How the new Consumer Duty regulations affects regulatory hosting firms who do not service retail clients
Posted on 12 Jan 2023
The last quarter of 2022 has given regulated firms much to chew on. All firms have been affected by at least three immense regulatory changes. The review of the appointed representative regime, changes to the financial promotion rules and earlier, the implementation of new Consumer Duty regulations.
With the FCA’s New Consumer Duty regulations coming into effect in 2023, it has become essential for firms to understand the effect of its implementation, especially on regulatory hosting. The regulations mark a significant shift for both firms and the FCA, providing a fair ground for growth and innovation.
For Regulatory Hosts and principal firms, the wave of regulatory change may have appeared heavy, with most firms surviving the implementation of the rules across its appointed representatives by use of Regulatory Software’s and compliance technologies, particularly for regulatory hosts with a wide variety of business plans across its appointed representatives.
The Consumer Duty rules outlined by the FCA include the following note-worthy points:
- Under Principle 12 of the FCA Handbook, it is prescribed that the firms must “act to deliver good outcomes for retail customers”, ensuring that customers are put in a position where they can make informed decisions. Presenting the customers with products and services matching their individual needs where they are offered a fair value.
- Provide customers with support throughout, finding the best ways to engage with and solve problems quickly and effectively.
- Provide access to the needs of diverse consumers by focusing on their investment objectives.
- Appoint a new ‘champion’ to take on the responsibility for a firm’s compliance with Consumer Duty.
The rules have been designed to have an impact on the broader market, including any regulated activity under the umbrella of the retail market. Essentially, the rules target all regulated firms that may influence or are in the position to influence retail customers, directly or indirectly, through their activities. This effectively determines that all regulated instruments, irrespective of their regime, are to comply with the new Consumer Duty rules.
Although the term ‘new’ Consumer Duty rules is used often, it is important to remember that much of the obligations which firms had to consider pre-dated the implementation of the Policy Statement 22/9. Many of the themes in the PS 22/9 were explored by the 2018 MiFID Product Governance (PROD) rules which required firms to produce target market assessments and confirm the chain of distribution against the characteristics of a product. Many firms that complied with their PROD obligations will find that the PS22/9 brings similar thematic reviews. Nonetheless the release of the Policy Statement and changes to the FCA handbook bring a much-needed clarity as to how firms need to comply with the rules and what their key considerations should be.
To understand how the new Consumer Duty regulations affects regulatory hosting firms who do not service retail clients, it is essential to understand how retail clients are classified by the FCA and outline the activities that do not fall within the scope of Principle 12.
The definition of “retail client”, according the FCA handbook, is “a client who is not a professional client or an eligible counterparty” COBS 3.4. Firm that have such permissions would have been exposed to a higher degree of compliance. Firms that do not have the permissions to service retail clients should only be providing regulatory services to professional clients and eligible counterparties, and would not have typically had a direct exposure to Consumer Duty rules.
By October 2022, Firms were required to produce an implementation plan (with board/management sign-off) which looked into whether the firm is directly or indirectly exposed to retail clients. Based on the assessment, Firms had to look into implementing the consumer duty rules proportionately. This includes the impact the rules have on its appointed representatives.
Exceptions to Principle 12 following the definition laid out by the FCA are listed below:
- Where products and services are only marketed and distributed to non-retail customers.
- If a firm distributes a product or service to another firm, although this may be enable the latter to distribute the product to a retail customer.
- When it is enunciated that the product/service is to be offered only to professional clients of eligible counterparties. This can be done through marketing prospectus or announcements clarifying that the product/service to be distributed only among non-retail sectors. The distributor must have taken appropriate measures to ensure that the distribution material is only directed to the eligible instruments.
- Where it is in relation to promotions or offers of specified liquid, listed financial instruments; ones that are not an AIF, collective investment scheme or structured financial products.
- Firms that operate within a mandate set out by a different firm in the chain.
- Firms supplying factual information to provide support to the work of a different firm in the chain.
- Firms that do not hold permissions for retail clients.
Principal firms should now be at a stage 2-3 of their implementation plan: finalising their gap analysis and concluding on which AR’s may need to comply with the consumer duty rules OR confirm which AR’s may expose the firm to the rules the most. For principal firms that have concluded that the application of the rules is required, firms will have up until June 2023 to implement the requirements.
Principal firms that are not exposed to retail clients, directly or indirectly, through their appointed representatives, should continue conducting a regular assessment of its AR’s activities. For example, ensuring that Consumer Duty forms part of the principal’s monitoring plans will help capture exposures to the rules and help the principal adapt to potential reporting requirements.