The Consumer Duty rules are arranged into groups around four outcomes. This note considers the key issues arising in relation to the “products and services” outcome.
Most regulated firms are already subject to rules or guidance regarding product governance – but there is a great deal of variability in the level of detail that applies to different firms. Firms engaged in investment business or general insurance are required to comply with the detailed requirements of the FCA’s PROD rulebook and various items of legislation. Other firms follow the less prescriptive requirements of the FCA’s RPPD guidance, or the BCOBS sourcebook, for example.
The Consumer Duty rules will introduce a common standard that applies to all firms. For many firms, this is likely to represent a significant step up from their current approach.
In the course of advising on the Consumer Duty, we have identified a number of notable issues arising in relation to the products and services outcome:
Manufacturer v distributor
The obligations under the rules are different for manufacturers and distributors. In the context of the Consumer Duty, the definition of “manufacturer” is: a firm which “creates, develops, designs, issues, manages, operates, carries out, or (for insurance or credit purposes only) underwrites a product”.
The FCA’s guidance says that anyone who can “determine or materially influence” the manufacture of a product or service will be a co-manufacturer. Many firms may have to make difficult judgments about whether they are performing such a role. This presents a particular challenge for distributor firms who are involved in product design – such as a firm that white-labels a third party manufacturer’s product. Such firms could be regarded as co-manufacturers under the rules, and thus become subject to manufacturer obligations.
“Services” as a product
There is currently no definition of “product” in the FCA rules, but the Consumer Duty introduces a definition for the first time – and, crucially, it includes services as well as what might conventionally be thought of as products.
Until now, many firms that provide services will have regarded themselves as distributors only, and therefore complied only with any applicable product governance obligations relating to distributors. Many of these firms will now have to consider themselves as manufacturers and to comply with the rules that relate to manufacturers (potentially in addition to any obligations they have as distributors).
Target market
The manufacturer of a product is required to specify the target market for the product at a sufficiently granular level, taking into account the characteristics, risk profile, complexity and nature of the product. Having done this, the manufacturer must ensure that the design of the product meets the needs, characteristics and objectives of the target market and that the distribution strategy is appropriate for the target market.
Particular points to note include:
- The level of granularity required appears to be greater than that required previously. The Finalised Guidance gives the example of a term life assurance product and suggests that the defined list of medical conditions covered by the policy would need to be sufficient to meet the needs of the target market – suggesting that the insurer would have to identify how likely it was that its target market would be to have certain medical conditions. This may be a level of granularity beyond that at which many firms currently operate.
- The manufacturer must ensure that “all” relevant risks to the target market are assessed and that the design of the product avoids causing foreseeable harm in the target market. This presents a high hurdle for firms – they will have to be confident that there are no foreseeable risks that they have not identified.
- Firms that are currently required to follow the appropriateness test in COBS 10A may find that their existing approach is insufficient. COBS 10A only requires a firm to assess the “knowledge and experience” of the customer; the Consumer Duty requires a wider range of factors to be taken into account, including the customer’s financial objectives. Firms will no longer be able to take a narrow approach to the assessment of whether a product is appropriate.
- There is a particular focus on identifying characteristics of vulnerability among the target market, and on identifying risks that would affect vulnerable customers. Although the FCA has previously issued guidance regarding vulnerable customers, firms may need to consider whether they are doing enough.
- Firms that offer “streamlined advice” (i.e. advice that is limited to one or more of a client’s specific needs) may need to consider whether the target market requirements overlay the advice requirements in such a way that the firm needs to consider additional factors when giving streamlined advice, or may even need to consider whether streamlined advice is appropriate.
Testing
Manufacturers must test their products appropriately, including scenario analyses where relevant. Although many firms routinely do testing, it is not currently a requirement. Under the Consumer Duty, it will be.
Firms must do testing in a qualitative manner and, depending on the type and nature of the product and the related risk of detriment to retail customers, quantitative manner. Firms are likely to face a challenge in developing an effective testing routine that meets the new requirements.
Review of existing products
The Consumer Duty imposes a duty on firms to review their products on an ongoing basis, even after the contract has been entered into with the customer.
This duty not only applies to new contracts entered into after July 2023, but to contracts entered into before that date. The FCA has consistently maintained that the Consumer Duty is not intended to have a retrospective effect, but that position is hard to reconcile with the fact that the Consumer Duty standards will be applied to existing products and services.
The FCA says that firms will not be required to give up “vested rights” – which appears to mean rights that have already vested for the benefit of the firm, such as payments that have already been made. However, it appears that a narrow definition of vested rights will be applied, which means that this concession by the FCA is only likely to be of limited value to firms. Firms will be expected to revisit the terms of existing products and services more generally to ensure that they do meet the new standards.
Firms will be given an extra 12 months to review “closed products” – i.e. those which were closed to customers before 31 July 2023 – but all other products will need to have been fully reviewed, and any necessary changes made, by the 31 July 2023 deadline.
We will be producing a separate note on product reviews for existing and closed products.
Definition of customer
The Consumer Duty only applies to retail customers – but it makes clear that manufacturers may need to consider the position of retail customers who are affected by a product but with whom the manufacturer has no direct relationship. For example, a product provided to the trustee of a pension scheme (which would not itself normally be considered a retail customer) may now need to be designed having regard to the position of members of the pension scheme, who would ordinarily be considered retail customers.
Firms already complying with PROD
The “products and services” rules under the Consumer Duty do not apply to firms that are already subject to certain chapters of the FCA’s Product Intervention and Product Governance Sourcebook (PROD) in respect of products they manufacture or distribute.
Firms engaged in investment business, insurance distribution or the provision of funeral plan contracts may be able to take advantage of this exemption – and, given the scale of the task that firms are facing in order to comply with the Consumer Duty, it is natural that they will want to reduce the scope of the exercise. However, there are some differences between the PROD requirements and those of the Consumer Duty and, over time, firms may find it difficult in practice to maintain the line that the Consumer Duty does not apply to them. Some firms might even consider applying the Consumer Duty obligations in situations where they are not obliged to.
These examples show how there are some significant issues that firms will need to resolve before they can finalise their implementation plans.
Next steps
Firms should already have completed their implementation plans and should now be taking the steps necessary to comply with the July 2023 deadline. In relation to products and services, we expect that firms will be well underway with any reviews of products and services that they are required to make.
The next deadline is 30 April 2023, by which time manufacturers must have completed all the reviews necessary to meet the outcome rules for their existing open products and services, which they should share with distributors to meet their obligations under the Consumer Duty, and identify where changes need to be made.
If you require any assistance in relation to any of these issues, please contact Dominic Hill.
Authored by Dominic Hill.
