people rushing in escalators at a modern shopping mall.
PE Views

Is the Customer Always Right? PE in Focus as Regulators Tighten Grip on Consumer Facing Companies

April 4, 2023
Upcoming reforms in favour of stricter regulation, coupled with greater consumer awareness, could present significant challenges to businesses and PE firms.

Consumer-facing companies face an increasingly complex UK regulatory landscape as multiple regulators place the spotlight on consumer rights and protections. A raft of new legislation is set to impact businesses and PE sponsors, heightening enforcement and censure risks including fines, public sanctions, and consumer redress.

Tightening Grip

The Financial Conduct Authority (FCA) is refining its focus and reviewing how to enhance consumer protection. The FCA has confirmed plans to introduce a new Consumer Duty regime to improve how consumer-facing financial firms serve their customers. The new duty, set to come into effect from July 2023, introduces higher standards across the financial services sector and is designed to ensure regulated UK financial services operators (including PE sponsors and their financial services portfolio companies) put customers first.

What Is a “Consumer Duty”?

The Consumer Duty is a principles-based regime that will require consumer-facing financial services companies to deliver “good outcomes” for customers — requiring a mindset shift for many businesses. It also applies to UK regulated entities that do not directly face consumers but can determine or materially influence retail customer outcomes.

Whether the Consumer Duty applies will be fact specific and requires consideration of the rights PE sponsors retain in relation to the financial services companies they invest in. This could include, for example, a PE sponsor having investor veto rights over a regulated lender/business in relation interest rates charged, the types of products/services offered, the types of customers targeted, and/or collections activity.  

Firms will face a significant challenge to comply with the new regime and demonstrate how they deliver good consumer outcomes. Under the changes, regulated firms will be obligated to report other firms’ failings to the regulator — application to individual portfolio structures and regulated PE entities is expected to be complex, particularly when considering what “material influence” looks like.

Other Changes

Reforms to the Consumer Credit Act (CCA) are set to further increase the heat on consumer-facing businesses. The CCA changes, part of a broader package of financial services reforms under the Edinburgh Review, focus on modernising existing consumer credit legislation, and will consider whether current laws remain fit for purpose.

The UK has also begun reform of the buy-now, pay-later (BNPL) lending market, amid criticism of the sector’s approach to affordability assessments and consumer debt. New legislation will grant the FCA new powers to authorise and regulate BNPL operators. Regulation is likely to impact revenue, with some BNPL lenders looking to exit the market.

Further, announced reforms to consumer and competition law and policy (set to be the biggest legislative changes in this area in more than a decade) are expected to grant the Competition and Markets Authority new powers to investigate, enforce, and impose fines (of up to 10% of annual global turnover) for consumer protection breaches. Additional details are expected later this year.

What Is the Impact?

The changing regulatory environment comes amid greater consumer awareness of rights and how to exercise them. The “social media risk” is a new and real risk to consumer facing businesses, in which consumers, armed with a better understanding of their rights, alert other consumers to non-compliance issues, increasing the risk of adverse publicity and the potential for increased compensation claims.

Sponsors should carefully review existing portfolios and potential deal targets to assess risks, as the upcoming changes could impact profitability, regulatory compliance risk, type of services offered, and the focus of consumer-facing companies.


    Explore the Full Series

    PE Views

    Our Insights on the World of Private Equity

    Read More
    This Insight is published by Latham & Watkins as a news reporting service to clients and other friends. The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the lawyer with whom you normally consult. The invitation to contact is not a solicitation for legal work under the laws of any jurisdiction in which Latham lawyers are not authorized to practice. See our Attorney Advertising and Terms of Use.