In this article we provide an overview of co-manufacturing under Consumer Duty and some of the primary considerations for consumer credit firms.

WHY IS IT IMPORTANT?
Where parties are co-manufacturing a product within the scope of the Duty they are required by PRIN 2A to agree in writing between them how they will jointly discharge their obligations under the Duty in respect of that product. This must include, but may not be limited to, their respective responsibilities in relation to product governance and price and value assessments. Failure to do so will amount to a breach of the FCA’s rules.

The overriding purpose of the requirement is to enable the FCA to identify the parties’ respective responsibilities for the product design, approval and fair value, particularly in cases where issues or harm is identified.

WHY IS IT CHALLENGING?
The FCA has defined the concept of manufacturing broadly. As a result, it can be challenging to draw the line between merely distributing products and having a hand in manufacturing them.

Intermediaries, particularly those whose main business activities are not regulated, may not have considered whether they are co-manufacturers of consumer credit products that they distribute. There is no one-size-fits-all answer; it is impossible to provide
a definitive guide to every scenario and the classification of individual arrangements will turn on their facts.

Firms should work with the other parties in their distribution chains to reach a shared view on how their respective activities should be classified. While daunting, this exercise provides an opportunity to clearly define and delineate roles and responsibilities within distribution chains and to update contracts, governance, and oversight practices accordingly.

KEY DEFINITIONS AND CONCEPT OF CO-MANUFACTURING
Under the Duty a “manufacturer” is essentially defined as a firm which created, developed, designed, issues, manages, operates, carries out, or underwrites a product. A “distributor” is a firm which offers, sells, recommends, advises on, arranges, deals, proposes or provides a product. The term “co-manufacturer” is not defined, but FCA commentary in FG22/5 clarifies:

“A firm would be considered a co-manufacturer where they can determine or materially influence the manufacture of a product or service. This would include a firm that can determine the essential features and main elements of a product or service, including its target market.”

In its March 2023 Dear CEO Letters about Consumer Duty to the motor finance providers portfolio and the credit brokers portfolio, the FCA stated that it expects firms to be clear about their roles in the distribution chain. Reiterating its comments in FG22/5 (above) about co-manufacturing, the FCA highlighted this example:

“If a lender negotiates an APR price-point with a dealer or broker firm, the firms may need to consider whether the lender is making the pricing decisions or if the dealer or broker has a material influence on this”.

TOP TIPS: FACTORS TO FOCUS ON
Firms should focus on the materiality of the influence a distributor exerts over the main components of the product, how it is delivered and to whom. In most cases this could boil down to a simple question about each product: “to what extent is each party calling the shots?”

In asking themselves this, firms should identify which features of the product and product experience will have the biggest impact, for better or worse, on customer outcomes.

While influence over pricing, fees and charges and product benefits are all obvious starting points, firms should look beyond the product documentation and ensure they also consider influence over the key components of the product lifecycle from design to performance. For example, influence over affordability policy, collections strategy or use of customer data.

Factors to consider may include, but might not be limited to:

1) how customers understand the roles and responsibilities of the parties and their positions in the distribution chain

2) remuneration arrangements in the chain (particularly who determines them)

3) the contractual relationship between the parties

4) how the relationship operates in reality (for example, the balance of power andinfluence between the parties)

5) the finance provider’s product design processes and how decision making occurs in relation to the product

6) the evolution of the product and its distribution strategy and the maturity and complexity of the distribution chain; and

7) the practical ramifications of concluding the parties are co-manufacturing, namely what their respective roles and responsibilities would be.

TOP TIPS: GETTING GOVERNANCE RIGHT
Given the interpretive uncertainty, firms should develop a formal process for reviewing their distributor relationships and identifying co-manufacturing. This could include:

• designing and performing a standard assessment, using a questionnaire, flow chart or decision tree
• recording the output and justification for the conclusions of that assessment in writing
• ensuring senior management oversight and approval; and
• keeping the position under periodic review.