In this third blog in our series on the new Consumer Duty (CD), I will focus on what I believe will be the work required to get a firm’s response to the ‘Products and Services’ outcome in line with the higher standards demanded by the new rules.
Products & Services
The Products & Services (P&S) outcome is core to the new Duty. The good news for most firms in the insurance and investment sectors is the core disciplines should already be in place because the PROD rules, governing the design, marketing and selling of products and services, have been in place for several years.
To quote the FCA;
“Product oversight and governance refers to the systems and controls firms have in place to design, approve, market and manage products throughout the products’ lifecycle to ensure they meet legal and regulatory requirements”.
The FCA goes on to say:
“Good product governance should result in products that:
- meet the needs of one or more identifiable target markets
- are sold to clientsin the target markets by appropriate distribution channels
- deliver appropriate clientoutcomes”.
So why, when the PROD rules are clear and have been in place for some time, is the FCA putting P&S centre-stage in the incoming CD? The answer, I believe, lies in the analysis the FCA has been conducting on how well firms are conforming to PROD. The FCA’s suspicions are not purely anecdotal, the MIFID II Product Governance Review in 2021, (sounds dry I know), but it gets right to the heart of the FCA’s concerns and desire to change things for the better. The FCA researched eight asset managers who ‘manufactured’ UK-authorised collective investment schemes, available to retail investors through platforms on both an advised and an ‘execution-only’ (non-advised) basis. The review identified issues in four areas: product design, product testing, distributors and governance. In all four areas, whilst the FCA fell short of describing practices as failing, they certainly identified shortcomings that should be improved. And that gets to the heart of the issue, the FCA sees the P&S outcome as a way of improving how both manufactures and distributors work independently and together in pursuit of providing consumers with better outcomes.
If that’s the background then, what can firms do to comply with the letter and the spirit of the new rules? Firstly, in my view, firms should review the data sources they already use to assess their compliance with the existing rules. Product cancellations, i.e., cancellations within the 14-day cooling off period, product lapses, i.e., when regular payments are missed and policies or contracts redeemed early, are all possible indicators of products not meeting the needs of their target market. Complaints are a second, rich source of data. What does your firm’s complaints MI tell you about your products and services? Complaint numbers, upheld complaints and root cause analysis should provide indicators that something may be amiss.
All this data is available to distributors, but what about manufacturers? How much of this information is being passed back from distributors to manufacturers? Firms should already be using these to ensure their products and services are meeting the needs of their target markets, however, how open are the communications channels between the teams, even firms, collecting this data and those that can make change? For example, a key finding in the FCA’s review cited above is the patchy channels of communication between distributors and manufacturers? In these instances, manufacturers are often in the dark about the changes needed.
Even assuming your firm utilises this information to the full, however, this will not be enough to comply with CD. Because CD is outcomes based, firms need to be surveying consumers at each stage of the product lifecycle, i.e., from initial interest in the product through to post sale. And, if the product has a long duration post sale, e.g., life assurance policies, mortgages etc., customers need to be surveyed periodically to identify whether the product still meets their needs and if the firm’s post sales processes are sufficiently responsive. This information needs to be integrated with the existing data sources, e.g., product cancellations, to provide a rounded dataset. And just to confirm how high this new standard is, firms need to be able to also show how that their product information and supporting processes are helping consumers make more educated decisions in their best interests.
If this dataset indicates changes are needed, how can firms realign their P&S with their intended target market? The good news is that firms can use multiple touch points to adjust their approach, for example:
- Information Passing: One of the key findings identified in the MIFID II Product Governance Review was that the information flow between distributors and manufacturers was far from perfect. Indeed, the incoming CD rules places an obligation on firms in partnership to pass information between each other if they believe the other firm’s actions are causing detriment to the end user. Therefore, opening communication channels between distributor and manufacturer is key.
- Sales Practices: Are the distributor’s sales practices sensitive to the needs, and potential vulnerabilities, of likely customers? Are sellers rewarded appropriately and are potential customers given full information on the risks as well as the benefits of the product / service?
- Product Information: How rounded is the information set provided to customers, e.g., full disclosure on costs (another failing highlighted in the FCA’s Review)?
- Post Sales Practices: Does the distributor ‘stay close’ to customers, checking that they are being serviced appropriately and is alert to potential changes in the customers’ circumstances?
- Financial Promotions: Is the firm’s promotional material honest and detailed or does it risk misleading potential customers?
The incoming rules rightly shine a spotlight on P&S, and it will require manufacturers and distributors to work more closely together, to share traditional sources of data more widely and use newly developed customer survey data to fine tune the design and selling of P&S to the changing needs of their target market and customer bases.
The implementation date of 31st July 2023 gives firms time to ensure their P&S meet the new standard of care, but it will not be without work. I wonder how many firms will use the incoming rules to truly review their operations, or will they fall back on ‘the same old’’. Only time will tell.
In my next blog, II will focus on what I believe the ‘Price & Value’ (P&V) challenges will be for firms under the new CD rules as well as providing some suggestions on the steps firms can take.