Consumer Duty View – December 2022

In this issue we flag an important development for those involved in the implementation of the Consumer Duty within their organisations. Despite encouraging signs from the FCA that no further formal amendments would be forthcoming on the CD, the FCA have just issued its standard quarterly consultation paper where they are proposing certain clarificatory amendments to the Consumer Duty.

While these are being presented as “clarificatory” points, these could have a significant impact on how some firms have scoped products and business line in or out of scope for CD purposes and should be considered carefully by CD implementation teams. The consultation will close in 5 weeks – meaning that responses should be submitted by 9 January.

The consultation paper seeks to clarify points a number of points and we have set out a high level overview of these below (we have listed these in order of impact, rather than as set out in the consultation paper):

Application of the Duty to occupational pension schemes

The FCA are proposing to amend the part of the definition to make it clear that “retail customers” include any person who is not a client of the firm but who is, or would be, a beneficiary of an occupational pension scheme (rather than a beneficiary in relation to the investments held in the scheme). This has the effect of potentially broadening the scope of schemes caught by removing the specific link to the beneficiaries of the underlying investments, which could have an impact on the scoping analysis for DB schemes in particular. However, helpfully, the FCA does go on to say that, in practice, they do not expect there to be many instances where FCA authorised firms have a material influence on retail customer outcomes in relation to DB occupational pension schemes. It is possible, however: for example, a firm might provide services to DB trustees that have a material influence on consumer understanding or consumer support. The FCA are of the view that the application of the Duty should not be ruled out in this context. They have suggested that the test should be “whether a firm can determine or materially influence retail customer outcomes, rather than a blanket exclusion for DB occupational pension schemes”.

This confirms Simmons view that firms should have clear processes and standard to determine when an activity will or will not “materially influence retail customer outcomes”.

Application of the Duty to non-retail financial instruments

The paper focuses on the £50,000 exemption for non-retail financial products – the Consultation Paper is proposing to amend the exemption so that it cannot be applied in respect of investment funds. This would mean that funds (AIFs or UCITS) that have a minimum £50,000 subscription amount but still have retail investors (e.g. high net worth investors) would not be able to rely on this exemption. This could have significant implications for firms that have already de-scoped such products from their implementation. The FCA’s rationale for this is as follows:

This exclusion is intended to be used in relation to purely wholesale activities. However, the current wording might be interpreted as also excluding certain retail activity. It might be read as excluding firms in a distribution chain selling investment funds to retail customers, where the minimum investment is £50,000. For example, an adviser of high net worth retail customers may think advice is out of scope of the Duty where it relates to a fund with a minimum investment above £50,000. Similarly, a firm creating a fund for another firm to sell to retail customers – such as an asset manager working with a pension provider or an investment platform to design and manage funds for retail customers – may look to use the exclusion.

The ‘closed product’ definition

The FCA are proposing to clarify the definition of “closed products”. Under the current definition, a product cannot be classed as closed if it is still being distributed. However, the Glossary term defines ‘distribute’ broadly. It could potentially be interpreted to mean that no product or service in which an account is still held, or an ongoing relationship exists, can be classed as closed. The FCA are proposing to remove the use of the defined ‘distribute’ term in the ‘closed product’ definition.

Application of the Duty to firms approving or communicating financial promotions

The FCA are proposing to make clear that certain aspects of the Duty will also apply to firms where their only role is to approve or communicate a financial promotion.

Application of the Duty to firms in the temporary marketing permissions regime

The FCA are proposing some minor amendments to ensure aspects relating to the approval of financial promotions will also apply to firms in the TMPR.

Application of the Duty where an exemption applies in a sectoral sourcebook

The FCA are proposing to introduce rules to make it clear that the Duty follows the scope of existing sectoral rules.

We are encouraging firms to consider these proposed clarifications in detail, in particular whether they impact project scoping done it date.

Additional Support

Many firms face a challenge in coming to terms with the practicalities of effectively implementing this new Consumer Duty. We’re here to help you demystify it and have a growing suite of helpful tools and materials, including our Consumer Duty Toolkit, which:

• provides an “off-the-shelf” practical and user-friendly templates and guidance is designed to assist smaller firms with the process of updating existing policies/documentation to reflect the new requirements of the Consumer Duty;
• identifies the areas of uplift and enhancements; and
• includes implementation materials across:
  • Management information;
  • Board reporting;
  • Enforcement risks;
  • Identification of key harms; and
  • The regulatory delta.

We bring a diverse team of international specialists, not only lawyers from across our contentious and non-contentious practices, but also data scientists, legal engineers and legal designers, who can help with your implementation. This includes answering key questions around project execution, product governance, data monitoring and communications.

We can quickly get you to the core of the uplift needed and build the foundation for your Board and Senior Managers to fulfil their roles in overseeing compliance with the Consumer Duty.

Do please let us know how we can help you further.