How to manage consumer duty obligations in the distribution chain

The consumer duty will apply across the distribution chain, “from product and service origination through to distribution and post-sale activities”.

The FCA considers the distribution chain to include all companies involved in the “manufacture, provision, sale and ongoing administration and management of a product or service to the end retail customer”, and the consumer duty will apply to a firm’s activities to the extent that they are able to determine, or materially influence, retail customer outcomes. 

Where companies are within scope of the consumer duty — for example, they are not overseas entities and/or cannot rely on a relevant exemption — then they will need to satisfy their obligations in the context of their role in the distribution chain.

The obligations applicable to a company will vary depending on their role as a manufacturer and/or distributor and will apply in the context of the relevant product and service that is being provided to the end retail customer.

In this article, we will consider the obligations (and practical challenges for) a company in scope of the consumer duty in a distribution chain, vis-à-vis other regulated companies, which can be broadly split into three categories:

• co-manufacturer relationships
• distribution chain relationships (for example, distributor to manufacturer, or distributor to distributor)
• FCA notification requirements

Co-manufacturers

The consumer duty requires in-scope companies to enter into a written agreement outlining their respective roles and responsibilities in order to comply with the regulation’s requirements — for example, to comply with the product and services outcome, price and value outcome.

This written agreement should outline which company is responsible for meeting the different aspects of the consumer duty — for example, company A will provide information to company B on items one, two and three, for the purposes of enabling company B to undertake the fair value assessment for compliance with the fair value outcome. 

In practice, this means that companies that have identified that they are co-manufacturers under the consumer duty may need to either repaper an existing commercial agreement for these purposes, or enter into a new written agreement to meet these requirements.

The consumer duty requires in-scope companies to enter into a written agreement outlining their respective roles and responsibilities in order to comply with the regulation’s requirements

Given the similarity to the existing Mifid II product governance requirements for co-manufacturers, it is anticipated that many companies already subject to Mifid II may use their existing co-manufacturer agreements as a good starting point for documenting how the firms will comply with the consumer duty requirements.