The UK’s Financial Conduct Authority (the FCA) is introducing sweeping new regulatory obligations for financial services firms that serve UK retail customers, called a “consumer obligation” (the obligation). The obligation represents a major effort by
The UK’s Financial Conduct Authority (the FCA) is introducing sweeping new regulatory obligations for financial services firms that serve UK retail customers, called a “consumer obligation” (the obligation). The obligation represents a major effort by the FCA to reset expectations for consumer protection, increasing the level of care companies must give to customers, and rising to “a significant change in the culture and behavior of many companies.”1 It is, in other words, a substantial compliance challenge. Companies have until July 31, 2023 to prepare.
Electronic Money Institutions (EMIs), Payment Institutions (PIs) and Registered Account Information Service Providers (RAISPs) will be subject to the requirement, along with other businesses currently subject to the Principles for FCA businesses, including investment firms, asset managers, consumer lenders and banks, among others.
The obligation will apply to new and renewed products and services from July 31, 2023, and closed-book activities from July 31, 2024. UK consumers will need to prepare to comply with the obligation.
EMIs, IPs and RAISPs, to whom the Business Principles have only applied since August 2019, may need to take particular care as the Duty will impose a significant advance in applicable conduct obligations. It is also a further move away from rules-based regulation for IMEs, PIs and RAISPs towards outcome-based regulation, a more nuanced and arguably more complex standard from a compliance perspective. .
Below we discuss the key features of the requirement and some of the steps companies may need to take to prepare for it.
Under the FCA’s final rules and guidelines, which were published in July 2022,2 duty will require companies to proactively design their products and services to deliver good results for customers, taking into account real consumer behavior. The following rules and guidelines will give effect to this:
- an overarching principle in the FCA’s Business Principles – the ‘Consumer Principle’ – which will compel businesses to act to achieve good results for retail customers;
- cross-cutting rules that will require businesses to act in good faith, avoid causing foreseeable harm, and enable and support retail customers in pursuing their financial goals; and
- a set of rules and guidelines relating to specific outcomes regarding products and services, price and value, consumer understanding and consumer support.
The FCA clarified that the new rules do not change the nature of a relevant firm’s relationship with its customer; it does not, for example, create a fiduciary relationship where none already exists. The FCA also explained that it will interpret the obligations imposed on companies subject to the duty, “in accordance with the standard that can reasonably be expected of a prudent enterprise carrying on the same activity in relation to the same product and services, taking due account of the needs and characteristics of customers in the relevant target market.”3 In other words, the FCA will apply an objective standard to assess compliance with duty.
These points notwithstanding, the requirements under duty are extensive and businesses may need to work hard to get to a point where they are comfortable complying with them.
How to prepare?
Affected companies will have to review their business model and the products and services they offer. This examination should take into account, among other things, the nature of the product or service offered, the characteristics of customers in the relevant target market and the role of the company in relation to the product or service. This will involve a substantial commitment of resources and the FCA expects companies to take an evidence-based approach to carrying out this assessment.
This raises several practical questions for companies, including how to determine the type and range of data they will need to obtain to perform these assessments. Customer research, product testing, and/or internally derived data may all be relevant, depending on the nature of the product or service. Firms may also find it necessary to validate their own thinking in these areas by comparing them to the practices and procedures of other firms. Companies should be prepared to share their data and associated methodologies with the FCA.
The nature of a company’s obligations will depend on its role in relation to the product or service provided. This is relevant because the right will apply to the entire distribution chain for the relevant products and services. The FCA defines “distribution chain” for these purposes as follows:all businesses involved in the manufacture, supply, sale and day-to-day administration and management of a product or service to the end retail customer“, where these companies have a significant influence on, or determine, the results of retail customers.4
In many cases, each company involved in a distribution chain will have to assume obligations under the law in addition to those to which it is already subject. The FCA calls distribution chains in the payments industry as a specific illustration, referring to the responsibility of EMIs to ensure that they comply with the obligation in relation to the distribution activities carried out by their agents and distributors. Companies involved in other arrangements such as payment aggregation and acquiring, BaaS, white label products and services, lending institutions that protect funds from IP or EMI, service providers Payment initiation and account providers will also need to consider their obligations under the Duty.
Although the obligation only applies to business carried on from the UK, businesses operating cross-border supply chains will need to consider whether the involvement of non-UK businesses in the chain – businesses which will not be subject to the obligation – could lead to poor results for clients. Some businesses may therefore need to review and possibly modify or terminate their relationships with non-UK service providers to ensure that they meet their obligations under the obligation.
Driving through cultural change, and preparing for Duty more generally, will require commitment at the board level. This is partly because the FCA will require boards to review and approve a report on the relevant company’s compliance with the obligation at least once a year. The FCA also expects companies to appoint a board-level champion, ideally an independent non-executive director, to help ensure Duty is discussed regularly and raised in all relevant discussions.
The FCA is amending its individual liability rules in accordance with Duty. Under the Senior Management and Certification Scheme (SM&CR), each senior manager will be responsible and accountable for the role they play in ensuring compliance with the requirement. The FCA is also introducing a new individual conduct rule to ensure that all company employees (except auxiliary staff) act to deliver good results to clients in accordance with the duty.
Importantly for PIs, EMIs and RAISPs, the FCA expects even companies that are not subject to the SM&CR and its rules of conduct to ensure that they receive oversight and guidance. a senior management responsibility for Duty, and that their employees act in a consistent manner. with Duty.
For more information on this or any of the other regulatory obligations mentioned in this alert, and how to approach compliance, please contact Wilson Sonsini’s attorneys. Josh Kaplan and Chris Hurn.
 FCA, Policy Statement PS22/9, New Consumer Obligation Feedback to CP21/36 and Final Rulesand Finalized Guidelines, FG22/5, Final non-handbook guidance for businesses on the consumption obligation July 2022, July 2022.