Consumer Duty: practical implementation for financial products 'as-a-service' providers

Having come into force in July 2023 and intended to be the subject of a multi-firm implementation review this year, Consumer Duty is the FCA’s tentpole policy to require firms to deliver good outcomes for customers, across all consumer product interactions. In the FCA’s own words (Paragraph 2.10 Policy Statement PS22/9), the standards under Consumer Duty are intended apply to all firms in a distribution chain that can influence material aspects of the design, target market or performance of a retail financial services product or service, even if the firm does not have a direct relationship with the retail customer.

How that applies and can be achieved in the context of a Product-as-a-Service (“PaaS”) model* can be a complicated question, particularly given the variation of regulatory treatments that can apply to Banking-as-a-Service (“BaaS”) propositions. The purpose of this article is to look at the key steps PaaS providers, and the third parties they work with, should look at in relation to implementing Consumer Duty.

Overarching approach

The key message from the FCA in relation to Consumer Duty has always been that firms are expected to understand who their services can impact and what would be a good outcome based on the impact you can have. The businesses that will be in the strongest position will be those that can show they have:

1. mapped their business operations and their delivery to identify where consumers may both directly and/or indirectly interact with their offering, 
2. used sensible and consumer-focused principles for defining what would be a positive outcome from each interaction with those touchpoints,
3. looked at how other parties in any distribution chain are involved with each touchpoint and the possible impact this may have on the consumer’s experience, and
4. implemented processes and contractual controls that are specifically intended to help push the interaction to the defined positive outcomes.

Where both product providers and fintechs collaborate to build this picture of their businesses, it will guide both parties as to what is the right course of action for particular services in question. This in turns allows the parties to tailor their contractual and operational approaches in the way that works best for both sides of the partnership and the consumers involved in the service chains.

Offering a PaaS service

Looking at the detail of this, Consumer Duty requires that products being offered meet the needs, characteristics, and objectives of a firm’s target market. In the PaaS context, the parties a PaaS provider integrates with will have both a significant impact on whether the target market is reached, and how the product meets target market requirements.

To account for this, PaaS firms should consider incorporating specific assessments of:

1. the type of third party proposition that the products being made available via the PaaS offering would best support, and 
2. the operational processes those third parties need to have in order to be compatible with the intentions of the product, into their product design and review processes. This, in turn, will allow it to implement clear markers within the sales processes to prevent non-compatible products being made available for connection with third parties that do not share the same underlying product objectives, and to have upfront details about the integration expectations.  

Taking BaaS propositions as an example, product providers should make an assessment as to whether the functionality of specific accounts are best aligned with propositions that are focused on offering payment functionality or savings option – there should be clear requirements for parties wanting to utilise the BaaS provider’s products to explain how they will be used and presented to customers, and the resulting terms should provide appropriate rights for the BaaS provider to assess how their services are being operated in practice at regular intervals.

In addition, the extent to which the third party being integrated with is directly subject to Consumer Duty will heavily influence the contractual arrangements. Whilst it is clear that the PaaS providers are a Consumer Duty manufacturer, the position of those third parties they allow to integrate is not always as obvious, particular in a BaaS model. 

Arranging of deposit products is not always a regulated activity, so it is possible that the entity integrating a BaaS proposition may not be a ‘firm’ that is directly subject to Consumer Duty, even though they can determine or materially influence retail customer outcomes. Contrast this with a firm acting as a credit broker, who can be both a distributor and a manufacturer in their own right.

Both parties should therefore ensure that they have developed an understanding of where a typical target proposition sits within the regulatory perimeter (or not) and have processes to determine if a particular offering deviates from this. This allows entities to define what their template contractual model needs to incorporate to ensure there is a flow through of a PaaS provider’s Consumer Duty needs and then enhance the oversight and information requirements if the specific regulatory position presents additional risks.

Price and value

The FCA has focused significantly on revenue models across multiple industries recently*, emphasising the significance these can have for customer outcomes. Firms subject to Consumer Duty are expected to ensure that products offer fair value to retail customers, with the costs incurred by consumers in relation to the distribution of the product also being relevant to this assessment.

For a PaaS proposition, a key piece of due diligence for a provider will be understanding the fee/revenue structure implemented by the third party it is working with, and whether this adds any additional layers of cost and/or removal of benefit from the products in question. Once this is understood, this can be contrasted with the original value assessment of the product to determine if the product still offers fair value.

In a BaaS context, this may require ongoing assessments of:

• service fees charged by the partner on a one-off or ongoing basis to access the embedded products;
• whether the platform is taking a portion of any interest paid on the accounts, rather than passing it to consumers;
• whether there are any non-financial costs associated with the partner’s service, for example customers being required to agree to the sale of their data; and
• the role of any other parties in the distribution chain and whether these add additional cost layers on to accessing the product.

Customer Understanding and support 

PaaS propositions potentially place additional distance and communication barriers between product providers and underlying consumers, reducing the direct control the product provider has over ensuring customer interactions with the proposition (at all stages) meet customer needs and that the experience of the product is a positive one in its specific context.

To mitigate against the additional risks that a PaaS proposition provides, the parties should consider:

1. creating agreed branding guidelines and marketing processes that incorporate the specific disclosures the product provider believes need to be made – ensuring that the fintech incorporates messaging about the product in a way that;
2. the level of input the product provider has in the customer contracting journey, to ensure that any relevant terms are clearly presented and customers understand the specific roles each entity plays; and
3. to the extent that customer support for the products are outsourced:

• creating specific scripts and/or authority levels to ensure key risks are managed in accordance with the product provider’s expectations; and
• automated reporting tools regarding complaints with the product and/or its distribution, so as to ensure full visibility of risks associated with the PaaS provider’s services.

Conclusion: know your business, know your impact

Ultimately, collaboration across the distribution chain is key to compliance with Consumer Duty in a PaaS propositions. When parties work together to understand exactly how their offerings will interact with each other and what their intentions are for the proposition, they gain a stronger understanding of the key risks to consumers. This, in turn, allows them to build specific and workable controls to address those exact concerns.

About James Dickie

James Dickie is a partner in the financial services regulatory team, specialising in banking products, consumer credit and payment services.
james.dickie@cms-cmno.com 
James Dickie | LinkedIn

About CMS

CMS is a full-service international law firm with over 5,000 lawyers in 79 offices across 44 countries, offering legal expertise to clients worldwide. Within its fintech practice, the firm has a specialist industry teams in the UK who advise banks, lending platforms, payment firms and a wide range of financial service companies.