the word ‘responsible’ could be read as implying an assumption of responsibility, FCA guidance suggests that this will depend on “the extent to which a firm is in practice exercising discretion over customer outcomes”. The relevant customer outcomes relate to products and services, price and value, consumer understanding and consumer support.
For instance, the duty will apply in circumstances where firms can influence material aspects of how a retail product or service is designed or operates (e.g., as product manufacturer). It will also apply if the firm can materially influence the distribution of the product or service, the communications that are provided to retail customers or related support services.
When a firm acts as manufacturer or distributor of a product or service, the broad nature of the firm’s responsibility should already be familiar from existing FCA and EU product governance rules.
The application of the consumer understanding and consumer support outcomes may be limited where a firm has no direct relationship with retail customers. However, firms may consider if there are circumstances where their communications could be enhanced to enable customer-facing firms to provide information to retail customers that better meet their needs. They should also consider the extent to which communications addressed to their clients may be passed on to retail customers.
The application of the price and value outcome may prove tricky; while a wholesale firm may be able to influence the price of the product for retail customers, is the firm ‘responsible’ for determining the price of the product or is that the responsibility of the distributor who can select providers according to the value they provide?
It seems, however, that a manufacturer of a product or service will be expected to carry out an assessment to consider whether fair value is provided and to ensure distributors have the necessary information with respect to the value a product is intended to provide to a retail customer.
The substance of the firm’s role is therefore essential. If the firm’s role in the chain does not enable it to determine or materially influence retail customer outcomes, the duty will not apply.
The level of responsibility will depend on the firm’s role
While the FCA expects firms with a decision-making role for customer outcomes to carry the greatest responsibilities under the duty, the level of responsibility in other circumstances will depend on the firm’s actual role and influence in practice, rather than on disclaimers or other provisions in contractual terms between the parties in the distribution chain.
The FCA recognises that there is a need for a proportionate interpretation of the obligations and has noted that the impact of the duty on wholesale firms may be less marked than some respondents to its consultation had initially suggested. It has also made clear that “where a firm is already subject to rules on product design or the assessment of value, complying with these rules will also satisfy relevant parts of the duty”.
However, the FCA expects firms to assess and evidence the extent to which and how they are acting to deliver good outcomes for retail customers and to take action if they identify any concerns. Wholesale firms that materially influence or determine customer outcomes will need to take responsibility for their actions, regardless of where they sit in the distribution chain.
Where firms are within the scope of the duty, additional regulatory obligations of acting in good faith, avoiding causing foreseeable harm and enabling and supporting retail customers will also apply. Firms should therefore be aware of the higher standards of behaviour that will be expected.
Planning for implementation
The FCA expects firms’ implementation plans to be sufficiently developed by the end of October to provide their governing bodies and the regulator with assurance that the duty has been carefully considered and will be implemented in time for the July 31, 2023 deadline.
Wholesale firms will therefore need to put in the effort now to assess the impact of the duty and ensure they are able to take any actions required as a result.
Elisabeth Øverland is a counsel and Mark Kalderon is a partner in the London office of international law firm Freshfields Bruckhaus Deringer.
