General
The Consumer Duty applies to the regulated activities and ancillary activities of all firms authorised under the Financial Services and Markets Act 2000 (FSMA), the Payment Services Regulations 2017 (PSRs) and E-money Regulations 2011 (EMRs), in respect of products and services for prospective and actual retail customers.[1]
The scope of the Consumer Duty is aligned with the existing scope of the FCA’s sectoral sourcebooks. This includes small and medium enterprises (SMEs) for which the FCA already regulates the provision of financial services.[2]
Firms should also be aware that Principles 6 and 7 continue to apply to conduct outside of the scope of the Consumer Duty, in the same way that they apply currently.[3]
The FCA recognises that this might cause issues in practical implementation. For example, a firm may be out of scope with respect to the Consumer Duty for one particular service (for example a bank account) but may be in scope with respect to the Consumer Duty for a different service (for example an insurance product). In these circumstances, firms can either make the necessary changes or simply may find it more straightforward to apply the Consumer Duty standard in all circumstances.[4]
The FCA also recognises that certain products (for example, investment funds or payment services) are accessed both by retain customers and non-retail customers. As such, firms face the prospect where – with respect to the same product – the Consumer Duty applies to one set of clients whereas Principles 6 and 7 apply to another set of clients. The FCA clarifies that if a firm is already subject to specific rules on product design or assessment of value, compliance with these rules will also satisfy the firm’s obligations under these aspects of the Consumer Duty.[5] If not, the FCA expects firms to comply with the requirements of the Consumer Duty, but to do so in a “pragmatic and proportionate manner”.[6]
Unregulated activities
The Consumer Duty DOES NOT apply to unregulated activities.
However, the Consumer Duty DOES APPLY to unregulated activities which are ANCILLARY to a regulated activity. An activity is ‘ancillary’ to a regulated activity if it is carried on in connection with a regulated activity or held out as being for the purposes of a regulated activity.[7] This would include unregulated activities which are necessary for the completion of a regulated activity. The FCA gives the example of product design services or customer support. Neither are regulated activities. However, they are necessary activities which are linked to regulated activities. As such, they are in-scope for the purposes of the Consumer Duty.[8]
Application outside of the UK
The Consumer Duty applies to firms conducting regulated activities in the UK.[9]
The Consumer Duty also applies to firms conducting business for non-UK customers, where the business is within scope of rules in existing sectorial sourcebooks. The FCA recognises that this might cause particular problems for firms which are within a distribution chain, part of which lies outside of the UK. In particular, potential issues regarding information sharing by non-FCA regulated firms were recognised.[10] The FCA has clarified its expectations in these circumstances, providing guidance to firms that they should use any available information to support their work under the Consumer Duty but would not be expected to obtain information from firms that are not themselves subject to the Consumer Duty.[11]
The Consumer Duty also applies to firms in the temporary permissions regime following the UK’s withdrawal from the EU. The UK left the EU on 31 January 2020 and the temporary permissions regime allows European Economic Area (EEA) firms to continue operating in the UK within the scope of their permissions for a limited period, while seeking full UK authorisation, if necessary. The Consumer Duty applies to these firms, whether they are doing regulated business from an establishment in the UK or on a cross-border services basis.
The Consumer Duty also applies to firms in supervised run-off under the financial services existing contracts regime.[12]
UK distributors of non-UK products and services must take all reasonable steps to understand the product or service, the target market it would serve and the value it provides in order to ensure it will be distributed appropriately. Regulated firms should also consider whether including a firm that is not subject to the Consumer Duty in the distribution chain leads to a risk of poor customer outcomes.[13]
Where a distribution chain includes non-UK distributors (which are not subject to the Duty), UK manufacturers may not be able to obtain relevant information from them. In this case, UK firms should consider what is reasonable in the circumstances to gather information. For example, they could use any information that they do have available to support their work, but they would not be expected to obtain information from firms that are not subject to the Consumer Duty.[14]
Products and services designed for the wholesale market
Products or services that are not designed for retail customers are NOT in-scope for the purposes of the Consumer Duty, provided that:
- they are only marketed and approved for distribution to non-retail customers, and
- they are not provided to another firm under an arrangement forming part of a distribution chain for a retail product or service.[15]
In addition, financial instruments which are designed primarily to be wholesale instruments are excluded from the scope of the Consumer Duty, where this will not have a negative impact on retail customers.[16] It follows, therefore, that firms in the wholesale market could still be subject to the Consumer Duty (even if they do not have a direct relationship with retail customers). For example, an investment bank that designs a structured product for sale to retail customers would be subject to the Duty. Conversely, an investment bank providing wholesale instruments that a third-party firm independently uses as component parts of a retail product would not.[17] Either way, firms should be aware that incorrectly classifying a product or service as non-retail with the aim of avoiding the requirements of the Consumer Duty, and then distributing the product or service to retail customers, would be in breach of the Consumer Duty.[18]
The list of wholesale activities specifically excluded from the Consumer Duty includes:
- manufacture of products or services only for wholesale purposes, where they meet the conditions in the ‘retail market business’ definition (as discussed above),
- activities relating to non-retail financial instruments,
- market activities for certain financial instruments meeting the criteria in the ‘retail market business’ definition,
- activities relating to insurance contracts of large risks for commercial customers or where the risk is located outside the UK,
- activities connected to the distribution of group insurance policies or the extension of these policies to new members and
- the regulated activity of administering a benchmark, any ancillary activity to that activity and any activities undertaken by a benchmark administrator for the purpose of complying with the Benchmarks Regulation.[19]
Distribution chains
A “distribution chain” means all firms involved in the manufacture, provision, sale and ongoing administration and management of a product or service to the end retail customer.[20]
The Consumer Duty has indirect application in the sense that firms need to consider any retail customers who ultimately make use of a product or service, even if those customers are not direct clients of the firm.[21] In simple terms, the Consumer Duty is capable of applying to all firms within the distribution chain of a product. More specifically, the Consumer Duty applies to firms that are responsible for determining or materially influencing retail customer outcomes. [22] For example, it applies to firms that can influence material aspects of, or determine the:
- design or operation of retail products or services (including their price and value),
- distribution of retail products or services,
- preparation or approval of communications that are to be issued to retail customers, or
- delivery of customer support for retail customers.[23]
The use of the word “responsible” (as opposed to, say, “able” or just “determines” or “influences”) is interesting. This could be interpreted as implying some sort of deliberate or implicit assumption of responsibility. However, the word “responsible” does not appear in the FCA’s guidance. 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 Consumer Duty.[24]
Firms would NOT be exercising any kind of “material influence” (and as such, the Consumer Duty would NOT apply) where the role of the firm is limited to activities such as:
- operating within a mandate determined by another firm in a distribution chain,
- providing factual information to support the work of another firm in a distribution chain, or
- providing IT systems.[25]
Unless there are regulatory requirements or contracts require it, firms within distribution chains are responsible only for their own activities and do not need to oversee the actions of other firms in the distribution chain.[26] However, firms must notify the FCA where they become aware that another firm in the distribution chain of which they are part may not be complying with the Consumer Duty.[27] Regulated firms should also consider whether including a firm that is not subject to the Consumer Duty in the distribution chain leads to a risk of poor customer outcomes.[28]
“Manufacturers” vs “Distributors”
“Manufacturers” are firms that create, develop, design, issue, manage, operate or underwrite (for insurance or credit purposes only) a product or service. [29] More than one firm may be involved in the manufacture of a single product. It is also possible that intermediaries may be co‑manufacturers, for example if they set the parameters of a product and commission other firms to build it.[30]
Firms that purchase books of closed products or services from an original manufacturer will be regarded as “manufacturers” due to the fact that they ‘managing, operating or carrying out activities’ in relation to the product or service in question. As such, they will be expected to continue to review customer outcomes, as required by the Consumer Duty.[31]
“Distributors” are firms that offer, sell, recommend, advise on, arrange, deal, propose or provide a product or service.[32]
Remember though – the essence of a “product” is that it is offered to a “retail customer”.
Co-manufacturers
Where the firms involved are co-manufacturers of a product or service, they must have a written agreement outlining their respective roles and responsibilities. This agreement should clarify which firm is responsible for deciding a particular issue and provide confirmation of which firm is responsible for meeting different aspects of the Consumer Duty.[33]
Information exchange within distribution chains
The FCA recognises that distribution chains for retail market business can be long and complicated. This can cause issues for manufacturer firms obtaining relevant information about customer outcomes. Some manufacturers do not have full visibility of the distribution chain or the end customers. In these circumstances, the FCA expects firms to do what is reasonable.[34]
As previously mentioned, where a distribution chain includes non-UK distributors (which are not subject to the Consumer Duty), UK manufacturers may not be able to obtain relevant information from them. In this case, UK firms should consider what is reasonable in the circumstances to gather information. For example, they could use any information that they do have available to support their work, but they would not be expected to obtain information from firms that are not subject to the Consumer Duty.[35]
Appointed representatives
Principal firms are required to oversee the actions of their appointed representatives, as set out in the Supervision sourcebook (SUP). They should check that their appointed representatives comply with the Consumer Duty when doing so.[36]
Outsourcing arrangements
In general, the Consumer Duty does not apply to outsourcing arrangements, unless an FCA-authorised outsource provider can determine or has material influence over retail customer outcomes.[37]
Occupational pension schemes
The Consumer Duty does not apply to pension schemes regulated by The Pensions Regulator (TPR).[38] However, FCA authorised firms creating a product and operating pension schemes for occupational pension scheme trustees will need to comply with the Consumer Duty if they can determine or materially influence retail customer outcomes.[39]
Group insurance policies
The Consumer Duty does not apply to the distribution of group insurance policies or the extension of the policy to new members.[40]
[1] FG22/5, 2.1
[2] Policy Statement PS22/9, 2.3
[3] Policy Statement PS22/9, 2.3
[4] Policy Statement PS22/9, 2.8
[5] Policy Statement PS22/9, 2.9
[6] Policy Statement PS22/9, 2.9
[7] Policy Statement PS22/9, 2.28
[8] Policy Statement PS22/9, 2.30
[9] Policy Statement PS22/9, 2.31, FG 22/5, 2.35
[10] Policy Statement PS22/9, 2.34
[11] Policy Statement PS22/9, 2.34
[12] FG22/5, 2.38
[13] FG22/5, 2.39
[14] FG22/5, 2.40
[15] Policy Statement PS22/9, 2.20
[16] Policy Statement PS22/9, 2.23
[17] FG22/5, 2.29 and 2.30
[18] Policy Statement PS22/9, 2.20
[19] FG22/5, 2.32
[20] FG22/5, 2.12
[21] Policy Statement PS22/9, 2.4; PRIN 2A.1.15G (see page 107); PRIN 2A.1.13G(1) (see page 106)
[22] FG22/5, 2.13; FG22/5, 2.17; PRIN 3.2.7R; PRIN 2A.1.13G(3) (see page 106)
[23] Policy Statement PS22/9, 2.14 and FG22/5, 2.14
[24] https://www.lexology.com/library/detail.aspx?g=be43294f-5090-4048-be5c-4768055f8c9e&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2022-09-26&utm_term=
[25] Policy Statement PS22/9, 2.14
[26] FG22/5, 2.23
[27] FG22/5, 2.22
[28] FG22/5, 2.39
[29] See definition of “manufacturer” (page 102)
[30] Policy Statement PS22/9, 2.24, FG22/5, 6.4. See also the definition of “manufacturer” (page 102).
[31] Policy Statement PS22/9, 2.24, FG22/5, 2.41 and 2.42
[32] Policy Statement PS22/9, 2.24. See also the definition of “distributor” (page 99).
[33] FG22/5, 2.28 and 6.11, FG22/5, 6.12
[34] FG22/5, 2.22
[35] FG22/5, 2.40
[36] FG22/5, 2.24
[37] Policy Statement PS22/9, 2.39
[38] Policy Statement PS22/9, 2.14
[39] Policy Statement PS22/9, 2.14
[40] Policy Statement PS22/9, 2.14
