"The Duty can be a positive means to re-visit, refresh and update manufacturer and distributor relationships so they more accurately reflect the current position"
The FCA recently introduced a new Consumer Duty, aimed at setting a higher standard of care that financial firms must provide to consumers. This marks a major change for the UK financial services industry as firms must meet a new principle of “acting in good faith to deliver good outcomes for retail customers”.
With the deadline for implementing these rules for any new and existing products rapidly approaching on 31 July 2023, and for any closed book products on 31 July 2024, it is vital that firms clearly determine how to implement the Duty across all products and services that are caught by the regime.
New requirements and the impact upon the distribution chain
The products and services outcome under the Duty will raise a number of interesting issues from a commercial perspective. Under this outcome, firms that create, develop, issue, manage or operate a product are considered manufacturers. Under the rules, manufacturers are required to identify a target market and an appropriate distribution strategy for that product. Some of these distribution strategies will have complex distribution chains including a mix of regulated and un-regulated parties.
Given the complexity of some distribution chains, the Duty will have a significant impact due to the potentially large number of interconnected contractual arrangements. Some of these agreements may not have been reviewed or amended and may be relatively untouched since inception. This will mean manufacturers will need to revisit these agreements to identify, analyse and implement the Duty throughout each product’s distribution chain. Although the Consumer Duty may appear an onerous requirement upon the manufacturers and distributors of retail products, there are some potential opportunities which all parties can benefit from both now and over time.
From a customer perspective being 'Consumer Duty compliant' and completing implementation in a positive and proactive way can become the new gold standard of compliance used as a marketing tool to attract more clients and make the firm stand out amongst its competitors, adding to its goodwill and reputation. Done badly, however, it could have the opposite effect with significant regulatory and commercial consequences for firms.
From a distribution and commercial relationship perspective, the Duty can be a positive means to re-visit, refresh and update manufacturer and distributor relationships so they more accurately reflect the current position vis a viz duties. It will also ensure obligations between parties are fit for purpose and are aligned to core brand propositions.
From a commercial point of view, implementing the Duty is likely to involve a renegotiation of the terms of affected arrangements. We will expect parties to reassess agreed remuneration and other financial metrics, particularly considering the additional monitoring, data and management information obligations on parties to ensure compliance throughout the chain.
At this initial implementation stage, the weight of compliance sits more heavily on the manufacturer. Over time, we anticipate a rebalancing of associated increased costs as manufacturers objectively re-asses the value proposition in their distribution relationships and potentially assert more control over the distribution chain.
Firms will have to ensure they add additional levels of protection into their contracts, including specific warranties, indemnities and governance and audit clauses to comply with the Duty. Parties will also need to carefully review their acceptable liability caps to take account of any potential losses and fines that may arise out of non-compliance with the Consumer Duty, and to reflect this in their exit strategies and termination rights.
A feature of note of the Duty is a new requirement on firms to notify parties in a distribution chain if it identifies consumer harm. The firm must also notify the FCA when it becomes aware of non-compliance. One view is this will facilitate greater collaboration as it will be in all parties’ interests to prevent a regulatory breach. This should result in the higher standards alluded to at the start of this article. A secondary implication is that some firms may use this obligation to eliminate their competitors’ products and disrupt distribution chains to their advantage.
Any new, as well as relevant existing distribution arrangements and contracts, will need to be carefully considered and updated to reflect the new requirements and to clearly allocate roles and obligations as well as the responsibility for compliance with the duty between the parties.
It is also vital that the parties, particularly the product manufacturer, can evidence compliance and obtain the relevant supporting evidence and data. Although there is currently a lack of clarity as to the allocation of responsibility along the distribution chain, the FCA indicates this should follow a proportionate approach according to the parties’ roles.
Managing wider commercial relationships
We also consider that implementation of the Consumer Duty will not only have a direct impact on the distribution chains and co-manufacturing agreements, but it will also impact the wider commercial relationships with third parties for all parties affected, including technology systems and use of online services, changes to front and back-office systems, technology platforms and customer facing interaction and a need to interrogate and understand automated decision-making algorithms.
Looking ahead
As with any emerging new regulatory change, there is currently no universal approach to allocating responsibility within the distribution chain. Firms are advised to assess each arrangement on a case-by-case basis.
TLT LLP is keeping up to date with the latest recommendations issued by the FCA and market practices and would be happy to provide further advice on this matter.
