The FCA introduced the Consumer Duty to ensure consistent good outcomes for retail customers. The duty already applies to new and existing products and services open to sale or renewal, and will come into force for closed products and services on July 31, 2024.

The Consumer Duty comprises an overarching “Consumer Principle”, which requires firms to act to deliver good outcomes for retail customers. Firms must act in good faith, avoid causing foreseeable harm, and enable and support retail customers to pursue their financial objectives. Firms are also required to deliver good customer outcomes across four key areas:

• products and services;
• price and value;
• consumer understanding;
• consumer support.

The Consumer Duty has broad application and applies across the distribution chain for regulated and ancillary products and services that are offered and sold to retail customers. The distribution chain includes firms involved in the manufacture, provision, sale and ongoing administration and management of a product or service to the end retail customer.

What this means for third party arrangements

Although an authorized firm is not generally responsible for the compliance of other authorized firms in its distribution chain, authorized firms will still have certain responsibilities under the Consumer Duty for end customers in the distribution chain (even if those end customers are not their direct customer). For those entering into outsourcing and third party supply arrangements, the authorized firm will remain responsible for compliance with the Consumer Duty.

Firms will, therefore, need to consider the risks associated with each relevant arrangement and look at the likelihood of the arrangement having an impact on the firm’s ability to comply with the Consumer Duty. It is essential to think about whether a failure or poor performance by the supplier could result in poor outcomes for retail customers. Where risks are identified, steps must be taken to ensure the relevant contractual and operational mechanisms are adequate to protect customers.

The FCA recently highlighted a good practice example of firms reconsidering their role in distribution chains and taking steps to support good outcomes for customers, even where those firms did not have a direct relationship with the customer. Examples of poor practice included firms not sharing information effectively across the supply chain and not paying close enough attention to ensuring their distribution strategies are driving good outcomes.

Unregulated suppliers may resist contract provisions or changes that seek to make them subject to a law that would not otherwise apply to them, but it is important that firms carefully consider each of their arrangements and assist these unregulated providers to understand the context around why the Consumer Duty is important.

Contractual considerations

We have been working with many firms to help them with third party Consumer Duty compliance, and some of the key questions to be asking include:

• What roles in the distribution chain do each of the parties hold, and do they have obligations under the Consumer Duty in their own right?
• What circumstances (specific to this arrangement) could arise which could lead to a risk of poor outcomes for retail customers?
• Is the firm satisfied that the relevant service specification, KPIs and incident resolution provisions are sufficient to ensure good outcomes for retail customers?
• Are any provisions relating to product design, product adaptation, milestones and acceptance testing suitably drafted with the Consumer Duty in mind?
• What is the liability position under the contract in relation to any breach of the Consumer Duty?
• Is there an obligation on the supplier to notify the firm of any circumstances that may adversely affect retail customer outcomes?
• Does the firm have sufficient flexibility to make adjustments to ensuring ongoing compliance?

Depending on the response to these questions, new contractual terms or contractual variations may be required to give the firm comfort that it is taking all steps necessary to comply with its obligations under the Consumer Duty.

Joanne Owens is a consumer finance and retail financial services regulatory partner with particular focus on the consumer credit and regulated mortgages regimes. Eve England is a Company Commercial Group partner, she advises clients across a range of sectors on technology and consumer law matters. Ruth Fairhurst is a principal associate in the Financial Institutions Group.

Thank you to Joanna Hooper for co-writing this article.

For disclaimer, please see Eversheds Sutherland.