The Consumer Duty applies to firms that materially influence consumer outcomes.
The Duty applies across the distribution chain – namely, to all firms involved in the manufacture, provision, sale, and ongoing administration and management of a product or service to the end retail customer.
The Duty applies to all firms that have a material influence over, or determine, retail customer outcomes.
The FCA considers firms that have decision-making roles for one or more of four customer outcomes, or discretion over customer outcomes, to be able to materially influence retail customer outcomes and thus to be in scope of the Duty.
|Four Customer Outcomes
The four customer outcomes are a suite of rules and guidance setting more detailed expectations for firm conduct in four areas that represent key elements of the firm-consumer relationship, including:
1. Governance of products and services
Scope of Material Influence
In its letter to the Asset Management, Custody & Fund Services and Alternatives portfolios sector (Dear CEO letter), the FCA explains that the question of whether a material influence exists will depend on the extent to which a firm is exercising discretion over customer outcomes. For example, the Duty 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;
- the distribution of retail products or services;
- preparing and approving e communications that are to be issued to retail customers; or
- engaging in customer support for retail customers.
It follows that firms which can determine the target market, charges, or terms and conditions of a product or service will likely be considered as having material influence over retail customer outcomes.
In its letters to the mortgage intermediaries (Dear CEO letter), credit brokers (Dear CEO letter), and Retail Finance Providers portfolios (Dear CEO letter), the FCA clarifies that if a firm can determine the target market for a product or service, it will be considered a co-manufacturer by virtue of being able to determine or materially influence the manufacture of a product or service.
The FCA further provides that, for firms engaging in lending and broking activities, if a lender negotiates an APR price point with a dealer or broker firm, both firms may need to consider whether the lender is making the pricing decisions or if the broker or dealer has a material influence on this decision-making.
However, material influence will not apply to a firm whose role is limited to operating within a mandate determined by another firm in the chain, such as a portfolio manager whose role is limited to managing assets under a mandate determined by a professional client, where that client is entirely independent of the manager. Nor will material influence apply to a firm that provides factual information to support the work of another firm in the chain.[i]
The Duty applies proportionately based on what is reasonable in the circumstances. The extent of a firm’s responsibilities will depend on its role and the extent of the firm’s influence over retail customer outcomes. The level of responsibility depends on the firm’s actual role and influence, rather than just what is set out in contractual terms between firms in the chain.
A firm playing a key role — for instance, by determining a product’s charges or terms and conditions — will have more significant obligations. If a firm works with a fund manager to design a fund and has a decision-making role on elements such as the target market or investment strategy, then the firm will be regarded as a co-manufacturer.[ii]
Non-Retail Products and Services and Wholesale Firms
In an attempt to clarify the scope of application to wholesale firms, the FCA explains in PS22/9 that, whilst all firms that can determine or materially influence retail customer outcomes should take responsibility for their actions (regardless of where they sit in the distribution chain), products or services that are not designed for retail customers are not in scope of the Duty if they:
- are only marketed and approved for distribution to non‑retail customers; and
- are not provided to another firm under an arrangement between them as part of a distribution chain for a retail product or service.
For example, an investment bank that designs a structured product for sale to retail customers would be subject to the Duty. On the other hand, an investment bank providing wholesale instruments that a third-party firm independently uses as component parts of a retail product would not be subject to the Duty. Similarly, a fund manager of an institutional investor-only fund would not be subject to the Duty if a third party, without the fund manager’s involvement, invested into the institutional fund via a retail fund of funds.
It should be noted that incorrectly classifying a product or service as non‑retail with the aim of avoiding the Duty, and then distributing that product or service to retail customers, will constitute a breach of the Duty[iii].
Benchmark administration activities are not within scope of the Duty[iv]. However, since products within the scope of the Duty can use benchmarks, the Duty may apply to other firms in the distribution chain of such products. The FCA encourages benchmark administrators to reflect on this possibility when considering how they conduct their own business. Nonetheless, index providers, whose indices feature in retail structured products, might fall in scope if they can influence the design or operation of retail indices, including their value and price or their distribution.
Similarly, a non-retail-facing custodian with a non-decision-making role ordinarily will not be in scope of the Duty. However, a custodian could fall in scope if they provide direct communications or information to retail customers.
Finally, it is unlikely that a non-retail-facing executing broker that is subject to a non-discretionary mandate, or a firm providing investment research, will be able to materially influence retail customer outcomes. If a firm acts solely as sub-investment manager to a third-party fund structure, but does not act as distributor or co-manufacturer, then it will not be in scope of the Duty.
Where an FCA‑authorised outsourced services provider can determine or has a material influence over retail customer outcomes, it will be subject to the Duty[v]. For example, if a firm has outsourced customer support to a third party, the outsourced services provider will be able to determine or have material influence over the customer support outcome — in which case the third-party provider will be subject to the Duty.
Firms should consider whether they have a decision-making role over retail customer outcomes. Firms that do not have a decision-making role should then determine whether they have material influence over any of the outcomes. As per the FCA’s guidance, the absence of discretion over customer outcomes is a strong indicator against material influence.
Firms should conduct a detailed and fact-specific analysis on a product-by-product and service-by-service level. This includes firms whose products and services are part of multiple distribution chains.
[i] PS22/9 and FG 22/5.
[ii] FG 22/5.
[v] PS 22/9 and FG 22/5.