The Consumer Duty has changed - here's what you need to know

We previously blogged on changes the FCA was considering making (in CP22/26) to the Consumer Duty and how certain scoping changes could prove seriously problematic for affected firms.

The FCA's now made some changes (FCA 2023/10 and Handbook Notice 108).  Some are changes they consulted on; some are changes to the changes; and in some cases they aren't making changes now but reserving the ability to do so in future.

This makes things easier for firms in limited respects and harder in others, with an added dose of regulatory uncertainty. 

More uncertainty

The QCP proposed three changes to the Duty that arguably went much further than the ‘clarifications’ they were portrayed as. These were:

• A proposal to deny investment funds access to the £50k minimum denomination/investment exclusion from the application of the Duty. 
• A proposal to amend the definition of retail customer so as to clarify how the Duty applies to those providing defined benefit pension schemes.
• Proposed amendments clarifying the application of the Duty where an exclusion applies in a sectoral sourcebook.

These generated significant industry response, particularly the suggestion that funds with a minimum investment of £50k be removed from the definition of non-retail financial instruments. Interestingly, the FCA has chosen not to provide feedback on these points, essentially reserving its position on the following proposals for the time being. If it does make any future changes here, it indicated that it would grant an appropriate implementation period for firms. This is helpful for firms trying to manage initial implementation, but does not remove the possibility of future changes here.

If you feel strongly about any of these proposals then keep up your FCA engagement - you need to make your voice heard.

Financial promotions: compliance headaches

The FCA has now stated explicitly that the Consumer Duty applies to the communication or approval of a financial promotion where this is addressed to, or likely to be received by, a retail customer. This is in addition to its application to "retail market business".

The FCA has specifically exempted promotions where one of the six carve-outs from retail market business apply i.e. products not distributed to retail, non-retail financial instruments, offers of financial instruments traded on exchanges, large risks insurance, insurance distribution activities relating to a group policy, and administering a benchmark. This clears up a concern raised by many in respect to the December QCP the proposed changes to the application of the duty to financial promotion cut across the exemptions to “retail market business”.

The proposals in the QCP explicitly brought TMPR and other firms approving financial promotions into the scope of not only Principle 12, the cross-cutting rules and the consumer understanding outcome, but also the monitoring, governance and redress provisions in PRIN 2A. This was controversial, as it would pull overseas ManCos within the scope of the vast majority of the Duty, notwithstanding the fact they are not UK regulated. 

This has been replaced by guidance that where a firm is only within scope of the Duty because they're communicating or approving a promotion, outcomes 1 (products and services), 2 (price and value) and 4 (customer support) - and PRIN 2A.11 (sale and purchase of product books) - are likely to have limited relevance. The amendments then require firms to consider what's needed to comply with all parts of the Consumer Duty rules (even those parts, like the products and service outcome, that seem tangentially relevant at best). This is likely to result in firms instituting a Consumer Duty “lite” regime relating purely to the promotions that they approve or disseminate. As with so much of the Duty, however, it leaves a lot to firms to interpret with little concrete guidance, compounding implementation challenges.

Welcome clarity on closed products

The FCA has amended its "closed product" and "existing product" definitions.  As amended, they use the word "distributed" in its ordinary sense (that is, "to market or offer a product for sale, but not including providing the product as such").  

The original rules used "distributed" as defined, which was broad in scope and could have resulted in interpretations that no ongoing product or service could be classed as "closed".

Credit unions win

Credit unions now get an exemption from the Duty for payment services and issuing e-money (except if they're ancillary to regulated activities other than issuing e-money).