"Firms have made solid progress in many areas of the Consumer Duty and the clock is now ticking for closed products and services to comply.”  Sheldon Mills, Executive Director, Consumers and Competition, FCA, 20 February 2024. 

The Consumer Duty represents a sea change in how regulated retail products are designed, distributed, sold and run down across the entire distribution chain in the financial services industry.  With phase 1 for “open” products having come into force from 31 July 2023, firms are now undertaking the arguably thornier task of bringing portfolios of closed products into compliance with the Duty from 31 July 2024. 

Whilst FCA guidance and communications go a long way to explaining the intentions of the regulator on how the Duty applies to closed books, there are still many unanswered questions, and market practice (and the FCA’s approach) in response is still evolving.

On 28 February 2024, TLT hosted a webinar seeking to clarify some of the differences and peculiarities of closed book reviews, and to attempt to assist with some of the open questions which, as yet, remain unanswered. The webinar yielded crucial insights and practical takeaways for over a hundred clients in attendance.

Hosted and presented by TLT’s Tom Ward and Richard Clark, we have set out the link to the slides so that they can be used as an aide memoire and prompt for further enquiries, and have set out below the key takeaways from the webinar as well as answers to the questions which arose in the course of the session.


It’s not in force for closed books yet – but it is relevant now to portfolio sales

Whilst the Duty does not come into effect for closed books until 31 July 2024, for portfolio sales happening now, purchasers are already asking for due diligence which will enable them to comply with the Duty after implementation.

You need to have a strategy for bringing product books into compliance

The review and remediation process can be broadly broken down as follows:

  • Identify products in scope (including size of portfolio).

  • Group together similar products (e.g. product features, target market, customer base).

  • Assess key characteristics of affected products (especially known issues/complaints and known market regulatory intervention).

  • Are there active customers?Are customers engaged or disengaged?

  • Assess changes to products over time impacting pricing/value.

  • Assess what product features are particularly valued or disliked.

  • Breakdown complexity., pricing, value, fairness, difficulties in remediation and the possibility of switching to other products.

  • Determine remediation strategy (fix, migrate product, close the book or sell).

  • Remediationmay involve fixes which are visible to customers (e.g. rate changes, pricing changes) which need to be communicated or invisible (such as unfair contractual rights) which can be addressed by “switching off” through internal policy setting.Determine which is the more suitable strategy.

  • Plan steps:what are the priorities and how will you execute it (including customer comms, support and complaints handling)?

  • Plan for FCA engagement, especially if products are being closed.

  • Sale is not a magic bullet to avoid Duty compliance.

Where does responsibility for compliance sit?

There are some unanswered questions about where responsibility for the Duty sits where legal and beneficial title to a portfolio is held separately. In particular:

  • Where debt sales occur with a split completion (seller remains lender of record until full title transfer but buyer has the economic interest in the portfolio from completion);

  • Where an unregulated SPV buys a portfolio and appoints a servicer.

  • In forward flows and securitisation structures, where beneficial interest is sold to a third party on or after origination.

Best practice seems to indicate that those with an economic interest in the portfolio should have at least a “shadow” policy to enable informed decisions to be made about compliance matters when they arise.

Securitisation structures and forward flows pose particular issues

Securitisation structures are a problematic issue, as not only is legal and beneficial interest in a portfolio held separately, but servicing may be undertaken via a third party, and the economic interest is held by noteholders, who may have voting rights on what changes can be made to the underlying portfolio. Added to this, many customers in securitised portfolios will not be able to choose from other products available from the SPV, and any change to pricing will impact directly on the anticipated returns to the noteholders. Similar issues arise with forward flow arrangements.  Plan early engagement with the noteholders and funders if their input is required to change product pricing and features.

Firms which have bought portfolios need to comply

Equally, where firms were not he original manufacturers of products, a compliance review still needs to be undertaken, even given the limited data on product design which may be available. Use of customer contact and complaints data is particularly important, and can be supplemented by benchmarking against similar products (of a similar age) and research/data generally available on the market (or commissioned by the firm).

Vested rights are not necessarily set in stone

Vested rights (such as fees and pricing) are a difficult issue. Although the FCA’s Final Non-Handbook Guidance (para 3.11) indicated that the Duty would not infringe vested rights, recent guidance from the FCA (see below) indicates that vested rights may nevertheless lead to poor outcomes, such that firms need to think about reconsidering those rights (such as changing pricing or waiving fees), or else helping customers migrate to other, more suitable products. Changing pricing may impact on firms, however, given that they may have their own costs (of funding or administration) which need to be covered, or else expected returns they have to make to their own investors, limiting the options available. It is not currently clear the extent to which firms’ own funding and investment structures will justify not changing pricing (for example) on p4roducts which are perceived to offer poorer value.

Recent FCA guidance on Duty implementation and best/poor practice is available

The FCA recently published a report on good practice and areas for improvement, and the results of an Autumn 2023 survey on Duty implementation, all backed up by a speech by Sheldon Mills (Executive Director, Consumers & Competition), which elaborates more on the issues facing closed book reviews, and in particular the need for use of data and the issue of vested rights for closed products. See the useful links below for further detail.

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.


Additional resources

Date published

28 February 2024



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