Francesco Di Costanzo
Back to articles

(4) Consumer Duty and the Capital Markets: Why Fair Value Is a Funding Discipline, Not a Compliance Exercise

/10 min read

The Real Question

The debate around Consumer Duty has largely been framed as one of compliance burden. Boards discuss implementation timelines, monitoring frameworks, and regulatory engagement strategies. Compliance teams build dashboards. Lawyers parse PRIN 2A. Yet this framing misses the more consequential question. Is Consumer Duty emerging as a structural determinant of cost of capital for non-bank consumer lenders?

For lenders reliant on warehouse facilities, forward flows, and securitisation markets, this is not an academic question. It goes directly to funding access, pricing, and survival through credit cycles. The issue is not whether Consumer Duty exists. It is whether it becomes underwritten, priced, and embedded into capital formation.

From Conduct Obligation to Balance Sheet Variable

Consumer Duty's significance lies not in its four outcomes, but in its governance architecture. The requirement for demonstrable fair value assessments, ongoing outcomes monitoring, board-level annual attestations, and management information capable of evidencing foreseeable harm creates something new: observable governance artefacts.

Fair value is no longer an abstract principle. It must be evidenced through data, segmentation, root cause analysis, and corrective action. Foreseeable harm is defined dynamically, meaning firms are expected to detect emerging risks from their own complaint data, monitoring systems, and customer journey friction. Weakness is therefore measurable.

In consumer lending, this matters because conduct risk is rarely linear. It accumulates silently through pricing drift, commission structures, distribution chain misalignment, or servicing failures. When crystallised, it does not show up as marginal credit deterioration. It appears as multi-year remediation provisions. At that point, it becomes capital.

The UK Has Already Shown the Mechanism

The United Kingdom has repeatedly demonstrated how conduct risk becomes a cost-of-capital shock.

Payment Protection Insurance generated over GBP45 billion of provisions across the banking sector. Motor finance commissions have triggered an estimated redress exposure in the high single-digit billions, shuttered the public auto ABS market for more than a year, and frozen M&A activity in the sector. Payday lending price caps effectively eliminated entire business models and led to capital exit.

None of these events were credit losses in the traditional sense. They were conduct liabilities. Yet they drove earnings volatility, dividend suspensions, capital ratio pressure, rating reviews, and funding withdrawal.

Consumer Duty is designed precisely to prevent the next PPI or motor finance episode. Ironically, that design is what makes it capital relevant. The moment a firm cannot evidence fair value, target market alignment, or adequate support, it is accumulating a liability that will eventually crystallise in the same way.

Why Funding Providers Care - Even If They Do Not Say "Consumer Duty"

Warehouse lenders already negotiate covenants restricting origination policy changes, underwriting drift, and servicing modifications. They monitor eligibility criteria, concentration limits, and excess spread levels. These are operational controls designed to prevent risk drift.

Consumer Duty effectively extends drift control into conduct territory. If pricing structures, commission arrangements, or customer support frameworks evolve in a way that generates foreseeable harm, the resulting remediation can compress excess spread or alter portfolio economics. In revolving structures, that can trigger early amortisation events. In warehouses, it can reduce borrowing bases or require additional credit enhancement.

Rating agencies already incorporate operational risk, originator quality, and legal enforceability into their methodologies. They have ESG overlays and qualitative caps. The infrastructure to incorporate Consumer Duty governance quality into originator assessments already exists. It does not require a new methodology, only application.

The transmission mechanism is therefore credible. Weak governance under Consumer Duty can evolve into servicing instability, legal enforceability risk, or redress-driven earnings volatility. All of these are rating relevant and funding relevant.

Investor Behaviour Is Already Shifting

The motor finance episode provides unusually clear evidence of investor reaction. Debt providers and private equity investors have explicitly stated that regulatory risk premiums have increased and that regulatory due diligence intensity has risen. Structural protections have been strengthened. Backup servicing arrangements have been scrutinised. Representations and warranties have expanded.

Specialist due diligence firms now market Consumer Duty testing specifically for securitisation and warehouse transactions. That is a market signal. Capital providers are not waiting for enforcement actions. They are underwriting governance pre-emptively.

At present, there is no publicly observable "Consumer Duty spread differential." Funding spreads are influenced by macro rates, liquidity, and asset performance. However, capital allocation behaviour - which transactions get done, at what advance rates, and with which covenants - already reflects heightened sensitivity to regulatory tail risk.

Closed Books and Portfolio Trading

Consumer Duty's application to closed products introduces another capital channel. Portfolio acquisitions, forward-flow agreements, and refinancing of seasoned books depend heavily on data quality and governance transparency. The FCA's focus on data gaps, vulnerability assessment, and distribution-chain remuneration in closed books increases diligence friction.

In a market where speed and certainty of execution matter, firms that can produce defensible fair value frameworks and clean management information will transact more efficiently. Those that cannot will face extended diligence cycles, pricing haircuts, or deal failure. Over time, this creates competitive funding divergence.

The Counterargument: Structural Insulation

There are valid reasons to resist overstating the thesis. Securitisations are designed to insulate investors through subordination, reserve funds, and bankruptcy remoteness. Existing UK conduct regulation was already robust before Consumer Duty. Rating agencies have not yet explicitly embedded Consumer Duty compliance metrics into published methodologies.

It is also true that Consumer Duty is not retrospective. For many firms, it may function primarily as a compliance overlay rather than a cost-of-capital determinant.

However, these counterarguments assume stability. The historical UK record suggests that when conduct liabilities emerge, they are rarely incremental. They are episodic and severe. Structural protections mitigate loss severity, but they do not prevent funding markets from closing to new issuance or from repricing sector risk.

The absence of a pricing signal today does not invalidate the mechanism. It simply reflects that the next conduct shock has not yet been triggered under the new framework.

Forward-Looking Implications

The FCA has signalled increasing supervisory intensity around outcomes monitoring, customer journey testing, and fair value frameworks. It is pursuing powers that would enable faster redress schemes. At the same time, securitisation rules are being simplified, potentially shifting investor focus from procedural compliance toward qualitative governance assessment.

If Consumer Duty functions as intended, firms with strong governance will experience fewer remediation shocks and lower earnings volatility. That should, in theory, reduce perceived regulatory risk and support funding stability. Firms with weak implementation will accumulate latent tail risk that eventually crystallises.

The most important insight is this: Consumer Duty is not about lowering APRs or improving disclosures in isolation. It is about forcing boards to institutionalise early detection of conduct risk. In capital markets terms, it is an attempt to convert unobservable tail risk into governed risk.

Markets price tail risk aggressively. If Consumer Duty reduces it, cost of capital falls. If it exposes it, cost of capital rises.

Conclusion

Consumer Duty is not yet a line item in securitisation pricing models. It is not quoted in basis points. But the governance infrastructure it mandates produces observable signals that sophisticated capital providers can underwrite.

The UK has already shown that conduct risk can shut markets, erase equity value, and destroy business models. Consumer Duty does not eliminate that risk. It makes it measurable.

For non-bank consumer lenders dependent on structured finance, fair value is therefore not a moral aspiration or a regulatory formality. It is a funding discipline.

Sources

FCA Consumer Duty - Rules, Guidance, Governance

  1. Financial Conduct Authority, "The Consumer Duty (PRIN 2A)" https://www.handbook.fca.org.uk/handbook/PRIN/2A.pdf

  2. Financial Conduct Authority, "Consumer Duty - information for firms" https://www.fca.org.uk/firms/consumer-duty-information-firms

  3. Financial Conduct Authority, "Consumer Duty Board Reports: good practice and areas for improvement" https://www.fca.org.uk/publications/good-and-poor-practice/consumer-duty-board-reports-good-practice-and-areas-improvement

  4. Financial Conduct Authority, "Final non-Handbook Guidance for firms on the Consumer Duty (FG22/5)" http://www.fca.org.uk/publication/finalised-guidance/fg22-5.pdf

  5. Financial Ombudsman Service, "A new Consumer Duty - setting a higher standard of care for consumers" https://www.financial-ombudsman.org.uk/data-insight/our-insight/new-consumer-duty-setting-higher-standard-care-consumers

Conduct Risk History - PPI, Payday, Motor Finance

  1. S&P Global Ratings, "Banks make £45B PPI provision but drag on earnings is over: S&P Global Ratings" https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/banks-make-163-45b-ppi-provision-but-drag-on-earnings-is-over-s-p-global-ratings-78085896

  2. Financial Conduct Authority, "Monthly PPI refunds and compensation" https://www.fca.org.uk/data/monthly-ppi-refunds-and-compensation

  3. The Week, "Final PPI bill to hit £53 billion" https://www.theweek.com/103132/final-ppi-bill-to-hit-53-billion

  4. New City Agenda, "The top 10 retail banking scandals: 70 billion reasons why shareholders must play a greater role in changing bank culture" https://newcityagenda.co.uk/the-top-10-retail-banking-scandals-50-billion-reasons-why-shareholders-must-play-a-greater-role-in-changing-bank-culture

  5. Financial Conduct Authority, "FCA confirms price cap rules for payday lenders" https://www.fca.org.uk/news/press-releases/fca-confirms-price-cap-rules-payday-lenders

  6. Financial Conduct Authority, "FCA proposes price cap for payday lenders" https://www.fca.org.uk/news/press-releases/fca-proposes-price-cap-payday-lenders

  7. BBC News, "Payday lender Wonga saw losses double in 2015" https://www.bbc.com/news/business-36201486

  8. The Compliance Company, "The FCA killed payday loans but what followed could be just as bad" https://www.thecompliancecompany.co.uk/fca-killed-payday-loans-followed-just-bad-borrowers/

  9. The Conversation, "Wonga’s collapse and what it means for the people who rely on payday loans" https://theconversation.com/wongas-collapse-and-what-it-means-for-the-people-who-rely-on-payday-loans-102419

  10. Financial Conduct Authority, "Pause on motor finance complaints handling to lift on 31 May 2026" https://www.fca.org.uk/news/statements/pause-motor-finance-complaints-handling-lift-31-may-2026

  11. Financial Conduct Authority, "FCA to consult on a compensation scheme for motor finance customers" https://www.fca.org.uk/news/statements/fca-consult-compensation-scheme-motor-finance-customers

  12. KPMG, "Motor Finance Commissions - Latest Updates" https://kpmg.com/xx/en/our-insights/regulatory-insights/motor-finance-latest-updates.html

  13. PwC, “FCA consults on motor finance redress scheme – Redress calculation and cost of redress” https://www.pwc.co.uk/industries/financial-services/understanding-regulatory-developments/fca-consults-on-motor-finance-redress-scheme.html

  14. Reuters, "UK car finance industry faces $11-13 billion mis-selling hit" https://www.reuters.com/sustainability/uk-car-finance-industry-faces-11-13-bln-redress-scheme-under-regulators-plans-2025-10-07/

  15. Lenvi, "A UK auto ABS market in flux" https://www.lenvi.com/en-gb/latest-thinking/resources/uk-auto-abs-market-insight/

  16. Janus Henderson Investors, "A delayed verdict: the FCA’s motor finance review, a risk to UK auto ABS?" https://www.janushenderson.com/en-gb/institutional/article/a-delayed-verdict-the-fcas-motor-finance-review-a-risk-to-uk-auto-abs

  17. S&P Global Ratings, "How Will The Probe Into Discretionary Commission Models Affect U.K. Auto ABS Transactions?" https://www.spglobal.com/ratings/en/research/articles/240201-how-will-the-probe-into-discretionary-commission-models-affect-u-k-auto-abs-transactions-13293205

  18. The Guardian, "Supreme court grants permission for appeal against UK car finance ruling" https://www.theguardian.com/business/2024/dec/11/supreme-court-permission-appeal-uk-car-finance-ruling

Securitisation, Rating Agencies, Structural Protections

  1. Chambers and Partners, "Securitisation 2026 - UK: Trends and Developments" https://practiceguides.chambers.com/practice-guides/securitisation-2026/uk/trends-and-developments

  2. AFME, "Securitisation Data Report Q4 2025 & 2025 Full Year" https://www.afme.eu/publications/data-research/securitisation-data-report-q4-2025-2025-full-year

  3. Challenger Investment Management, "European & Australian ABS: 2025 review and outlook for the remainder of the year" https://www.challengerim.com.au/european-australian-abs-2025-review-and-outlook-for-the-remainder-of-the-year/

  4. ARC Analytics, "Sterling finally joins the auto ABS splurge - Volkswagen’s Driver UK 10 marked the return of sterling Auto ABS" https://www.arcanalytics.com/insights/sterling-finally-joins-the-auto-abs-splurge

  5. Financial Conduct Authority, "CP26/6: Rules for reforming the UK Securitisation Framework" https://www.fca.org.uk/publications/consultation-papers/cp26-6-rules-reforming-uk-securitisation-framework

  6. Slaughter and May, "UK developments: Consumer duty and other current regulatory topics affecting securitisations" https://www.slaughterandmay.com/insights/importedcontent/uk-developments-consumer-duty-and-other-current-regulatory-topics-affecting-securitisations

  7. DBRS Morningstar, "The United Kingdom’s 2025 in Structured Finance So Far: Auto ABS still standing" https://dbrs.morningstar.com/research/455532/the-united-kingdoms-2025-in-structured-finance-so-far-auto-abs-still-standing

  8. Fitch Ratings, “UK Auto ABS Shielded from Set-Off Risk Amid Commission Ruling Uncertainty” https://www.fitchratings.com/research/corporate-finance/uk-auto-abs-shielded-from-set-off-risk-amid-commission-ruling-uncertainty-20250206

  9. S&P Global Ratings, “U.K. Auto ABS Likely To Cruise On Following Car Finance Ruling” https://www.spglobal.com/ratings/en/regulatory/article/-/view/sourceId/101634432

Consumer Duty in Due Diligence, Funding and Portfolio Trading

  1. Clifford Chance, “The FCA Consumer Duty – Practical implications for market participants” https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2023/08/the-fca-consumer-duty-practical-implications-for-market-participants.pdf

  2. TLT, "Impact of the FCA Consumer Duty on loan portfolio sales and acquisitions" https://www.tlt.com/insights-and-events/insight/impact-of-the-fca-consumer-duty-on-loan-portfolio-sales-and-acquisitions

  3. Grant Thornton, "Consumer Duty: Driving growth through fair value and good outcomes" https://www.grantthornton.co.uk/insights/consumer-duty-driving-growth-through-fair-value-and-good-outcomes/

  4. Grant Thornton, "Closed book products: Complying with Consumer Duty" https://www.grantthornton.co.uk/insights/closed-book-products-complying-with-consumer-duty/

  5. KPMG, "Lender Due Diligence" https://assets.kpmg.com/content/dam/kpmgsites/uk/pdf/2024/01/lender-due-diligence.pdf

Redress System Modernisation and Faster Schemes

  1. DWF, "The FCA's Call for Input on modernising the redress system" https://dwfgroup.com/en/news-and-insights/insights/2024/12/the-fcas-call-for-input-on-modernising-the-redress-system

  2. RPC, "FCA and FOS jointly consult on modernising redress system" https://www.rpclegal.com/thinking/professional-and-financial-risks/fca-and-fos-jointly-consult-on-modernising-redress-system/

  3. Financial Conduct Authority, "Redress system reforms to prevent compensation delays, provide predictability needed for innovation" https://www.fca.org.uk/news/press-releases/redress-system-reforms-prevent-compensation-delays-provide-predictability-needed-innovation

  4. HM Treasury, "Review of the Financial Ombudsman Service - Consultation" https://www.gov.uk/government/consultations/fs-sector-strategy-review-of-the-financial-ombudsman-service/review-of-the-financial-ombudsman-service-consultation