Advisers and other companies who outsource to third-party providers must ensure they understand the potential impact of consumer duty on these arrangements, and have processes in place to mitigate problems.
According to City law firm CMS, advice firms must make sure they have understood the way in which the incoming consumer duty will apply to any regulated firm that has a material influence over, or determine, the retail customer outcomes.
This means advisers will need to be able to show they have understood the potential impact on firms’ outsourced service arrangements for both day one of implementation - July 31 - and on operational controls.
In a detailed update, partners Joy Davey and Angela Greenough have highlighted a series of processes and agreements where consumer duty will apply.
Advisers and their third-party providers - such as discretionary fund managers - will need to make sure they are in full compliance with consumer duty when it comes to such processes and agreements.
These include, but are not limited to:
- In-scope agreements
- Contractural requirements
- Ensuring the outsourced provider is in compliance with the law
- Governance
- Updating service level agreements
- Oversight and control over any subcontracting.
In terms of in-scope agreements, the partners stated: "The duty will apply even where a firm does not have a direct contractual relationship with the retail customer.
"This may be where the firm has outsourced arrangements with an unregulated service provider whose actions have the potential to impact end customers, such as a call centre or mail service provider.
"It could also include a regulated service provider whose actions have the potential to impact end customers and as such, its own compliance and the firm’s compliance with the duty, such as a pension scheme administration service provider providing customer support and responding to complaints."
However, the FCA has stated that compliance with the duty cannot be delegated to third parties and remains the responsibility of the firm.
While the incoming duty has no specific requirements for outsourcing agreements, the authors said: "Firms will need to have systems and controls in place to monitor the support provided by third parties, and to provide assurance that firms are meeting their regulatory obligations.
"Where systemic or recurring issues are identified, firms will need to have the ability to take action to remedy these."
They suggested that, to make changes to the agreement, change control provisions should be assessed, as the third party may be entitled to charge for change requests / statements of work, even where this is facilitating the firm’s compliance with regulatory rules and guidance.
Ways to meet the requirements
To help firms meet the requirements imposed by the duty, the authors have suggested in-scope material outsourcing agreements could include, or add to existing, contractual provisions, such as ensuring third parties comply with applicable law.
"The key issue that often arises here is that if the third party is itself unregulated then the duty will not apply to it."
