Consumer Duty: The inside track on products and services

3 min read 22 Nov 22

In practical terms, the Consumer Duty’s products and services outcome mostly concerns collaborating and communicating with product providers.

To meet this outcome, the FCA has separate requirements for distributors and providers. Here, we’ll focus on what the regulator needs from advisers – as ‘distributors’ – and how you’ll be working with providers to meet the FCA’s requirements.

In a nutshell, this outcome embeds the existing PROD rules and indicates that you may need to refresh (or at least verify) your target market definitions. You should also identify all vulnerable customers, and take action to mitigate any “foreseeable harms”.

Even though the direct impact of the products and services outcome on advisers will be limited, you’ll be expected to work more closely with product providers and, in some instances, supply them with the MI they need to meet their own responsibilities.

What the FCA wants products and services to be

In many ways, the three other Duty outcomes – price and value; consumer support; and consumer understanding – all hang off the products and services outcome. This is where your reading and planning before next summer’s implementation deadline should start.

In the FCA’s words, consumers “can only pursue their financial objectives and avoid foreseeable harm when products and services are fit for purpose”.

Referring to both providers and distributors, the Duty explains that firms must ensure the design of any product or service meets the needs, characteristics, and objectives of customers in an “identified target market”.

Everything then becomes about making sure activity is appropriate to that market, starting with distribution. At frequent intervals, providers and advisers should evaluate whether a product or service continues to meet the target market’s needs.

At this stage, the difference between a provider and distributor is clear: while advisers must consider suitability for individual clients, providers don’t need to go that far when considering a target market.

What the FCA wants distributors to do (and not do)

The FCA says firms are distributors if they offer, sell, recommend, advise on, arrange, deal, propose, or provide a product or service, including at renewal.

The requirements on advisers can be summarised as follows:

  • Your distribution arrangements must avoid causing and, where that is not practical, mitigate foreseeable harm to customers. They should also support management of conflicts of interest and ensure the needs, characteristics and objectives of the target market are considered.
  • And as will come as absolutely no surprise: firms should not offer sales targets which could incentivise people to recommend a particular product or service.

Working with product providers

In the FCA’s words, distributors must get all the information they need from providers so that they fully understand what it is they are recommending. Which is where collaboration becomes key.

The FCA’s list isn’t particularly short:

  • You must understand the characteristics of the product (or service) you are recommending and the identified target market.
  • You must consider the needs, characteristics and objectives of any customers with characteristics of vulnerability.
  • You must identify the intended distribution strategy.
  • You must ensure the product or service will be distributed in accordance with the needs, characteristics and objectives of the target market.
  • It may be that you devise your own distribution strategy for a product or service. That is fine, says the regulator, but it must be consistent with the provider’s strategy too.
  • You should review often whether your distribution arrangements continue to be appropriate and up to date, and whether a product or service has been distributed correctly. How often you conduct this review depends on the nature of the product or service, the customer base, and any indicators of customer harm.
  •  If relevant and asked (i.e. you only have to do this if you are asked), distributors should provide aggregated information to support providers’ reviews, including sales and cancellations details.

Four questions you may be asked by providers…

  1. Have you identified any issues related to the target market assessment?
  2. Have you identified any issues when reviewing your distribution arrangements for a product or service?
  3. Have you identified any issues by, or for, customers with characteristics of vulnerability? What are they at a high level (not identifying individual customers)?
  4. Has any review uncovered whether there were any sales outside the target market? In what way were they outside? What harm is foreseeable?

If a provider judges a product should generally be held for at least five years, and where it lacks oversight of the full distribution chain or end customers, it may also ask what proportion of customers held the product for less than one year, or more than one year but less than five.

In summary

As all other Consumer Duty outcomes hinge off this one, and because PROD is already in place, we consider it will have a medium impact on advisers.

When it comes to your target market, you may need to revisit and refresh your definitions or segments to ensure they continue to reflect your client base, and to ensure that vulnerable customers are identified.

When it comes to working with providers, it really is a case of being clear what you need from them while also considering what you can do to help.

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