FCA Consumer Duty – a closer look at the four outcomes. Outcome 1: Products and Services

Back in early December, just as I was starting to think about slowing down for Christmas, the FCA gently woke me up with the second consultation paper as part of its Consumer Duty work. Although there was little in the way of significant change from the initial consultation, a whopping 243 pages certainly gave a lot to ponder and only served to reinforce that this is a big deal for financial services. 

Reflecting back on my initial reaction, and considering it all from a financial adviser’s perspective, a number of things strike me again. Firstly, whilst this is a big change for most financial advice firms it will be an evolution rather than revolution. A good proportion of the Consumer Duty is building on existing rules and good practice that many firms will have already adopted. While the current timescales might look rapid in terms of the consultation itself (responses due by 15 February 2022), in terms of implementation itself, the new rules are unlikely to bite until April 2023. However, unless you fancy spending the first few months of next year frantically getting up to speed I would seriously urge advisers to start thinking about what changes will be needed to ensure compliance, and how and when these will need to be made.

This brings us nicely on to a closer look at the first of the four outcomes that the Consumer Duty looks to achieve – Outcome 1: Products and Services - as this is the best place for advisers to start in terms of taking action. Each of the outcomes will be underpinned by enforceable rules (drafts of which can be viewed via the current consultation paper) and the FCA has also published some guidance setting out good and poor practice examples for each outcome.

The Four Outcomes

1. Products and Services
2. Price and Value
3. Consumer Understanding
4. Consumer Support

Outcome 1: Products and Services

The FCA wants all products and services for retail customers to be fit for purpose. This means they are designed to meet consumers’ needs, and subsequently targeted at these consumers with different requirements, depending on the firm’s role in the distribution chain:

• Manufacturers: firms that create, develop, design, issue, operate or underwrite a product or service would be regarded as a product manufacturer. More than one firm may be involved in the manufacture of a single product.
• Distributors: firms that offer, sell, recommend, advise on, propose or provide a product or service would be regarded as distributors.

Note, firms could be both a manufacturer and a distributor, depending on their activities. It is also possible that intermediaries may be co-manufacturers, for example if they set the parameters of a product and commission other firms to build it.

For advisers (distributors) the FCA is proposing to introduce the need to:

• develop distribution arrangements for each product or service distributed
• get information from the manufacturer to understand the product or service, its target market and its intended distribution strategy, and
• regularly review the distribution arrangements to ensure they are appropriate and, if they identify issues, take appropriate action to mitigate the situation and prevent any further harm

If you are thinking this all sounds very similar to the PROD Governance Handbook you’d be right, however the FCA guidance states that, “the Consumer Duty as a whole is broader and satisfying the existing rules in PROD is unlikely to mean a firm meets all aspects of the Consumer Duty.” Firms will need to take care to ensure the target market is defined at a sufficiently granular level to help avoid sales for consumers whose needs, characteristics and objectives are incompatible with the product or service on offer. These definitions will also need to be regularly monitored to ensure the required outcomes are being delivered and that appropriate steps are taken if issues arise. It will also be important to keep track of and consider these target market definitions and outcomes alongside the other three Consumer Duty objectives, especially price and value, as well as consumer support.

The detail of this first outcome clearly gives us all quite a lot to chew over already. But if you’re eager for more immediately, hop on over right away to our next piece which looks at the second outcome: Price and Value, or grab a cuppa and come back to it once you’ve had a chance to catch your breath. Either way, it’s certainly worth a read as there is a lot more important detail for advisers to get through.