Impact of the FCA Consumer Duty on loan portfolio sales and acquisitions

The new consumer duty (the duty) represents a significant change to how the FCA will supervise and regulate the retail financial services sector. 

It introduces:

• a new Consumer Principle, which requires firms to ‘act to deliver good outcomes for retail customers’;
• a set of cross-cutting rules that explain how firms should act to deliver against the Consumer Principle;
• a suite of other rules and guidance linked to four particular outcomes that represent the key aspects of the firm-consumer relationship.

The duty will be introduced in two phases:

• by 31 July 2023 the duty is to be implemented for all new and existing products and services that are currently on sale;
• by 31 July 2024 the duty is to be implemented for all closed products and services.

What impact will this have on due diligence for loan portfolio sales and acquisitions that take place from 31 July 2023 onwards?

The duty includes rules and guidance that apply to regulated firms buying and selling portfolios of regulated products (see FG22/5 - 3.24-3.32 and 6.5).

The obligation on sellers

The principal obligation on sellers is to provide relevant information to buyers to enable them to comply with the duty on an on-going basis from the point of purchase. 

This information should enable the buyer to understand the product design and the basis on which it has been assessed as providing fair value. The information should enable the buyer to monitor on an ongoing basis if the product meets the needs, characteristics and objectives of the target market and offers fair value.

The obligation on buyers

The principal obligation on buyers is to obtain the relevant information from the selling firm to be able to comply with the duty on an on-going basis from the point of purchase. The information must provide sufficient detail to allow the buyer to conduct ongoing reviews of the product.

PRIN 2A.11.4R(3) will require the buying firm to carry out sufficient due diligence to ensure they understand in particular:

• whether any group or groups of retail customers of the product have characteristics of vulnerability or as a group have in common a specific protected characteristic in the same form;
• the outcome of the selling firm’s product approval process for the product book and the outcome of any product reviews carried out by the selling firm;
• the benefits the product is intended to provide and the costs the retail customer pays for the product; and
• the basis on which the product has been assessed as providing fair value.

What happens if the acquisition takes place after 31 July 2023, but it is not the first sale of the relevant portfolio?

The specific due diligence obligations referred to above only apply where a portfolio is sold for the first time after 31 July 2023 (PRIN 2A.11.4R(1)).

Where a loan portfolio is acquired after 31 July 2023, but the first sale of that loan portfolio took place prior to 31 July 2023 (and unless the buyer was a co-manufacturer of the product or has significantly adapted the product on or after 31 July 2023), the buyer will be expected to:

• comply with Principle 12;
• use its best endeavours to comply with PRIN 2A.3 (products and services outcome) and PRIN 2A.4 (price and value outcome); and
• comply with the remainder of PRIN 2A.

How does the duty apply to loan portfolios acquired prior to 31 July 2023?

The specific due diligence obligations referred to above only apply where a portfolio is sold for the first time after 31 July 2023 (PRIN 2A.11.4R(1)).

Unless the buyer was a co-manufacturer of the product or has significantly adapted the product on or after 31 July 2023, the buyer must:

• comply with Principle 12;
• use its best endeavours to comply with PRIN 2A.3 (products and services outcome) and PRIN 2A.4 (price and value outcome); and
• comply with the remainder of PRIN 2A.

What happens if the buyer is unregulated?

Legislation grants the ability to sell mortgage or credit books to entities with either limited regulatory permissions or which are not regulated in respect of their activities.

Although unregulated firms would not be subject to the duty, they are bound by general consumer law, including the Consumer Protection from Unfair Trading Regulations 2008.

The FCA has indicated that in its view, the general standards of conduct expected by the duty rules may be considered relevant to what amounts to honest market practice or the general principle of good faith in the field of activity of mortgage and credit books and the sales of such books.

Therefore, although the new duty rules apply to regulated firms buying or selling regulated loan portfolios, in practice we are likely to see the principles applied more broadly.

Are there any other points to consider in relation to the application of the duty?

There are several other points funders, lenders and portfolio-holders may need to consider in relation to the application of the new rules and guidance, including:

• how the FCA’s rules and guidance apply if the transaction or funding model proposed involves a split in the ownership of the legal and beneficial titles to the loans; and
• the impact on acquisition or funding structures involving a mix of regulated and unregulated entities and outsourcing relationships.

What should we do next if we are involved in the sale or purchase of loan portfolios?

• Analyse how the new rules and guidance will apply to the transaction structures that you adopt.
• Consider any changes required to your transaction documentation to reflect each party’s obligations under the duty.
• If you are the seller:
  1. consider the information that you will provide to buyers of the portfolio to enable them to comply with the duty on an on-going basis from the point of purchase.
• If you are the buyer:
  1. update due diligence processes and procedures to enable you to:
     1. assess compliance with the Duty by the seller (and any related compliance risks); and
     2. obtain the information that you need to be able to comply with your obligations under the Duty in relation to the portfolio on an ongoing basis;
  2. consider how you will integrate acquired portfolios into your own framework for compliance with the Duty, for example, ongoing monitoring and management information.

How can we help?

Although the new rules and guidance will not enter into force until 31 July 2023, the FCA has indicated that it is not waiting for the duty to enter into force before acting to improve customer outcomes. 

Now that the final rules and guidance have been published and implementation plans will be in place, we are likely to see compliance with the duty becoming an increasing part of the due diligence phase of a loan portfolio transaction.

Our structured finance and loan portfolio transactions team has partnered closely with our specialist consumer finance and mortgage regulatory team to advise on the impact of the duty on all types of structured finance and loan portfolio transactions including forward-funding of mortgages, securitisation, warehousing structures and sales and acquisitions.  Please let us know if we can support you with understanding the impact of the duty on a proposed transaction.

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