Pursuant to the FCA’s new Consumer Duty Principle, firms will have to act to deliver good outcomes for retail customers. This overarching duty will be supported by more specific rules and guidance.
Firms will need to apply the duty to new and existing products and services that are open to sale (or renewal) from 31 July 2023, with the application to closed books being delayed to 31 July 2024.
The application of the new consumer duty to firms dealing directly with retail customers is clear. But what does the duty require of wholesale firms whose activities relate only indirectly to retail customers? When does the duty apply and what does it entail?
Application of the duty to indirect provision of products and services
The application of the duty to wholesale firms is defined by reference to their presence in a ‘distribution chain’ involving a retail customer. A retail customer for this purpose includes any person who is, or would be, the end retail customer in that distribution chain but is not a direct client of the firm. This concept applies clearly enough to financial products where it would catch, for example, a fund manager designing a product that is distributed to retail customers through a platform or financial advisers. However, its application to a service is less clear.
Where a firm provides a service to its wholesale client, which enables that client to provide a corresponding service to its retail customers, the firm would not normally be regarded as ‘distributing’ its service to retail clients. Nevertheless, it seems likely from the FCA’s guidance that it would regard this type of activity as being caught. Indeed, in one of the examples the FCA gives (a bank safeguarding the funds of payment and e-money institutions), the service provided by the wholesale firm (deposit taking) and the service provided to the retail customer (payment services or issuance of e-money) are not even the same. Furthermore, whilst the rules and guidance reference the application of the duty in relation to the provision of a ‘product’, this is broadly defined to include any service which involves or includes a regulated or ancillary activity which is provided by one firm to another to enable the latter to distribute investments or provide a regulated activity to a retail customer.
Where a firm does not have a direct relationship with a retail customer, the consumer duty is expressed to apply to it ‘only to the extent that the firm is responsible … for determining or materially influencing retail customer outcomes’ (PRIN 3.2.7R). The use of the word ‘responsible’ (as opposed to, say, ‘able’ or just ‘determines’ or ‘influences’) is interesting. It could be taken to imply some sort of deliberate or implicit assumption of responsibility. This nuance is not, however, reflected in the FCA’s guidance, which indicates that whether a material influence exists will depend on ‘the extent to which a firm is in practice exercising discretion over customer outcomes’ and states that ‘firms must consider if there are retail customers at the end of the distribution chain and if they can determine or materially influence outcomes for them’. Nevertheless, the guidance does helpfully confirm that a firm whose products are made available to retail customers without its involvement would not be subject to the duty.
The interaction of the consumer duty with the ‘agent as client rule’ should also be considered. Although firms will still be able to regard agents as their clients, where the agent is itself an authorised firm acting on behalf of retail customers they are likely to be subject to the consumer duty.
Referencing the need for a proportionate interpretation of the obligations, the FCA noted in its Policy Statement that the impact of the duty on wholesale firms may be less marked than some respondents to the consultation had suggested. It clarified 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’.
Application of the retail customer outcomes
The FCA wants to see four retail customer outcomes from the application of the consumer duty. These relate to:
- products and services,
- price and value,
- consumer understanding, and
- consumer support.
The FCA expects firms to assess and evidence the extent to which and how they are acting to deliver good outcomes and address any issues they identify. Wholesale firms that can determine or materially influence these outcomes will be expected to take responsibility for their actions, regardless of where they sit in the distribution chain.
The steps that wholesale firms need to take to satisfy the four retail customer outcomes would need to be considered specifically in relation to the product or service in question. However, we set out some general thoughts below.
The products and services outcome is likely to apply where the firm is involved as the manufacturer or distributor of a product or service that it is aware will be made available to retail customers. The nature or design of the product is likely to influence retail customer outcomes. The nature of the firm’s responsibility in these circumstances is familiar from existing FCA and EU product governance rules.
The application of the consumer understanding and consumer support outcomes is likely to be more limited where a firm has no direct relationship with retail customers and therefore does not communicate directly with them or provide product support to them. The consumer understanding outcome would clearly apply where a firm designs marketing materials. In its Policy Statement, the FCA noted that in respect of products and services held by both retail and non-retail customers, where it is possible and appropriate, firms might be able to develop different communications or support services for retail and non‑retail customer groups, although this was not in the context of a distribution chain. However, where a firm does not itself communicate with retail customers and is not responsible for designing marketing materials, it is difficult to see how it would be in a position to influence retail customers’ understanding. Would the firm be under a proactive duty to ensure that a customer-facing firm in the ‘distribution chain’ drew certain matters relating to products and services to customers’ attention or is it the customer-facing firm that is responsible for doing this? We think the latter would seem more appropriate, but firms may want to consider if there are circumstances where their communications with customer-facing firms, ie their clients, could be tailored in a way that would enable customer-facing firms to provide information to underlying retail customers that better meet their needs.
It is perhaps the price and value outcome that is the least clear. By pricing a product or the constituent of a product (say a swap provided to the manufacturer of a retail structured product) a wholesale firm may well be in a position to influence the price of the product for retail customers. However, is the firm ‘responsible’ for determining the price of the product to the client, or is that the responsibility of the product manufacturer, who can select swap providers according to the value they provide?
The FCA is introducing cross-cutting rules aimed at providing clarity on their expectations under the consumer duty and to assist the interpretation of the four outcomes. Where firms are within the scope of the consumer duty, the cross-cutting obligations of acting in good faith, avoiding causing foreseeable harm and enabling and supporting retail customers apply. Where the duty is engaged, firms should accordingly be aware of the higher standard of behaviour that will be expected.
However, there are important limits. First, the cross-cutting rules will not affect the nature of the basic legal duties owed by firms. For example, the rules confirm that acting in good faith does not require a firm to act in a fiduciary capacity where it was not already obliged to do so. Secondly, the obligations are subject to the overall standard of reasonableness: the rules confirm that obligations on firms in the distribution chain must be interpreted reasonably, in a manner that reflects the firm’s role in that distribution chain and the degree to which it can determine or materially influence retail customer outcomes.