UK payment services and e-money firms urged to embrace consumer duty

The Financial Conduct Authority (FCA) confirmed in a webinar, on 1 November, that the new consumer duty (161-page / 1.08MB PDF) is directly relevant to payment services firms and e-money firms, even if they are not in direct contact with retail customers. The financial regulatory body considers that the duty supports and strengthens its goal of seeing customers and customer outcomes at the heart of a firm’s business. It views payment services as having a crucial role in this.

“This is a definite shift for payment services and e-money firms, who have been used to operating in their own regulatory regime,” said financial service regulation expert Venetia Jackson of Pinsent Masons. 

“In implementing the consumer duty, the FCA is levelling up its protection for consumers across the whole financial services sector. The application of the consumer duty to payment services firms and e-money firms shows the FCA thinking holistically about the consumer journey and looking to ensure a joined-up approach and identical standards applying throughout that journey,” she said.

The FCA’s definition of “retail market business” in the final rules of the new consumer duty extends to the provision of payment services and issuing e-money, whether doing so directly to a retail customer or providing services in a distribution chain involving a retail customer.

Jackson explained that the duty applies throughout the product or service distribution chain. For example, the duty could apply to a firm that provides merchant acquiring services and an e-money issuer that uses a distributor or agent to distribute their product. Although there is no one-size fits all solution, she said, the key question to ask is whether a firm has material influence over any retail customer outcomes.

“It is necessary to consider your own business model, distribution channels, customers and your impact on customer outcomes. It is important to be fully aware of the scope of the customer definition and how that fits with the consumer duty,” she said.

“A merchant acquirer, for example, may have direct retail customers if it sells its services to charities or micro-enterprises who fall within the definition of retail customer. They will also need to consider indirect retail customers, such as the cardholders purchasing goods at the end of the retail chain,” she said.

The duty applies reasonably, according to a firm’s role and position in the distribution chain. There will be more obligations under the duty on a firm with direct contact with retail customers than one higher up the distribution chain.

But if the duty applies, at a minimum Principle 12 and the cross-cutting rules, which are the overarching requirements that set standards of conduct across all areas of a firm’s retail financial services activities, will be relevant. 

The relevance of the individual outcome rules will depend on the role the firm has. A firm that has no role with retail customer support will not need to apply the consumer support outcome.

Jackson urged payment services and e-money firms to take into account important considerations in relation to the application of the new duty, such as gaining a clear understanding of what amounts to a good outcome for a retail customer in relation to a firm’s services and how the firm’s actions impact on retail customer outcomes.

“There are many questions to be asked. If you are an e-money issuer you are likely to have material influence through the design of your e-money product. Relevant questions include how does your fee structure work and who ends up paying the fee?  If you are a payment service provider who charges a failed transaction fee, what is the level of that fee and does it still ensure fair value?” explained Jackson.

In addition, the FCA expects payment service and e-money firms to communicate through the distribution chain in relation to product design, price and value. As an example, if a firm identifies an issue that is leading to poor outcomes, it is expected to communicate this through the chain so this can be addressed by the firm in the chain able to make changes to resolve the issue.

The FCA has taken a two-stage approach in implementing the new duty. The duty will apply to existing products and services that consumers can buy or renew from 31 July 2023 and be extended to cover products and services in ‘closed books’ from 31 July 2024. The FCA has also set out high level milestones for firms in implementing the new duty, the next one of which is for product manufacturers to complete product reviews by 30 April 2023.