Consumer Duty View – March 2023

With five months to the implementation deadline, and one month to go before the much talked about information exchange from Manufacturers to Distributors, Consumer Duty remains in the spotlight, whether this is through the continued publication of FCA guidance on their expectations in relation to the Duty, including thanking firms for their efforts in implementing the Duty properly, to the recent comments of the Duty by a City of London Minister, who flagged the regulatory burdens on the financial services industry.

In this month's Consumer Duty View we bring you the key points from these FCA updates, the latest industry body updates and some interesting information as to what is happening in this space outside of the UK as consumer protection reform clearly gathers momentum globally.

We offer you three newly available resources:

1. Join us at our in-person Consumer Duty surgery on 4 April to discuss the challenges of implementation with our Consumer Duty team and other industry peers. You can register here.

2. We've made four recent additions to our menu of Consumer Duty solutions:

• Vulnerability and behavioural bias briefing note (manufacturers): a practical guide summarising FCA guidance and research on vulnerability and cognitive behavioural bias requirements (which run to +500 pages!) and what you need to do to comply covering product design, distribution, monitoring and reporting summarised in 12 simple steps.
• Price and value framework (manufacturers): a structured framework designed to support assessment of value requirements required by PRIN 2A.4 of FCA Handbook.
• Data & MI template for ongoing board reporting (manufacturers & distributors): to assist in preparation of the report the firm needs to provide the Board on Consumer Duty compliance, we have prepared.
  • A template which maps the Key questions for firms provided in the FCA finalised guidance to the broad data and Management Information (MI) required to answer each of the 41 questions, covering but quantitative and qualitative data points.  In addition, the template also maps the 15 examples of MI that the FCA outline firms should consider obtaining so that it is clear to the firm which harm or outcome they are seeking to monitor.
  • A template Board Report which focuses on the issues reserved for the Board and customer outcomes.
• Policies and procedures uplift (manufacturers & distributors): uplifting organisational policies and procedures to reflect the requirements of the Duty. Common documents we are uplifting include (i) Complaints Handling Procedure + Complaints Policy; (ii) Conflicts of Interest; (iii) Outsourcing; (iv) Product Governance; (v) Value assessment; (vi) Remuneration; (vii) SMCR Documentation including reasonable steps and conduct risk documentation; and (viii) Treating Customers Fairly Polices.

3. Watch the recording here of our recent webinar discussing 'What firms are doing to be Consumer Duty compliant by 30 April'.

As always, please do get in touch to discuss options or any questions on the Duty.

FCA updates

1. FCA podcast: Interview on the Consumer Duty April milestone

The FCA have released a podcast (transcript available here) with Ed Smith (FCA Head of Competition Policy) on the Consumer Duty April implementation milestone and what the FCA expects to see by the end of April and beyond.

The FCA confirms it wants to see firms working together to deliver customer outcomes, and this can be achieved by each party in the distribution chain understanding what information is relevant and openly and constructively sharing this with the supply chain. First, firms will need to collate the information, which should be done by way of an assessment by the manufacturers including reviewing products and services critically to ensure they are providing fair value and are understandable to consumers, as well as reviewing whether adequate support is being provided to consumers. Manufacturers should also be looking to areas where they are falling short and make sure changes are made in order to deliver good outcomes.

Manufacturers will then need to determine what is relevant to share with the supply chain, and the FCA indicates this will depend on the role they play in the supply chain and what other firms in the supply chain would reasonably need to know, for example information on the target market, fair value assessment of the product and how fair value has been assessed. If the manufacturer does not have a role in relation to retail customers, the FCA does not expect it to supply any information. The FCA does not expect this information to be provided to other parties in the supply chain in a particular format, although points to useful common templates drafted by trade associations.

The FCA also confirms that it does not expect firms that are already subject to requirements which are equivalent to those imposed by the Consumer Duty to rerun their assessments, although the FCA does want these firms to study the guidance and make amendments to any areas that fall short.

The FCA highlights that this timely information sharing process is why the April milestone is key, to ensure relevant information is being shared to distributors to enable them to assess and ensure they are meeting their obligations under the Duty. The FCA states that if distributors are concerned with a delay in receiving this information, they should raise this with the manufacturer, and if they do not receive a reasonable explanation, then they should contact the FCA. However, the FCA confirms that it is not for distributors or manufacturers to challenge the work of other parties in the supply chain.

2. FCA Feedback on December 2022 Quarterly Consultation Paper

Following the Quarterly Consultation Paper consultation in CP22/26 (described in previous edition of Consumer Duty View) the FCA aim to publish feedback on some of the proposed amendments in the Handbook Notice published at the end of March 2023.

At this stage we understand that the amendments will relate to:

• application of the Duty to firms approving or communicating financial promotions;
• application to firms in the temporary marketing permissions regime (TMPR); and
• the 'closed product' definition.

We understand that the FCA may not go ahead with implementing the proposed amendments in relation to occupational pension schemes, non-retail financial instruments or application of the Duty where an exemption exists in a sectoral sourcebook (for example, the £50,000 minimum investment exemption). If the FCA takes forward such proposed amendments, it would grant an appropriate implementation period for any changes we make to the rules.

3. Sheldon Mills on the implementation of Consumer Duty

The FCA has published a speech given by Sheldon Mills (Executive Director, Consumers and Competition) which outlines the rationale for the Duty, the FCA's views on the progress of implementation, and key consideration points for firms in the lead up to July 2023. The FCA recognises that the Consumer Duty requires a significant amount of implementation to get right, and thanks firms who have taken the time to embed the Duty properly and warning firms who have adopted an avoidance tactic that the Consumer Duty will not simply "go away".

Mr Mills takes the opportunity in the speech to highlight what firms should be doing in the upcoming months to implement the Duty, including:

• Sharing information with commercial partners and ensuring that they are on board with what needs doing. This includes a firm's distribution network and wholesalers as well as retailers and third parties;
• Focusing on the areas that will have the greatest impact on outcomes for the firm's customers. Firms should ask themselves whether their products and services are designed to deliver good outcomes for customers;
• Ensuring that the firm has sufficiently identified and narrowed its target market, as well as being satisfied that the target market understands its communications; and
• Considering if the firm engages in any "sludge practices" (that is, whether there are commercial incentives for firms to create friction points in the customer journey). Examples include punitive exit fees or unfair charges. The FCA is very clear that any such practices need eradicating.

Overall, the FCA believes the exercise of implementation will be useful to firms, helping them to uncover customers they had not engaged with, arranging plans ahead of schedule, enabling the identification of new opportunities, and ultimately making firms think differently in relation to consumers. From this, the FCA believes benefits will be seen throughout the financial services industry, boosting competition, lowering costs and increasing trust.

Mr Mills also confirms that going forward, the FCA will be surveying around 600 smaller firms to check how prepared they are with their implementation plans. He also notes that once the Duty is in force, the FCA will take a pragmatic and proportionate approach to enforcing the Duty, and will focus first on the biggest risks to consumers.

4. FCA Portfolio Letters

Further to the long list of Portfolio Letters published by the FCA in their "first batch" (referred to in the February edition of Consumer Duty View), the FCA have published a second and third batch to CEOs and directors to:

• Credit brokers;
• Credit unions;
• Debt advice;
• Debt purchasing, debt collecting and debt administration services firms;
• Mortgage intermediaries;
• Motor finance providers;
• Retail finance providers; and
• For particular interest for some clients - payment services and e-money firms.

Our initial take from the portfolio letters is that, whilst the FCA do not introduce any new requirements, they provide some helpful detail around the implementation of the Duty in the context of specific sectors, so are certainly worth a read. Particularly, some of the sector-specific examples of good (or less good) practices could be helpful for firms looking to determine what data/MI they need to collect to show compliance under the Duty.

We have prepared summaries of the relevant letters which can be found on our dedicated FCA Portfolio and Sector-specific Letters webpage.

Focussing on the portfolio letter to payment services and e-money firms, the letter sets out how the FCA sees the Duty applying to payments firms, and focusses on the broad range of business models, activities and target markets of payments firms. Notably, the letter does not provide additional clarity on issues discussed at industry level such as whether the provision of safeguarding accounts and agency banking services to PSPs are within scope of the Duty. You can read our summary of the Payments Services and e-money firms letter here.

Some key points for consideration:

• Products and Services: Firms should consider the potential impact of any plans to cross-sell as this carries a higher risk of selling products which may not meet the needs of the wider target market. Firms should also ensure that distribution strategies are followed and that information sharing with other firms in the distribution chain is in place. The FCA has shared a helpful example which confirms that a sale outside the original target market will not necessarily result in customer harm as long as this is considered, and the relevant assessment and risk controls are adjusted.
• Strong Customer Authentication: The FCA expects payment service providers to develop strong customer authentication solutions that work for all groups of consumers, taking into account characteristics of vulnerability -- this might result in needing to provide different authentication options to different group of customers.
• Price and Value: The FCA has stressed the importance of portfolio firms ensuring that there is a reasonable relationship between price paid for a product or service and the overall benefit, including reviewing regular and contingent fees, charging structures for different groups of customers with characteristics of vulnerability and the fees any distributors or third parties might levy on customers.
• Consumer understanding:The FCA has highlighted that the need to provide customers with clear information in a timely manner which is understandable is especially important in relation to fees and charges, protection levels for different products and services, offering regulated and unregulated products together and the allocation of responsibilities when using distributors and third parties.
• Consumer support: The FCA has noted the importance for payments firms of ensuring that they are providing appropriate support channels, and ensure the availability of support is being communicated effectively to customers. In instances where a product is no longer available, the firm should communicate clearly any suitable alternatives.
• Account freezing and fraud reports: The FCA expects payments firms to review their account freezing procedures and ensure that they are less frequent, less protracted, better communicated and better supported. Handling of suspected cases of fraud should also be improved to ensure firms are not unduly harsh or unsupportive towards their customers.

The FCA also indicated that larger payments firms (although notes that firms of all sizes may be subject to implementation monitoring) should expect to be asked regularly to provide their supervisors updates on their progress with implementation, with the FCA particularly focussed on the methodologies, progress, and outputs of the firm's baselining and gap analysis against the Duty outcomes, as well as the measures taken to address any deficiencies. The letter also emphasises that implementation should be a top priority for the CEO and senior management.

Industry updates

5. Wholesale Markets Updates

Following wholesale industry discussions with the FCA, there are key messages below on how to approach scoping and some of the primary market impact points:

Most wholesale business (i.e. those who are only dealing with, making products for and facing wholesale market participants) will be outside the scope of the Duty on the basis of material influence reasons. The other considerations are 'short cuts' to considering the business as wholesale. Our understanding is that it is intentional that there wasn't a portfolio letter from the FCA for the wholesale market, which is helpful colour.

The key message for firms when determining whether an activity falls within scope of "retail market business" is to consider whether: (i) it is a regulated activity; (ii) it is in a distribution chain with a retail customer; and (iii) there is material influence over customer outcomes. How firms apply the £50,000 exclusion to derivatives is a pressing issue where industry is forming a view next and aggregators are another area where there is a need for FCA case studies and examples (and where we are receiving a lot of questions in advance of the April 'distributor' deadline).

We understand that the FCA did not intend to 'cut across' the Primary Markets Exclusion with its Quarterly Consultation proposals and there will be an update on that shortly. This means, for example, that the approval of primary markets retail offering materials is part of the Primary Markets Exclusion. AIFs and investment trusts are intentionally not part of the Primary Market Exclusion (on the basis the risk of them is deemed different to equities) but underwriting and primary markets business can be brought outside scope (for the technical underwriting aspect) under the material influence consideration but not in relation to the promotional materials necessarily. It is worth noting the exclusion of units in AIFs and CISs from the Primary Markets Exclusion is embedded in the glossary text of the final rules (so not impacted by the QCP).

We continue to support industry working groups and clients AFME on these matters. If you would like to discuss further please get in touch with Penny Miller, Alex Ainley or Emily Ballisat.

6. Final consultation on amendment to EMT led by cross-industry trade association Working Group

The formal FinDatEx consultation regarding changes to the EMT (See European MiFID template (EMT v4.1) to cater for Consumer Duty (Manufacturer to Distributor) has now completed (closed on 24 March 2023). We expect feedback being incorporated and the final version to be published in the upcoming days.

In summary, the draft includes 10 new optional fields required for products being distributed in the UK, which include ex-ante and ex-post transaction costs and fields providing information on UK value for money. The Working Group are particularly focussed on the feedback loop, that is, the flow of information between Distributors and Manufacturers, with vulnerable customers being an initial focus. However, pushback is expected from Distributors in relation to the requirement to provide granular or trade level information on areas such as vulnerability, indicating this should be aligned to existing target market information feedback loops.  

Focus is now turning to the types of questions Manufactures will be asking Distributors as part of the distributor feedback loop. We are supporting the IA, who are working with the cross-industry trade association group on this. Focus is on Mechanism of collecting data -- primary contracted Distributor intermediation/sub-distributor, Timing of questionnaire, Template utilisation and Vulnerability.

If you would like to discuss further please get in touch with Penny Miller, Louise Tudor-Edwards or Rosie Davies.

And elsewhere...

7. EU Retail Investment Strategy -- Latest intel...

We mentioned in the February edition of Consumer Duty View that we were keeping an eye out for any updates in the EU as part of the Retail Investment Strategy (RIS), expected to be published in April 2023. We are aware that this has been pushed back to May 2023, and although we will not know the full extent of the proposals until we see the publication, we've heard on the grapevine that it is doubtful that the Commission will actually issue any proposals related to an inducements ban given that they are unlikely to be adopted (given strong opposition in the EU Parliament which are unlikely to pass the necessary amendments to MiFID II Level 1 text into law). It is also possible the EU Commission will seek further input via a consultation on inducements.

8. Singapore: MAS fair dealing Consultation Paper

Following Penny Miller's recent trip to Asia, we have summarised the Monetary Authority of Singapore (MAS)'s Consultation Paper which was published in December 2022 on proposed amendments to its Guidelines on Fair Dealing. The Consultation includes:

• widening the scope of application to include all financial products and services offered by financial institutions to all their customers (previously the Guidelines were only applicable to the marketing and distribution of investment products and the provision of financial advisory services); and
• incorporating key principles and guidance via 5 revised fair dealing outcomes on the fair treatment of customers throughout the customer journey, with the responsibility for delivering these outcomes on boards and senior management.

The Consultation closed in February 2023. Whilst it is worth noting that the end result of the consultation process may differ significantly from the items set out in this Consultation Paper, and it is possible that MAS decides not to implement them at all, it is interesting to see that other regulators are considering the need to regulate to improve consumer outcomes. We will keep you updated as to developments in this space. Please get in touch with Jason Valoti with any questions.