Get help with Consumer Duty

Two Key Definitions

A thorough understanding of new terms and definitions is often a key weapon to have in your arsenal when tackling any new piece of regulation, and Consumer Duty is no different.

Two definitions firms will need to review and understand to properly scope the impact of Consumer Duty are: ‘retail market business’ and ‘non-retail financial instrument’.

The first, ‘retail market business’ is the type of activity the new Consumer Duty rules within PRIN 2A apply in respect of. And retail market business does not include activities carried on in relation to non-retail financial instruments.

But what is a non-retail financial instrument? The definition broadly captures instruments targeted and marketed towards professional clients only and/or which have a minimum investment amount of £50,000 or more.

How does this impact firms?

Firms who determine they are out of scope of the Duty as they only deal with such products will need to consider documenting the technical rationale, alongside a description of the controls in place to demonstrate the products offered do (and will continue to) meet the definition of a non-retail financial instrument.

More will be required of firms who offer a mixture of products (i.e. retail financial instruments and non-retail financial instruments), and they could consider applying the higher Consumer Duty requirements across the firm (rather than having two different sets of rules).

Firms relying on the £50,000 de minimis investment amount should check fund documentation/product terms more closely. In particular, firms should ensure there no scope for the minimum investment amount to be ‘tweaked’ based on investor (or distributor) request.

It doesn’t stop there either. Even supposedly ‘out of scope’ firms will need to be able to demonstrate staff have been trained to ensure they understand the differences/limitations they are working under. And just as important will be the controls, MI and oversight in place to monitor compliance. Further checks will be needed, particularly around ‘investors’ who are not per se professional clients but instead follow the ‘elective professional’ route.

What are we seeing?

Anecdotally, it seems some smaller firms who previously would consider promoting ‘high risk’ products/services to HNW/sophisticated retail investors are choosing to place a ‘hard stop’ on this activity. This activity may have happened on a few occasions (i.e., family offices/UHNW investors), but to avoid complying with the more onerous standards set by the Consumer Duty (and the new financial promotion rules), this has stopped altogether.

We would not be surprised if firms begin moving up ‘de-minimis’ investment amounts to hit the £50k level more regularly in order to manage their regulatory risk. However, this may be more difficult for firms offering EIS schemes where the initial investment amount can often be lower, as individuals are investing year on year maximising tax relief as opposed to a one-off lump sum.

How can we help?

We have developed an impact assessment/scoping tool to assist firms document if/how the Consumer Duty applies to them. If you’d like to discuss this, or the Consumer Duty generally, in more detail, please do get in touch.

ComplyCraft have been busy assisting firms with their IFPR implementation, including helping with the Internal Capital Adequacy and Risk Assessment (ICARA) process. The link between this and Consumer Duty might not be obvious, but we feel it is worth exploring.

The ICARA asks firms to consider the risk of material harm to clients. The Handbook (MIFIDPRU 7) provides guidance on this and primarily focuses on harms to clients that may lead to a FOS complaint or a potential legal claim (i.e., a harm which has monetary implications for the firm in terms of cash and capital - key to understanding the ICARA process).

The Consumer Duty has been created to tackle a failure to provide the right products to the right people (with no thought to fair pricing/value). Alongside poor communications (reinforcing 'information asymmetries'), under resourced and restricted customer service, and unscrupulous use of behavioural psychology and 'sludge tactics' by some firms.

At first glance then, there are multiple harms that firms subject to the Consumer Duty will need to consider, and in some detail, just to comply with these new rules.

But IFPR pre-dates Consumer Duty and was spearheaded by a different team at the FCA. Does that mean there is a possibility for it to updated to reflect the harms described under the Consumer Duty in due course? Possibly. But even if it isn’t, prudent firms will see the relevance of Consumer Duty to their ICARA process, as can a firm which identifies a failure to deliver good outcomes for retail clients truly state there is no 'material harm' to consider under the ICARA?

The practical answer to that will likely flow through FOS findings and FCA guidance/supervision. We would be surprised if firms subject to the Consumer Duty and demonstrably cause harm (by failure to deliver good outcomes) are NOT required to hold capital/cash against this risk. Particularly when (or if) quantitative data from FCA fines/FOS complaints related to the Consumer Duty trickles through.

If you’d like to discuss Consumer Duty or the ICARA process in more detail, please do get in touch.

We offer a highly competitive Consumer Duty toolkit consisting of templates and resources to help firms implement the Consumer Duty. This package includes a scoping exercise, training and access to various templates, for example a template Gap Analysis, Implementation Plan and Board reporting documents.

The contents, and cost, of our IFPR toolkit can vary according to the level of support you need. We can help as and when you need it, either to assist with implementation, act as a sounding board for technical queries or provide external challenge and critique to demonstrate a robust approach. Our staff are happy to get creative, innovative and work to reach solutions with you.

Please get in touch with us to discuss what you need and how we can help.