The Extra Territorial Scope of the Consumer Duty

This blog is aimed at the Asset Management sector.

At a Glance

The Consumer Duty requires asset managers to assess the value of products and services they manufacture and distribute, as well as perform due diligence and oversee the third party client service providers downwards in the distribution chain.  As a result, the Consumer Duty’s extra territorial scope is now coming into the spotlight, and there are questions for what this means for non-UK firms involved in the chain.

This blog looks to explore the reliance being placed on these offshore firms for activities now in scope of the Consumer Duty; whether via manufacturing arms of UK firms distributing into the UK, or where UK distribution is via third country fund structures and client servicing agreements. Where operational elements of the Duty could stray outside of the UK’s jurisdictional remit, there is the potential that the service or value provided to customers is at risk of being perceived as being comparatively worse if the same criteria to assess is not used, or is harder to demonstrate, therefore consistency of approach is key.

With just over six months until the Consumer Duty deadline, firms are looking to ascertain where reliance is placed on other firms in the distribution chain to undertake outcome activity and generate MI. To help prepare for the upcoming requirements on these firms, we have highlighted some key areas for non-UK firms to consider.

Products and Services, and Price and Value Outcome Compliance

Consumer Duty is likely to have some degree of extra-territorial impact, as there is an obligation on distributors to obtain enough information from the manufacturer to understand the outcome of the value assessment (PRIN 2A.4.16R). As a result, non-UK firms should consider the following:

• Where the manufacturer is not subject to the Duty, then distributing firms must take “all reasonable steps” to comply (PRIN 2A.4.17R).
• Distributors in the UK will likely want evidence that asset managers have reviewed products for price and value if these are to be sold into the UK market.
• With the introduction of the Duty, managers of offshore funds distributed into the UK, are having to consider producing assessments of value for their funds, even though they were previously not required to do so. The result is that non-UK Asset Managers may potentially produce a less substantive version of the assessment of value to demonstrate adherence to the Duty. From a commercial standpoint, for Non-UK funds, there is an incentive to produce an assessment of value due in line with the FCA expectations due to the role distributors play in determining whether a fund meets the Duty. There is also the risk as being perceived as comparatively worse if an assessment of value is not performed, or performed to the same criteria.
• EU funds (both UCITS and AIFs) may already need to do value assessments because they are required not to charge undue costs to investors. ESMA’s supervisory briefing on the supervision of costs in UCITS and AIFs sets out the factors that firms should consider as part of their structured pricing process (e.g. whether the costs are in the investors’ best interests, whether they are proportionate compared to market standards etc). However, these value assessments can sometimes be quite high level in comparison to the rules under COLL 6.6.20.
• There is a potential risk that assessing value becomes distributor led, and therefore there is an emphasis on manufacturers to ensure due consideration is given to funds made available to the UK market, even if they are manufactured outside of the UK.
• Non-UK firms should understand the nexus between existing processes and the Consumer Duty, to help facilitate the provision of data to UK distributors. If data is provided quickly and in a way that can be easily understood and used to demonstrate value, then this could lead to a competitive advantage for Non-UK firms.

Consumer Understanding and Consumer Support Outcome Compliance

Where offshore and non-UK firms play a direct to consumer role in the distribution chain (client services and administration for example), the UK manufacturer or other distributors may seek to place reliance on them for all or parts of outcome 3 & 4 activities evidencing compliance with the Duty. When placing such reliance, UK firms should consider the following:

• UK firms should consider communicating their expectations in terms of testing consumer understanding and providing customer support to non-UK firms providing client services and onboarding based in offshore jurisdictions. Non-UK firms should take direction from the UK based manufacturer/other distributor in the chain regarding their expectations, and in the spirit of the Duty, do their best to support compliance.
• Clarifying data expectations will be important for UK manufacturers, to make it clear where information is required to be provided to them back up the chain. These expectations will be off the back of activities undertaken by non-UK firms, which a UK firm will rely on to evidence outcome compliance being undertaken by non-UK firms.
• As part of the data expectations, UK manufacturers may consider clarifying their expectations in terms of flagging indicators of vulnerability and foreseeable harm so that offshore providers can identify them in their client services activities. UK firms might wish to revisit their vulnerability and harm indicators/flags to ensure they are robust enough to be translated onwards where offshore firms are servicing UK clients and undertaking non-UK distributor style activities.
• UK firms should consider documenting roles and responsibilities around data sharing, data identification, and data collection between UK firms and non-UK firms supporting outcome activity compliance for the Duty. The format in which information will be shared might include the frequency of that information, and the trigger points for risk-based escalation exceptions to the UK manufacturing firm.
• Collaboration with non-UK service providers is key to identifying friction points and customer journeys within existing MI/frameworks where UK firms can rely on information identified along those journeys to inform and evidence outcome 3 and 4 compliance.
• Non-UK distributors may wish to leverage existing MI/data sharing frameworks and agreements to share information back up the chain to UK manufacturers. Firms are encouraged to start identifying now, where those friction points are to make sure offshore providers are able to provide data in good time.

Conclusion

When providing products and services to UK retail clients, the Duty makes it clear that everyone has a role to play, whether that’s specific outcome compliance as a full scope UK based firm, or in a supporting role to UK manufacturers and distributors. UK firms should therefore be engaging proactively across the distribution chain (UK and Non-UK), with Non-UK firms actively engaging in this process now.

Firms will be expected to share information up and down the chain to deliver good client outcomes and mitigate foreseeable harm. For UK firms, ensuring consistent compliance with the Duty will require collaboration and communication across the chain and non-UK firms will have a role to play in securing this aim.

Read our other insights on the Duty 

Our series of blogs on the consumer duty are a good start to assist non-UK firms who may be providing information to be relied upon within the Consumer Duty outcome activities:

FCA finalises Consumer Duty rules

How will the FCA’s Consumer Duty affect retail banks and consumer credit firms?

Consumer Duty implementation plans: what do Boards of investment managers need to focus on?

For detailed support on discharging outcome activity obligations to non-UK firms and the extra territorial scope of the Consumer Duty, please contact Paul Fraser, Jessica Castellino and Chris Collins.