Navigating the Consumer Duty Rules in Fintech Contracts

Summary: By defining roles and responsibilities in your contracts together with easy to understand contract schedule guides for your team (doesn’t everyone love a good flowchart), you’ll be setting your best foot forward to effectively implement the correct Consumer Duty actions :)

The enforcement deadline for the Consumer Duty rules is rapidly approaching (31st July ‘23 for existing products, and 31st July ‘24 for dormant or closed products). I thought it would be helpful to break down the details of these rules and how they mesh with existing concepts, such as outsourcing obligations, to showcase why it’s important to think about the different contractual schedules you'll want to have at the ready, to keep you moving fast while staying in control.

The Consumer Duty rules aim to ensure fair customer treatment, applying to authorised firms' regulated and ancillary activities. This encompasses product design, pricing, distribution, communication, and support. It applies to all firms with a material influence over or that determine retail customer outcomes, except those operating under another firm's mandate, firms solely providing factual information for support, and IT systems. Manufacturers create products or services and share information with distributors. Distributors sell these products or services to customers and must provide manufacturers with sales information and review details on demand.

Oversight arrangements similar to outsourcing may occur, where one party is liable for another's compliance with the Consumer Duty- which could include carrying out value and distribution assessments. The FCA and the PRA impose requirements on regulated firms entering into certain types of outsourcing arrangements. Outsourcing requires specific terms in contracts, like data security, access rights, incident reporting, and service quality agreements so that the outsourcing firm can maintain their oversight on compliance.

Consider an EMI working with an EMI distributor. This relationship may require the EMI distributor to carry out Consumer Duty assessments, and the principal would be responsible for their compliance. Alternatively, if the distributor only follows the EMI principal's mandate, the principal would likely conduct all assessments (this would reach the same result, i.e., the principal ensures compliance - however, the details in your contracts and tasks for your internal teams would be different depending on which method applied).

Another scenario involves two credit institutions offering a savings account. If both regulated parties have a direct relationship with the customer, separate liability under the Consumer Duty rules may occur, requiring information sharing related clauses in your agreements. But if the customer only has an agreement with one party, this could be arranged more like an outsourcing agreement, and the outsourcing entity would put in place compliance oversight provisions.

To ensure smooth compliance, it's crucial to clearly define roles and responsibilities within the agreement. Even though the FCA stresses that the actual roles matter more than the contract wording, clarity is essential from a legal perspective. By defining roles and responsibilities in your contracts together with easy to understand usage guides for your internal teams (doesn’t everyone love a good flowchart), you’ll be setting your best foot forward to effectively implement the correct actions.