FCA Consumer Duty and Wholesale Firms

The FCA Consumer Duty is coming into force in July 2023. It represents a 'paradigm shift' in the FCA's expectations of firms, increasing the current level of consumer protection in the retail financial services markets. At first glance, it seems that wholesale firms, such as banks, wholesale brokers, securities services firms or alternative asset managers, that do not interact directly with retail consumers may not need to take any action. However, through various updates the FCA is signalling that wholesale firms do need to review the requirements and reach a conclusion to validate the degree to which Consumer Duty will apply to their suite of products or services.

The Consumer Duty introduces a new FCA Principle for firms — that a firm must act to deliver good outcomes for retail customers. Underneath the principle there are three overarching cross cutting rules — a firm must:

• Act in good faith towards customers
• Avoid foreseeable harm to customers
• Enable and support customers to pursue their financial objectives

And then there are four outcomes which represent the key elements of the firm-customer relationship where firms will need to capture specific, granular evidence they are delivering good outcomes:

1. Products and services
2. Price and value
3. Consumer understanding
4. Consumer support

Do we have retail customers?

The first step is for wholesale firms to review whether they actually have a direct relationship with any retail customers. As part of MiFID II implementation — firms are likely to have had to classify all their clients into retail, professional and eligible counterparty. A check should be done on systems to see whether there are retail clients in the parts of business units or entities that deliver wholesale activities. If firms are not confident that their systems are accurate, they will need to consider other ways of finding out this information. Firms will also need to review their classification process and re-validate that customers who were opted out of retail classification were classified this way for appropriate reasons — i.e. that the professional category does not contain hidden retail customers that shouldn't have been opted up in the first place.

If retail customers are found, the requirements contained within Consumer Duty will apply. While considering their clients' best interests, firms may wish to evaluate whether the business gained from what may be a very small population of retail customers is worth the effort and resources (both initially and ongoing) that will be needed to align with Consumer Duty.

Do we manufacture products that are sold to retail clients?

In its finalised guidance (PDF 1.13 MB) the FCA has said that 'the Duty applies to firms that have a material influence over, or determine, 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'.

Therefore, even if the firm does not deal directly with retail customers they may be caught by the 'look through' obligation. With this guidance, wholesale firms that manufacture regulated products and services that are then distributed by other firms to retail clients will need to be compliant with consumer duty. For each of the outcomes above, there is the expectation that:

• Firms should assess their client base and the full range of services provided
• If there is any ambiguity on whether a firm is materially influencing retail customer outcomes, it should document its view and its rationale
• Firms review their current approaches to bring them in line with the Consumer Duty expectations
• Firms determine a target market and establish what a good outcome is for all key points with each product lifecycle and customer journey
• Firms embed consideration of characteristics of vulnerability within all aspects of the Consumer Duty
• Ultimately, firms can ensure they can evidence good outcomes in product/service design and operation, pricing and value, customer understanding and customer support
• Outcomes are reviewed and monitored on an ongoing basis
• Any issues identified are remedied or mitigated and root cause analysis addresses reoccurring issues

The FCA has confirmed (PDF 202 KB) that high net worth and sophisticated clients are still retail clients and could be captured by the Duty.

How are we complying with the scope of the requirements?

Reassuringly, the FCA recognises the concept of proportionality in the application of Consumer Duty. This is proportionality in the sense of the level of involvement and influence in the distribution chain, the greater involvement or influence — the more firms need to do. The FCA also considers the level of risk the product/service exposes the retail clients to. So firms manufacturing higher risk products will require more efforts to satisfy the requirements. The FCA made it clear in its Policy Statement (PDF 1.3 MB) on the Duty that if firms comply with existing PROD rules, which are the FCA's handbook rules that implement MiFID II product governance rules, then those firms would comply with the FCA's expectations on the products and services outcome under the Consumer Duty. However, the scope of Consumer Duty is broader than the scope of products referred to in PROD, therefore if firms manufacture services as well as products they will need to consider the specific circumstances and their compliance.

On the price and value outcome, this may not be totally in the manufacturer's control, but they are likely to have some input. Firms will need to review the FCA's expectations for this outcome, possibly in conjunction with the distributor or co-manufacturers.

The FCA has emphasised that the Consumer Duty is an outcomes-based regulation — so key to firms' compliance will be their ability to measure and evidence consumer outcomes. For manufacturers, importantly this will partly derive from requesting information from distributors. Industry agreed solutions, such as common templates, are developing in the market to meet the expectations of Consumer Duty. However, firms need to consider whether there is sufficient information in these solutions to meet their own risk appetite and culture.

Wholesale firms are likely to have less influence over the consumer understanding or consumer support outcomes. However, they will still need to be considered. For example, if the manufacturer's term sheet or terms and conditions for the product is being sent on directly to the retail consumer, it should review whether it is written in language that a retail consumer could be expected to understand, and whether the firm's contact details are provided.

Are our data or services used to deliver retail products or services?

The FCA has signalled that it is considering Consumer Duty in all its supervisory interactions. For example, in its supervisory portfolio letter (PDF 215 KB) to Benchmark Administrators, the FCA highlighted that although benchmark administration activities are not within scope of Consumer Duty, it is likely to apply to other firms in the distribution chain of products in which benchmarks are used. Therefore, the FCA expects benchmark administrators to support users of their benchmarks in meeting their obligations under the Duty. It is not completely clear what this means in practice, but it is clear there will be indirect implications where these firms' clients have their own obligations.

Using this example, firms that use benchmarks in products that are delivered to retail clients will need to evidence that their products are delivering fair outcomes to retail clients and therefore they need to be comfortable that the benchmark is reliable and fairly representing data. The firm using the benchmark may then ask the benchmark administrator to evidence or to confirm this. Benchmark administrators may find they get asked similar questions from a number of clients.

The FCA has indicated (PDF 202 KB) that custody and fund services firms may be captured by aspects of the requirements (for example, transfer agency services or depositaries' communications), but also noted that delivering outsourced services to asset managers could result in needing to consider the Consumer Duty.

Firms that know their services, data or products are being used by firms that need to comply with Consumer Duty need to consider how they can respond to similar queries or requests from their clients.

KPMG's UK firm professionals can assist with Consumer Duty and are currently advising clients on the navigation of these requirements, what it may mean for their business and providing implementation support.

For further articles on Consumer Duty, including how to assess price and value, implementation challenges and how the FCA will supervise, please visit our Consumer Duty hub.