The new Consumer Duty puts customers at the heart of everything and requires organisations to take responsibility for the outcomes they deliver.

This is a particular challenge for organisations with complex distribution chains because the responsibility for compliance stretches across the entire distribution chain.

Any organisation that plays a role in the distribution of financial products or services could be affected, including those not dealing directly with customers if they carry out activities that may influence customer outcomes. For example, an outsourced provider that fails to administer a customer’s account properly could cause financial harm, thus be liable for not meeting their obligations under the Consumer Duty.

The Duty applies to different participants of the chain in different ways. For example, organisations that manufacture products are responsible for ensuring that their products are fit for purpose and meet the needs of consumers they are designed for. Organisations that distribute products are responsible for ensuring that they are marketed and sold in a fair and transparent way. And organisations that provide advice on products are responsible for ensuring that their advice is accurate and impartial.

The obligation to consider the activities of other organisations in the chain raises numerous challenges, some of which are outlined below.

1. Collaborating with other organisations in the chain

Increased collaboration along the distribution chain should simplify the implementation of Consumer Duty for complex and intermediated products, benefiting customers. Segmenting and mapping the distribution chain accurately will help organisations to identify where they sit in the chain and understand their own roles and responsibilities and the roles of others. Often roles are well understood within organisations, but less so by third parties.

Distribution chain roles and responsibilities are not static. They can vary based on the product, market, or sector. A company that manufactures and sells a product directly to consumers will have different responsibilities to one that manufactures a product and then sells it to retailers, who in turn sell it to consumers.

Organisations may play distinct roles for different products or customer segments, or multiple roles for a single product or in a single chain. Often, the same product is sold direct to consumers and via intermediaries. Mortgages are a good example of this. The lender may have a responsibility to understand and comply with the Consumer Duty at all stages of the product development and distribution cycle, whereas an intermediary may only have to comply as a distributor.

As well as manufacturers and distributors, the FCA has drawn attention to the role of ‘co-manufacturer’ in certain distribution chains. For example, an advisory firm that is able to make decisions on pricing, terms and conditions, or investment options, or that has an exclusive ‘white label’ version of a product. Co-manufacturers have responsibilities similar to those of manufacturers so it is important that organisations identify situations where this may apply to them.

Lastly, customers themselves can sit at different points in the distribution chain. For example, a customer may have an advised pension and a direct-to-consumer life policy arranged with the same provider. This highlights the need for accurate and holistic customer views and systems that enable a single view of the truth.

2. Customer ownership and division of responsibility

In the context of intermediated products, where there are multiple stakeholders involved in the distribution chain, the Consumer Duty raises the question of who is responsible for the customer.

For example, in the case of a co-branded credit card with an associated insurance product, the card issuer may be responsible for issuing the card and setting the terms and conditions, but the bank that provides the underlying credit is responsible for assessing the customer’s creditworthiness and collecting payments. The card network is responsible for processing transactions, and the merchant who accepts the card may be responsible for honouring the terms of the card. Additionally, the insurance provided is defined by the Insurer who handles the claims and administration, but the suitability falls to the card provider.

There are several steps that organisations can take to clarify customer ownership and division of responsibility. These include:

• Establishing clear lines of communication between the different stakeholders in the distribution chain.
• Developing clear and comprehensive customer agreements that set out the rights and responsibilities of both the firm and the customer.
• Implementing robust training and awareness programs for staff on customer ownership and division of responsibility.

Customer ownership is increasingly topical as organisations define the role they want to play in the financial services eco-system. Some neo-banks have gone down the path of providing platforms and ‘Banking as a Service’ whilst traditional incumbents focus on manufacturing and selling products.

3. Data sharing

One of the key considerations for organisations is how they will provide and receive data within the distribution chain. Organisations will need to share data with their suppliers or distributors to comply with the new rules and to provide better customer outcomes. They need to ensure that the data they share is accurate and up-to-date, and that it is protected from unauthorised access.

Internal data management and processes are often better managed than external engagement, because organisations have more control over their internal systems and processes. However, a wider external data sharing ecosystem will be a key differentiator in engaging with participants in the supply chain.

Organisations with well-defined data strategies supported by strong systems and microservice-driven architecture will be front runners in the early stages of implementing the Consumer Duty. Agility and robustness in systems, processes and policies will pay dividends as the need for data sharing inevitably increases.

4. Raising concerns within a distribution chain

Under the Consumer Duty, organisations have a responsibility to raise concerns within a distribution chain, as well as notifying the FCA directly.

If a concern must be raised, organisations will need to work closely with distribution chain partners to identify and record the relevant information and ensure that appropriate actions are taken so that consumers are protected.

To this end it may be necessary to invest more effort, cost, and time in servicing and monitoring activities across the distribution chain – a consideration which may in turn affect longer term commercial decisions about product design and distribution strategy. Designing new products with this in mind will be critical, particularly more complex products or those suited to the intermediated market.

Collaboration is essential

In summary, all organisations involved in the distribution chain, whether that be manufacturing, advising, selling or servicing have a responsibility to act to deliver good outcomes for customers.

The FCA highlights the need for increased collaboration. This is essential for the financial services industry to deliver good outcomes for customers and the FCA is likely to act against organisations who fail to meet their obligations to co-operate under the Consumer Duty.

By working together constructively, organisations can better understand their customers, identify and mitigate risks, and adopt common standards and practices. This will help to ensure that customers receive a consistent level of service, regardless of which firm they deal with and where they are in the distribution chain.