If the FCA checked on your firm today, would your 'Implementation Plan' fit their criteria? Will your firm be affected by the new Consumer Duty Rules? If so, to what extent? In this newsletter Yhan Roger Rizet, Trainee Compliance Associate at FinTech Compliance, explores the level of expectations your firm faces, what and who are exempt, and the measures you should have in place before the October deadline.
The FCA’s expectations will apply differently (both flexibly and dynamically) to new products, services, and business models as they continue to emerge and develop in an ever changing and increasingly digital environment. So, the new rules must protect consumers from current and new/emerging drivers of harm, and give firms more certainty of the FCA expectations to support innovation, competition, and new ways of serving customers.
Do the new Consumer Duty Rules apply to your firm?
The new Consumer Duty (the Duty) applies to firms that can determine or materially influence retail customer outcomes. 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
the distribution of retail products or services
preparing and approving communications that are to be issued to retail customers,
or engaging in customer support for retail customers.
A firm that is remote from the retail customer, with no direct client relationship, may have more limited obligations. For example, a fund manager working with the board of an investment trust may have a material influence over product design and other matters, but the ultimate decisions may be taken by the board. The firm should, where reasonably practicable, comply with the Duty within the context of its role; this could include discussing any concerns with the board. An investment bank, for example, that designs a structured product for sale to retail customers would be subject to the Duty. On the other hand, an investment bank providing wholesale instruments that a third-party firm independently uses as component parts of a retail product would not.
Does the Duty also apply to your unregulated activities?
The FCA also proposed that it would apply to unregulated activities which are ancillary to a regulated activity. These are activities carried on in connection with a regulated activity or held out as being for the purposes of a regulated activity. Ancillary activities include unregulated activities necessary for the completion of a regulated activity. For example, the design of a product or service, and ongoing customer support services, are not themselves regulated activities. They are, however, necessary activities linked to regulated activities. So, for example, selling a separate nonfinancial services product at the same time a regulated activity is performed, where completion of the regulated activity does not depend on sale of the unregulated product, would not amount to an ancillary service.
Is your firm exempt from the Duty?
The Duty would not apply to a firm whose role is limited to activities such as the following:
Operating within a mandate determined by another firm in the chain. This could include a portfolio manager whose role is limited to managing assets under a mandate determined by a professional client, where that client is entirely independent of the manager. For instance, this might be the case where a portfolio manager is managing part of the portfolio of a defined benefit pension scheme. It is unlikely to be the case where the portfolio manager is managing the assets of an investment company and, while technically independent of the investment company, has, for example, a material influence on the design, branding and promotion of the product.
Providing information to support the work of another firm in the chain.
Providing IT systems. Moreover, The Duty does not apply to the distribution of group insurance policies or the extension of the policy to new members.
Credit rating agencies are not within scope of the Duty. Credit rating agencies issue credit ratings which are opinions of the creditworthiness of an entity, a debt or financial obligation, debt security, preferred share, or other financial instrument, or of an issuer of such a debt or financial obligation, debt security, preferred share, or other financial instrument, issued using an established and defined ranking system of rating categories.
Institutions such as recognised investment exchanges, recognised clearing houses, settlement systems and trade repositories would not be subject to the Duty where they are not authorised persons subject to the FCA’s regulation
The FCA confirm that the Duty does not apply to activities where an exclusion exists, either in the Handbook or in legislation. The have updated the rule on which we consulted to make this clear. So, for example, for mortgages, the Duty follows the position in MCOB and does not apply to unregulated buy to let contracts or large business customers.
How does the Duty apply to your firm?
The FCA proposed that most elements of the Duty would apply, on a forward looking basis, to existing products or services which are either:
– still being sold to customers, or
– closed products or services that are not being sold or renewed.
Moreover, the FCA proposed to disapply aspects of the product and service outcomes rules that could not be easily applied to closed products and services. For example, The FCA said that manufacturers would not need to identify a target market or develop a distribution strategy.
What sanction can your firm face if you are not compliant with the Duty?
The FCA has decided to continue with the proposed approach and is not attaching a private right of action (PROA) to any aspect of the Duty at this time. As set out in CP21/36, The FCA see benefit in giving firms time to implement the significant changes that the Duty entails without the threat of private action being taken.
Any future review of the case for a PROA could consider, for example, whether there was a stronger case for attaching it to the rules under our four outcomes, but not to Principle 12 or the crosscutting rules. Any decision to attach a PROA to the Duty would be subject to further consultation.
Now that we identified if your firm is affected by the consumer duty and to which extent the firm could be liable under the policy, the next question is…
What can your firm do to be compliant?
The Duty is comprised of three components:
A Consumer Principle the consumer Principle, Principle 12, requires firms to ‘act to deliver good outcomes for retail customers. It sets a higher standard than principles 6 and 7.
The ‘cross-cutting rules’ which: – develop the FCA’s expectations for behaviour through three overarching requirements that explain how firms should act to deliver good outcomes for retail customers. They require firms to: act in good faith towards retail customers – avoid causing foreseeable harm to retail customers – enable and support retail customers to pursue their financial objectives.
The ‘four outcomes’ which are a suite of rules and guidance setting more detailed expectations for firm conduct in four areas that represent key elements of the firm- consumer relationship:
– The governance of products and services: ensure that the design of the product or service meets the needs, characteristics and objectives of customers in the identified target market ensure that the intended distribution strategy for the product or service is appropriate for the target market carry out regular reviews to ensure that the product or service continues to meet the needs, characteristics and objectives of the target market.
– Price and value: fair value is about more than just price. The Duty aims to tackle factors that can result in products or services which are unfair or poor value, such as unsuitable features that can lead to foreseeable harm or frustrate the customer’s use of the product or service, or poor communications and consumer support.
– Consumer understanding: understanding: The consumers can only be expected to take responsibility where firms’ communications enable them to understand their products and services, their features and risks, and the implications of any decisions they must make (regards to principle 7).
– Consumer support: the FCA expect firms to provide support that meets their customers’ needs. The support firms provide should enable consumers to realise the benefits of the products and services they buy, pursue their financial objectives and ensure that they can act in their own interests.
Example of the type of question the FCA might ask your firm (after the October deadline)
Has the firm specified the target market of its products and services to the level of granularity necessary? How has the firm satisfied itself that its products and services are well-designed to meet the needs of consumers in the target market, and perform as expected? What testing has been conducted? Has the firm satisfied itself that the quality of any post-sale support is as good as the pre-sale support?
How is the firm ensuring that its Remuneration and incentive structures drive good outcomes for customers? What actions is the firm taking to improve outcomes? (Who’s accountable for this work, what will improvement look like, and when will it happen?)
As long as the firm is acting in respect of the consumer’s principle, the cross-cutting rules, the four outcomes and is able to comfortably answer the previous set of questions (where applicable), the firm can consider itself compliant with the Duty!
Yhan Roger Rizet
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