Consumer Duty View - June 2023

The Final Countdown... With the second implementation milestone having passed, and a 2-month countdown until Duty comes into force, this month's Consumer Duty View brings you the key takeaways from the FCA speech on implementation and FCA findings from a review of fair value frameworks, together with updates on the latest industry body and trade association work (focusing on manufacturer / distributor feedback loop and wholesale market considerations), further details relevant to payments, e-money firms and credit firms, and the latest on the EU Retail Investment Strategy.

We continue to support firms at different stages in their implementation, recent focus has been on the requirement for boards to assure themselves by 31 July 2023 that the firm is complying with the Duty, value assessment readiness, finalising policies and procedures updates, and client documentation uplifts. Our updated menu of services will be released shortly and will include board assurance templates, distributor focused price and value templates and much more. Do get in touch in the meantime with any questions.

1. FCA speech on the countdown to implementing Consumer Duty and FCA findings its fair value framework review

10 May was a busy day for those trying to keep up with the latest regulatory developments and FCA expectations on implementation of the Duty.

First off, the FCA has published a speech by Sheldon Mills, Executive Director of Consumers and Competition, which reminds firms of the rationale for the introduction of the Consumer Duty, including enhancing the UK's competitiveness in the financial services sector (with this aim being introduced as part of the Financial Services and Markets Bill).

Mr Mills highlighted a number of the 41 "key questions which firms," which the Consumer Duty Champion and the Chair should internally be asking themselves, showing their importance and indicates that these will be the questions the FCA will be asking of firms post the 31st July:

• Does the purpose and culture of firms align with their obligations under the Duty and support the delivery of good outcomes for customers?
• Is the Duty being considered in all relevant discussions such as strategy, remuneration and risk?
• Have firms made sure their remuneration and incentive structures drive good outcomes for customers?
• Are firms prioritising delivering good outcomes for customers in a changing external environment?

The speech is also used as an opportunity to highlight the findings of the FCA's review of firms' fair value frameworks which was published that same day. You can find our dedicated Consumer Duty Alert on FCA findings from a review of fair value frameworks here. Some particular points of note:

• One of the key findings included firms failing to properly consider outcomes for different groups of customers, and instead relying on broad averages which could hide where certain types of customers are receiving poor value.
• The FCA also found that firms were not challenging themselves enough on uncomfortable questions, such as where high profit margins on a specific product may be a sign that customers are not getting fair value. This comment on profitability comparisons (coupled with Mr Mill's speech above) suggests firms should consider how they are factoring profitability analysis into the value assessment and what proxies they may need to create to enable that to be done on a consistent basis over time.
• The FCA emphasises that firms should use the remaining time prior to the deadline to ensure their fees are fair and transparent and that particular groups of consumers are not disproportionately disadvantaged.
• The FCA also confirms that it is working with industry bosses to clarify expectations in relation to the sharing of information between manufacturers and distributors, indicating it does not want firms to create overly burdensome processes.

Firms should familiarise themselves with the key findings from this review and whether they need to revisit their approach to implementing the price and value outcome rules in line with the good practice outlined. 

2. FCA Handbook Notice 108 - Consumer Duty Amendments

As anticipated in our previous edition of Consumer Duty View, the FCA in its Handbook Notice 108 has now published it's amendments to in relation to the Consumer Duty. As a reminder, these amendments were raised in CP22/26 as outlined in the February version of Consumer Duty View and received significant industry response, particularly the proposal that investment funds not being able to avail themselves of the £50,000 minimum investment exclusion, and the proposal to clarify how the Duty applies to those providing defined benefit pension schemes.

The FCA confirmed (without providing any further feedback or detail) that they are not going ahead with implementing the proposed amendments in relation to non-retail financial instruments (including the £50k minimum investment exemption) and occupational pension schemes changes.  This means the £50k minimum investment exemption remains available for all products sold to retail e.g. investment funds, structured products and derivatives (see more detail below in wholesale market update section) with a minimum denomination or investment of £50k.  We note that the FCA states that it is not bringing in these amendments "at this stage", potentially leaving the door open for subsequent amendments. However, we understand that if the FCA takes forward such proposed amendments, it would grant an appropriate implementation period for any changes which it makes to the rules.

Other amendments which the FCA has introduced include:

• Financial promotions: amendments to clarify the application of the Duty to firms that only approve or communicate financial promotions, as well as more narrowly focussing the requirements for firms in the temporary marketing permissions regime where they are communicating or approving UK financial promotions. 
• "Closed product" and "existing product" definitions: amendments to the definition of "closed products" to narrow the scope of the term "distribute" (by no longer referring to the wider FCA Glossary definition of "Distribute"). As amended, the word "distributed" is undefined and to be interpreted  in its ordinary sense that is, "to market or offer a product for sale, but not including providing the product as such".
• Credit unions: introducing a rule to clarify that the Duty only applies in relation to the regulated activities of credit unions, ancillary activities and the communication and approval of financial promotions where these relate to retail customers. 

3. Manufacturer / Distributor Feedback loop

Manufacturer - Distributor: Final EMT with Consumer Duty updates published

FinDatEx have published the final version of the European MiFID Template (EMT V4.1) incorporating changes to comply with the Consumer Duty. As mentioned in our previous edition of Consumer Duty View, this includes 10 new optional fields required for funds being distributed in the UK.

Distributor - Manufacturer: distributor questionnaires

Since the April milestone, industry focus has turned to the types of questions Manufactures will be asking Distributors as part of the distributor feedback loop in response to a request under PRIN 2A.3.18R or PROD 3.3.30R. We continue supporting the IA, who are working with the cross-industry trade association group on this. A draft version of the questionnaire has been prepared by a group of Manufactures which will require intermediaries in the distribution chain to pass on information obtained from the end distributor. It will now be shared with a distributor group for feedback, so we expect to see further iterations of the before it is finalised in upcoming weeks.

Last week the Joint Trade Association Group published new guidance to members in relation to manufacturer and distributor data exchange sharing in the context of the Consumer Duty.  The objective of the joint trade association work has been to help develop a coordinated and proportionate approach to data sharing, providing manufacturers and distributors with the information they need to help meet the Consumer Duty requirements.  The guidance, which has been seen by the FCA, covers the following areas:

• General messages with respect to proportionality by both manufacturers and distributors
• Areas of industry collaboration and the role of the EMT
• Issues relating to vulnerable customers
• The rationale for the new value fields in EMT
• Implementation timeline and the significance of the 30 April milestone

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

4. Wholesale Market updates and critical informal guidance

Application of £50k threshold to derivatives notional

One of the critical wholesale markets questions has been around the application of the £50k threshold -- and specifically that the ''non-retail financial instruments" test of minimum denomination or minimum investment amount can be interpreted to mean notional for derivatives.

The FCA has now sent some informal emailed guidance around the application of the £50k exclusion to derivatives notional following AFME discussions (which we have been supporting). The FCA has noted that this aligns with point 41 of PRIIPS RTS Annex IV used for the purposes of calculating performance scenarios: "For those PRIIPs that are forward contracts, future contracts, contracts for difference or swaps, performance scenarios shall be calculated assuming that the amount specified in point 40 is the notional amount."

The wholesale market is generally interpreting the emailed guidance as being applicable beyond those listed contracts in the PRIIPS RTSs (given that was primarily noted for alignment purposes).

This informal guidance is a welcome relief to the wholesale market, as it was one of the areas where there was material uncertainty and firms were required to take positions (and then implement around that) in advance of the July deadlines.

This update likely to be incorporated into wholesale industry level guidance being produced by an AFME working group. Another key topic being discussed is around the boundaries of material influence for wholesale market players and edge cases.

Other Industry Guidance

ISLA

ISLA has published guidance on the application of the FCAs Consumer Duty to securities lending. It provides an overview of the scope of application of the Duty rules and guidance, focusing on how these requirements apply in respect of two typical agency securities lending scenarios where there may be a distribution chain involving end retail customers (where there is no direct provision of service to a retail client). These are summarised as:

• Scenario 1: the client is a fund (or its manager acting on behalf of the fund).
• Scenario 2: the client is a platform or other regulated entity providing services to underlying retail customers.

Within these two broad scenarios, the guidance contemplates a variety of structures, including where the agent lender also acts as custodian (or uses a third party custodian). It is intended to help firms to make fact specific determinations of material influence by setting out practical guidance of features and other indicators of the likely application (or non-application) of the Duty on a general basis, as well as in relation to the two broad scenarios that are identified.

 Forthcoming Guidance/ Scenarios AFME (ECM Working Group) and UK Finance:

We also understand that there will be further guidance or scenarios from an AFME ECM working group which is working on a funds IPO paper, as well as a UK Finance working group, which is preparing scenarios to send to the FCA.

If you would like further detail on the above topics, please get in touch with Penny Miller,  Emily Ballisat or Rosie MacArthur. 

5. FCA Consumer Duty webinar on Payments and e-money

The FCA published a webinar discussing the implementation of the Consumer Duty in the payments and e-money sector. As well as outlining its expectations of firms operating in this sector with respect to each of the Consumer Duty Outcomes, the FCA also confirms that firms should be prepared to have meaningful discussions on the implementation of the Consumer Duty, and it will be taking a pragmatic and proportionate approach with a priority being identifying serious misconduct breaching the Duty. A number of topics were also discussed in the Q&A section of the webinar, including:

• The application of the Duty to merchant acquirers (this will apply to the extent their customers are microenterprises or charities with an income of less than £1 million a year, or the extent to which they materially influence the end consumers) and payment initiation service providers (this will depend on the extent they can materially influence the end consumers, such as how data is used or stored).
• Examples of harm in the design of e-money products, flagging assumptions that may be made and how in certain situations these assumptions may not be borne out.
• The qualitative and quantitative assessments and KPIs the FCA will be using to determine whether an e-money product is meeting the needs of consumers, including protections against the risk of financial crime, security of personal information, number of complaints and feedback from staff.
• Application to open banking, with the key point being for firms to ensure that their consumers understand what they are consenting to when allowing access to their accounts.
• Confirming that the FCA may ask questions regarding the Consumer Duty in any future authorisations of firms.

The FCA published a Portfolio Letter (in February 2023) on the implementation for payments firms, our detailed summary of which you can find here.

6. FCA speech on the credit market

The FCA has published a speech by Roma Pearson, Director of Consumer Finance at the FCA on ensuring the credit market delivers for consumers. Ms Pearson reiterates the FCA's desire for a well-functioning credit market where consumers are treated fairly, are supported when needed and have sufficient information to make good decisions, which is aligned with the Consumer Duty outcomes. Ms Pearson outlines the 3 key areas identified in the FCA's review of firms' implementation plans (as discussed in the February version of Consumer Duty view):

• effective prioritisation of implementation work, focussing on areas that will have the biggest impact on outcomes for consumers;
• embedding substantive requirements into business models such as identifying target markets and ensuring consumers understand communications; and
• working with other firms to share information across the distribution chain.

The FCA confirms that they are currently surveying 600 small and medium sized firms to understand their progress and are checking with Consumer Finance firms that the actions highlighted in their implementation plans have been taken forward.

7. More FCA portfolio letters

Adding to the long list of Portfolio Letters already published (summaries of which can be found on our dedicated FCA Portfolio and Sector-specific Letters webpage), the FCA has published a second portfolio letter in respect of contracts for difference providers and  a portfolio letter for firms within the self-invested pension plan (SIPP) operator portfolio.

The CFD Portfolio is directed at firms whose primary business model is marketing and providing CFDs, spread bets or rolling spot foreign exchange to retail customers. The FCA reiterates that it expects CFD firms to understand their obligations under the Duty, and sets out key areas CFD firms should be considering when embedding the Duty into their business models in Annex 2 of the letter. See the latest updated on Portfolio letters on our FCA Portfolio and Sector-specific Letters webpage.

8. End elsewhere... EU RIS - It's here at last!

The long-awaited (and much discussed) final version of the EU Commission's Retail Investment Strategy and Annexes (RIS) was published on 24 May 2023. The RIS has potentially far reaching impact for firms creating products and servicing EU retail clients. we are monitoring developments on this closely, in particular from a UK divergence perspective.

We have summarised the key take-aways in our RIS View here.

You can also watch our flash webinar on demand to hear views from our regulatory experts from across our European network. We were delighted to be joined by European Fund and Asset Management Association ('EFAMA') who shared their immediate views and suggested next steps for industry participants. Watch on demand here.

For further details on how we can assist with your Consumer Duty implementation please view our ready to go menu of templates, services and training programmes or speak to a member of the team.