The Consumer Duty for closed books and loan portfolio sales

• This ruling shows how condition precedent clauses are complex and need to be clearly drafted to be effective. This judgment gives guidance for drafting conditions precedent, providing indications of what is - and is not - likely to be sufficient as a condition.
• This case also demonstrates that it is important to ensure that each party is appropriately aware of the conditions on which relief is contingent. For a party to rely on relief rights within the contract, that party must strictly follow the necessary requirements connected to that right to relief.

We have sold all loans prior to implementation of CD July 23. What is the extent of actions we need to take. Business still regulated and dealing with small number of historic complaints.

To the extent that legal title in the loans has passed, the purchaser is now fully responsible for Consumer Duty compliance (although is this was an open book, the seller would remain responsible for Duty compliance issues between 31 July 2023 and the point of sale). The issue of historic complaints really depends on whether the complaints relate to (i) one-off conduct issues (such as mis-selling) where that liability remains with the purchaser or (ii) ongoing product issues, where the purchaser will inherit responsibility for remediation from a Duty perspective. Overlaying this is the terms of the portfolio sale agreement, which will no doubt contain provisions dealing with the seller’s input on complaints for which the seller remains responsible, and pricing where the purchaser takes on the burden of remediation.

We have retained responsibility for origination - question - would we have to do fair value assessment and full comms review?

The simple answer is yes. The extent of that responsibility really depends on how origination occurs, and whether or not the originator is visible to the customer.  Even where the originator immediately sells products into a funding structure, as lender of record Duty compliance falls – wholly or partly – on it. If the products in question were designed with input from the funder, however, it is entirely possible that the funder is a “co-manufacturer” of the products, in which case there should be an agreement in place setting out the roles and responsibilities of the originator and the funder, but both sides would have some responsibility for compliance. The extent of the burden on both sides has not yet been made clear, however.

When the legal title and beneficial interest are split between two parties, but the legal title holder still needs to get consent from the beneficial owner to undertake some activities, especially in relation to financial matters, would you deem these parties to be 'co-manufacturers?' and therefore brings the beneficial owner more into the CD scope?

The limited guidance available in the FCA’s Final non-Handbook Guidance (link below) (paras 6.9 and 6.10) indicates that a person is a “co-manufacturer” where “they can determine or materially influence the manufacture of a product or service. This would include a firm that can determine the essential features and main elements of a product or service, including its target market” and gives the example that “an  intermediary might design an investment fund and work with a fund manager to launch it. Both are considered co-manufacturers”. From that we conclude that the beneficial owner would have had to be involved at the product design stage, and does not become a co-manufacturer simply because they contractually acquire a say in the originator’s activities at a later stage. The note of caution I would add is that this area is evolving, and it may be that the FCA indicates further guidance later on which changes this position, given that the Duty is expressed to apply rights across the retail distribution chain.

Where a lender is the Legal Title Holder of 2nds Closed Book of a securitised, residential mortgages but is neither the beneficial title holder nor the original manufacturer. Which will obviously impact their ability to facilitate customer's exit to a Product Transfer (for example). To what extent can they realistically undertake a FVA of this book?

That’s a highly relevant and extremely thorny issue. The FCA’s Final non-Handbook Guidance (link below) (paras 3.24 – 3.29) indicates that where firms are not the original manufacturers of a portfolio, they may not have all of the relevant information to enable them to conduct ongoing reviews. Nevertheless, the FCA expects firms to use their “best endeavours” to meet the Duty’s requirements. The FCA has signposted several factors as relevant to the “product and services” outcome (para 3.26), but for “fair value”, you should follow the approach to be adopted for existing contracts made before the Duty comes into force (paras 3.10 – 3.17). Whilst a recent speech by Sheldon Mills of the FCA (link below) has highlighted the over-reliance upon firms of benchmarking against competitors and against similar products instead of relying on actual data, there is little choice - where the firm is not in possession of the original design methodology – but to use such benchmarking in conjunction with the other factors mentioned at para 3.26.

The situation is complicated even further where you have a servicer of a securitised portfolio (particularly where they are not the legal title holder). In that case, the servicing agreement will often require noteholder consent to make changes to the underlying portfolio. If consent is not forthcoming, then the servicer may be unable to make changes which it has identified as being necessary to comply with the Duty. I’m not sure there’s an easy answer to this. Obviously key to sorting the issue is checking what level of discretion the servicer has under the arrangements, its legal ability to make the changes (which will also depend on whether or not it is the legal title holder), and early engagement with the noteholders.