Implementing the Consumer Duty in Credit Reference Agencies (CRAs) and Credit Information Service Providers (CISPs) [pdf]

The Financial Conduct Authority, FCA, has published an open „Dear CEO Letter“ addressed at credit reference agencies (CRAs) and credit information service providers (CISPs) as regards the upcoming new consumer duty. Among other things, the letter
– reminds firms of the implementation timeline of the new duty,
– summarizes the key pillars of the duty,
– outlines how these pillars apply towards such firms,
– provides feedback from a recent review of firms‘ level of adaptation to the new duty,
– sets out the expectations of the FCA in this context,
– provides some good and poor practices as far as the adaptation to the new duty is concerned, and
– summarizes some key issues firms shall take into account when transposing their new requirements.
Some of the key issues addressed in the letter are briefly summarized below. It shall be noted in this context that the summary is far from complete which is why affected firms MUST review the original Letter.
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##### The key pillars of the new consumer duty
The new duty puts upfront the interests of consumers (hence the name) and requires firms to adhere to stringent rules in the following four key areas:
1. communications: firms must ensure that consumers get all the information they need to make informed decisions and that the information is comprehendable.
2. products and services: firms must ensure that their products are designed in a way that ensures that they meet the needs of consumers and that – in turn – they are only sold to those customers whose needs they are intended to meet.
3. customer service: firms must ensure that their levels of customer service meet the need of consumers and that such service does not hinder clients from achieving their desired outcomes.
4. price and value: firms must ensure that the products offered to retail customers are priced at fair value.
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##### The implementation timeline
– The policy statement to the new duty was published on July 27, 2022 (please see EventID 16865 in this context for more information).
– A corresponding guidance (FG22/5) was issued at the same time.
– The FCA expects / expected that by October 2022, all management boards have agreed upon a plan to implement the new duty.
– By April 2023, manufacturers of products should have concluded their reviews to ensure that their products or services meet the above noted requirements (area 2 and to some extent area 1 noted above) and should communicate any relevant information to their distributors.
– On July 31, 2023, the duty comes into force for new or renewable products and services.
– On July 31, 2024, the duty comes into force for legacy products or services not subject to any renewals.
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##### Issues to consider when transposing the new requirements and how the new duty applies to credit reference agencies and credit information service providers
As far as the application of the new duty towards CRAs and CISPs is concerned, the FCA states that such firms can be both manufacturers and distributors of the services and products they provide. If offering the product of credit rating to firms which use these ratings to evaluate customers‘ creditworthiness, then the CRAs or CISPs are manufacturer of the product. If the service is also offered to customers, e.g. to view their individual credit rating, then they may be considered distributors. In either case, the new duty will apply.
Additionally, the FCA particularly notes the applicability of the price and value outcome for customers. In this context, CRAs and CISPs are recommended to take into account the costs a customer may incur to get the information on his own. Furthermore, CRAs and CISPs need to be transparent about the fees they charge for their service and the way these are structured.
Most important, however, is the consumer communications outcome as far as credit reference agencies and credit information service providers are concerned: In light of their tremendous significance in the decision making process of firms as to whether or not a particular client shall be granted a credit, firms must ensure to provide „clients“ (the object of a credit rating assessment) with all the information needed about how credit ratings are derived. On top, they must ascertain that clients can complain about a particular rating and that erroneous ratings are corrected promptly.
Finally, the FCA particularly emphasizes the need for cyber resilience: most CRAs and CISPs operate online and may thus be subject to cyber attacks or disruptions caused by technical issues. Additionally, CRAs and CISPs deal with highly personal, confidential data a loss of which may be detrimental not only to service providers, but to „clients“ as well. Therefore, cyber resilience shall be considered as one part of the new consumer duty.
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The FCA concludes its Letter by noting that it will closely monitor the progress made CRAs and CISPs and that firms should be prepared to „discuss the Consumer Duty“ with the regulator and provide information to sufficiently prove the adoption of adequate policies and measures to embed the new duty into their business operations.