This could be highly significant for a number of firms. For instance, where the MiFID investment manager is specifically managing the assets of an occupational pension scheme the extended definition of retail customer is potentially worrisome. This appears to require the manager to ignore the OPS trustee as its direct (and, almost certainly, professional) client and "look through" the scheme to the underlying beneficiaries (i.e. the pensioners). This would be a significant development for MiFID investment managers with a professional-only client base. However, the Finalised Guidance says (in the context of guidance on whether a firm is able to determine or materially influence retail customer outcomes) that, where the manager is managing assets under a mandate that has been determined by a professional client that is independent of the manager, the Duty will not apply. The example the FCA gives is of a segregated portfolio manager which is managing part of the portfolio of a defined benefit pension scheme. Although certainly not free from doubt, we think this means that, provided that it is clear that the OPS Trustee has determined the mandate without material influence from the manager (and is categorised by the MiFID investment manager as a professional client), the manager should not need to "look through" to the beneficiaries under the scheme. MiFID investment managers managing OPS assets may want to revisit the investment guidelines/mandates governing their existing contractual arrangements to ensure that this is not an issue.
However, the above argument, which is predicated on the fact that the manager is not able to materially influence the consumer outcomes for the pension scheme beneficiaries, will be much harder, if not impossible, to run in other cases. For instance, on the face of it, the FCA guidance appears to offer little comfort to OPS firms, fiduciary managers, white label providers and other bespoke providers in the market which are much more "hands on" in terms of the mandate.
Scope: prospective customers
It is important to note that, following on from the above, the Duty will extend not only to actual customers with whom the firm has contracted, but also to prospective customers (even if those prospects never become an actual customer). So, the Duty applies to firms:
- Where they approve or communicate financial promotions.
- When they respond to queries raised by prospective customers.
- Where the prospective customer applies for a particular product or service.
Scope: What is "retail market business"?
This is defined broadly to include the regulated activities (and ancillary activities), payments services and electronic money issuance of a firm in a distribution chain (including a manufacturer and distributor) which involves a retail customer. However, it should be noted that this definition excludes (among others) the following:
- Activities carried on in relation to "non-retail financial instruments" – these are instruments where either (a) the marketing materials/prospectus have prominent and clear disclosures that they are only being offered to investors eligible for categorisation as professional clients or eligible counterparties and are not intended for retail customers and the issuer or distributor has taken reasonable steps to ensure that the offer/associated promotional communications are directed only to such professional client/eligible counterparties, or (b) a minimum denomination/investment of £50,000 (or equivalent) applies to the instrument. This is likely to be a useful exemption for many firms that might otherwise be caught where the terms for subscription provide for such a minimum denomination/investment.
- The manufacturer of a product that is only marketed and approved for distribution to "non-retail customers" where that product is not provided by one firm to another to enable the other to distribute another product to a retail customer (or operate a specified investment held by a retail customer). This exclusion from the definition of "retail market business" is not without some uncertainties.
Scope: distribution chains
Additional limb of the definition of "retail customer"
The definition of "retail customer" has been expressly extended where a firm is involved in a distribution chain: here the Duty applies across any distribution chain to the end retail customer in that chain, even though that person is not a direct client of the firm – so any firm involved in the chain leading from the manufacture of a product or service, to the provision, sale and ongoing administration and management of that product or service that is ultimately provided to an end "retail customer" is caught, broadly speaking where that firm can determine or materially influence retail customer outcomes.
This means the Duty will apply to firms (including those that operate exclusively in the wholesale markets but which are part of a distribution chain for retail products/services) where they can determine or have a material influence over:
- the design or operation of retail products or services (including their price and value);
- the distribution of retail products or services;
- the preparation and approval of communications that are to be issued to retail clients, and/or
- engaging in customer support for retail customers.
Turning that around, there is an effective exemption from the obligations under Principle 12 where a firm's role in a distribution chain is such that it is unable to determine or materially influence retail customer outcomes in connection with a product. Whether a material influence exists depends on the extent to which a firm in practice exercises discretion over customer outcomes. This may not be a question with a binary answer: the extent of a firm's responsibility will depend on its role and the extent of its influence over retail customer outcomes. The rules therefore envisage there being a "sliding scale" of responsibility along a distribution chain based on a firm's actual role and influence. A firm at the beginning of the chain, a long way from, and with no direct contact with, the end retail customers, may have more limited obligations than, say, a firm with such direct contact, subject to the extent to which it influences material aspects of e.g. the design of a product.
Responsibility for own activities
All firms will need to comply with the Consumer Duty for retail business for their own activities but, generally, would only be responsible for their own activities and would not need to oversee the actions of other firms in the distribution chain. In other words, while the FCA will generally expect firms with a direct relationship with the end user to have the greatest responsibility under the Consumer Duty, "all firms that have an impact on consumer outcomes will need to consider their obligations".
Payments and e-money institutions
The rules, products and customer journeys that are relevant in the context of payment and e-money services differ significantly from those that apply to other firms that may be caught by the Consumer Duty. (The rules that apply to them derive from the Payment Services Regulations 2017 and the Electronic Money Regulations 2011, supplemented by certain limited sections of the FCA Handbook that are switched on for them.) Accordingly, payments and e-money institutions are likely to need to consider the Consumer Duty differently. By way of example, the impact of the Consumer Duty along the "distribution chain" may be quite specific to the sectors, where "white label" or intermediate payments and e-money platforms often facilitate transactions for indirect end-user customers.
Payments and e-money firms also often rely heavily on external payments networks and systems and other actors (e.g., correspondent banks, account servicing banks). The FCA helpfully stresses in its Finalised Guidance that in-scope firms are generally subject to the Consumer Duty only to the extent that they have a material influence of retail customer outcomes (see above). Payments and e-money firms will need to consider the potentially complex "chain" in which their products sit, and their exposure to direct and indirect end-user retail customers – which will influence the extent to which such firms are responsible for complying with the Consumer Duty.
Listed investment companies
In respect of listed investment companies, including investment trusts, the FCA has included additional guidance. It recognises that firms must comply with the Duty within the context of their roles. The investment company structure means FCA authorised firms cannot always ensure issues are resolved, but the FCA expects authorised firms working with investment companies to take reasonable steps to address issues where they can. A fund manager will usually have material influence over product design, branding, distribution and other matters and so will need to comply with the Duty more fully in relation to those aspects, while recognising the ultimate decision is for the board. In other respects the practical steps it can take may be more limited (for example, it could discuss any concerns it has with the board).
There is a new rule now which requires firms to notify the FCA if they become aware that another firm in the distribution chain is not complying with the Duty.
There is also a new "self-whistleblowing" rule which requires firms to notify other firms in the distribution chain if they think they have caused, or contributed to, harm to retail customers.
Only firms conducting regulated activities in the UK are potentially subject to the Consumer Duty. So, broadly and subject to the other scoping provisions above, this includes UK investment managers and UK AIFMs.
By way of default, this captures activities carried on with retail customers located in the UK. It will also apply to TP firms in the temporary permissions regime (TPR) and the financial services contracts regime (FSCR), whether from an establishment in the UK or on a cross-border basis into the UK. Gibraltar-based firms are also caught.
However, the territorial scope extends beyond that default position if another applicable FCA rule or an onshored regulation has a different territorial scope. Put another way, the Duty will apply to UK firms conducting business for non-UK retail customers where the relevant business is within the scope of the applicable sectoral sourcebook (e.g. COBS) and that has extraterritorial application. So, it may apply to a UK manufacturer where there is a chain of distribution with non-UK distributors. In this case, the UK manufacturer (which will be subject to the Consumer Duty) may struggle to obtain requisite information from a relevant non-UK distributor (who will not be subject to that Duty). In this example, the FCA essentially says that the UK manufacturers should consider what is reasonable in the circumstances in terms of obtaining information, but that it would not be expected to obtain information from firms that are not subject to the Duty.