The Consumer Duty will apply to all firms in the distribution chain for products and services sold to retail customers. The FCA has decided to align the scope of the Consumer Duty with the existing scope of its sectoral sourcebooks (e.g. COBS, ICOBS, BCOBS, MCOB, CONC etc.). However, it will not apply to activities where an exclusion exists, either in the FCA Handbook or in legislation. For example, the Duty will not apply to unregulated buy‑to‑let contracts or large business mortgage customers. It will also not apply to SME lending (which is an unregulated credit-related activity); however, it will apply to debt-collecting under the Bounce Back Loan Scheme.
For payment service or e-money providers, the Duty will apply to business conducted with consumers, micro-enterprises and small charities.
The FCA has clarified that where only certain aspects of a sourcebook applies, the Consumer Duty will only apply to the areas covered by those rules. For example, regulated buy-to-let mortgages are only subject to rules on financial promotion in MCOB and therefore the only relevant aspect of the Consumer Duty – in relation to communications – would apply.
The Consumer Duty overall would apply both at a target market and individual customer level, depending on the situation.
Products or services sold to both retail and non-retail customers
The FCA recognised the complexity that exists where products or services are bought by both retail and non-retail customers, but declined to exclude such products and services from the scope of the Consumer Duty. Instead, firms will be expected to consider whether they might be able to develop different communications or support services for the two different groups or take a consistent approach for all customer groups.
Regulated v. unregulated activities
The Consumer Duty applies to regulated activities and to unregulated activities which are “ancillary” to regulated activities. The FCA clarified that ancillary activities include unregulated activities necessary for the completion of a regulated activity. Product design and ongoing customer services would be considered ancillary. However, the sale of a separate non-dependent non-financial service at the same time as a regulated product would not be ancillary, e.g. a broker selling boiler insurance and an unregulated routine service plan to the same customer.
Firms do not need to have a direct relationship with the retail customer to be within scope – firms that can influence material aspects of the design, target market or performance of a retail financial services product or service must comply with the new rules.
Application outside the UK
The Consumer Duty will apply to all firms that conduct regulated activities in the UK. This will include firms in Gibraltar selling in the UK and firms in the temporary permissions regime and financial services contract scheme following Brexit.
Guidance in FG22/5 clarifies that:
- UK distributors of non-UK products and services must take all reasonable steps to understand the product or service, the target market it would serve and the value it provides in order to ensure it will be distributed appropriately; and
- the Consumer Duty will apply to firms conducting business for non-UK customers in the same manner as for UK-customers. Where a distribution chain includes non-UK distributors who are not subject to the Duty, UK manufacturers are expected to consider what is reasonable in the circumstances to gather information but would not be expected to obtain information from firms that are not subject to the Duty.
Products or services that are not designed for retail customers, which are only marketed and approved for distribution to non-retail customers and are not provided to another firm under an arrangement as part of a distribution chain fall outside the scope of the Consumer Duty. The FCA clarified that classifying a product or service incorrectly as non-retail to avoid the Consumer Duty would be a breach of the Duty.
In response to concerns that the concept of financial instruments designed for wholesale investors under the draft rules were too narrow, the FCA amended the draft rules to exclude primarily wholesale instruments by amending the definitions of “retail market business” (which are intended to be covered by the Consumer Duty) and “non-retail financial instruments” (which are intended to be outside the scope of the Duty). The FCA has also included additional guidance in FG22/5 to further clarify the application of the Duty to the wholesale market.
The FCA clarified that unless an FCA‑authorised outsource provider can determine or has a material influence over retail customer outcomes, it would not be subject to the Consumer Duty. In such cases, the outsourcing firm will remain responsible for meeting the relevant aspects of the Duty.
The Consumer Duty will apply to the manufacture and distribution of investment companies, including investment trusts. The FCA expects firms working with investment companies to take reasonable steps to address issues where they can; but recognises that the company structure means FCA authorised firms cannot always ensure issues are resolved.