‘A firm must act to deliver good outcomes for retail customers’ – a phrase I’m sure you’re all becoming very familiar with. It’s the new Principle 12 and with the cross-cutting rules and four outcomes makes up the package of measures under the new Consumer Duty (‘the Duty’).
31st October 2022 saw the first milestone pass and with ‘implementation plans’ discussed, debated and signed off by Boards. Firms are now rapidly moving to progress with the execution of deliverables.
There are extensive rules under the Duty relating to each of the four outcomes. These outcomes represent key elements of the firm-consumer relationship which are instrumental in helping to drive good outcomes for customers.
The four outcomes relate to: Products and services, Price and value, Consumer understanding, and Consumer support – with each requiring firms to consider the diverse needs of consumers at every stage of the customer journey.
For this blog, we’re talking specifically about Outcome 1 – Products and Services. Watch this space for future blogs representing the remaining outcomes.
So, where to next? As a lover of the Sound of Music (who isn’t), ‘Let’s start at the very beginning, a very good place to start.’
Outcome 1 – Products & Services
The Duty sets a higher, clearer standard by requiring firms to ensure their products and services are fit for purpose, offer fair value, and help consumers make effective choices. For firms that have previously been subject to the Product Intervention and Product Governance sourcebook (PROD), it could be argued that no further work is required. Compliance with PROD will likely mean compliance with the Product and Services Outcome within the Duty. For many sectors, however, including retail lending where the PROD rules have not previously applied, there is considerable work to do. Specifically, manufacturers must maintain, operate and review a process for the approval of products (and material adaptations of a product) before it is marketed or distributed to retail customers.
We have outlined below the suggested next steps to help firms with the establishment of product oversight and governance arrangements. We have also outlined below the key steps to consider when developing your product framework, which in their totality, combine governance, internal processes and reporting aimed at designing products, bringing them to market, and reviewing them over their life cycle.
Step 1 – Establish a product approval framework
Manufacturers should establish, implement and review effective product oversight and governance arrangements. Moreover, arrangements should be regularly reviewed and updated, considered in the new product approval process, and be duly documented and proportionate to the nature, scale and complexity of the business.
We would expect each product to have ‘ownership’ within the firm, whilst also acknowledging the wider role of others. Good practice is also to ensure there is effective oversight and control of the product governance process with ongoing testing built into Compliance and /or Internal Audit monitoring programmes.
When designing your approval process, bear in mind the Duty is underpinned by the concept of reasonableness and proportionality. This means the product approval process should be relatively simple for straightforward and non-complex products that are compatible with the needs and characteristics of the mass retail market. On the other hand, for more complex products with a higher risk of consumer detriment, more exacting measures should be required.
Step 2 – Define the target market
Manufacturers should include policy and process that needs to be followed to identify, and update when necessary, the relevant target market of a product. The manufacturer should ensure that the product is deemed appropriate for the interests, objectives and characteristics of the identified target markets. The rules relating to the target market are quite explicit and include:
the requirement 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. This could include; client classification, risk profile, social and income demographics, education, literacy etc
taking account of any particular additional risks, needs, characteristics and objectives that might be relevant for retail customers within the specified target market. This should include recognition of characteristics of vulnerability; health, age, life events, financial resilience, financial literacy and capability etc
Firms need to ensure that in the design and distribution of the product, it meets the needs, characteristics and objectives of the target market does not adversely affect groups of retail customers in the target market and therefore ultimately avoids causing foreseeable harm in the target market.
We would also advocate firms’ assessment of their target market includes an identification of any negative target market, by which we mean any group of customers for whose needs, characteristics and objectives, the product or service is generally not compatible.
Ongoing Monitoring
Having identified the characteristics of vulnerability and other characteristics in the identification of the target market, it should be noted that the monitoring requirements are not limited to this. The expectation here is that firms use their judgement and monitor to see whether any distinct groups of customers (for example longstanding customers, customers from a particular geographical region or those who purchase a product through a specific distribution channel) are getting worse outcomes and/or experiencing foreseeable harm.
It should be noted that FCA expectations apply based on what is reasonable. They do not expect firms to exhaustively segment their customer base to identify differences in outcomes between all possible groups of customers, but data is important here. For those that listened to the FCA’s recent webinars, there were some great examples of the importance of data in identifying outliers. Firms generally have huge amounts of data, including that which is sent to the regulator as part of their quarterly, 6-monthly or annual FCA reporting.
Beyond process
Of course the above talks a lot about the process, however, Manufacturers need to ensure that staff involved in designing and manufacturing products have the necessary skills, knowledge and expertise to properly understand the products sold and also have access to and knowledge of the customers belonging to the target market.
The new Consumer Duty requires firms to put consumers at the heart of their business and focus on delivering good outcomes. To do this effectively, firms need to consistently consider the needs of their customers, and how they behave, at every stage of the product/service lifecycle.
With a robust product approval process in place combined with ongoing monitoring and testing in place, this allows firms to continuously learn from their growing focus and awareness of customer outcomes, which plays to both, firms’ commercial and customer experience agenda as well as the identification, rectification and prevention of any risks of consumer harm.
Furthermore, strong governance around the process ensures firms monitor action taken to address issues, and can provide direction back to the business based on trend analysis or concerns. These measures help complete the picture in line with SMF accountability under the Senior Managers and Certification Regime (SM&CR) and ensure Boards are well placed to ensure they provide products and services that are designed to meet customers’ needs, that they know provide fair value, that help customers achieve their financial objectives and which do not cause them harm – in short, products are designed to put consumers at the heart of their business and focus on delivering good outcomes for customers.
Questions for firms to consider
Do you have a product approval framework in place today?
Are you robustly and objectively assessing and reviewing the target market for each product?
Is your MI comprehensive to identify outliers and customers who are not receiving good outcomes?
Are you receiving and analysing information from distributors about how products are viewed and used?
Does the compliance function play an active part in your product governance arrangements?
Join our upcoming roundtable
If you have any questions or would like to learn more about the practical implications of learning how to evidence compliance with the challenges of Product Governance in a Consumer Duty world, please join our upcoming roundtable on the 30th November at 10am.
Click here to register in advance.
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