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Out-Law News 5 min. read

UK firms urged to address looming Consumer Duty deadline

A new looming Consumer Duty deadline means there will be no relaxed start to 2023 for UK financial services firms, according to one legal expert.

Venetia Jackson of Pinsent Masons said the next milestone in the Financial Conduct Authority’s (FCA) Consumer Duty implementation timetable is the review of existing open products, which manufacturers must complete by 30 April. “We are nearly halfway through the implementation period for the Consumer Duty and firms should now be well on the way to completing the tasks identified in their implementation plans,” she said.

According to the FCA, when reviewing products and services, manufacturers must: specify the target market taking account of vulnerable customers; assess all relevant risks to customers in the target market and ensure the product is designed to meet the needs of the target market. They must also ensure that products and services do not adversely affect groups of customers in the target market and avoids causing foreseeable harm; ensure the distribution strategy is appropriate for the target market and to take reasonable steps to ensure it is distributed to the target market.

The new rules come with significant consequences if, on review, a manufacturer finds that a product does not meet the needs of the identified target market. For existing products, a firm must make changes to ensure that the product does meet the needs of the target market or must stop distributing the product. In addition, manufacturers must provide information to distributors in good time to enable them to comply with their own obligations.

The FCA’s deadline for review of existing products is intended to ensure that the necessary information can be shared with distributors about the target market, distribution strategy and value assessment in good time. It will also allow manufacturers to identify any changes needed well in advance of the final Consumer Duty implementation deadline of 31 July. While the requirement to inform distributors of assessments are found in the products and services and price and value outcomes, the FCA expectation of manufacturer reviews is not limited to these outcomes alone. They also cover the consumer understanding and consumer support outcomes.

Jackson said: “The FCA’s expectations on completion of product reviews by 30 April 2023 is likely to require a lot of work from firms, especially from those who have not previously been subject to FCA product governance rules. Firms will need to work quickly to identify whether they are co-manufacturers and to ensure agreements are in place between any co-manufacturers setting out responsibilities.”

“The products and services rules and guidance show the FCA’s continued focus on ensuring that firms take account of vulnerable customers in their customer base.  It will be important in defining the target market to consider whether any customers are likely to be vulnerable, having regard to the FCA’s guidance on vulnerable customers in FG 21/1 (57 pages / 855KB PDF). Firms should look to plan in time to make any changes that may be needed to products, especially where changes may involve contractual variations and the need to adhere to contractual notice periods,” Jackson said.

She added: “Firms should also be mindful of the ongoing nature of the Consumer Duty obligations. It is very easy in the rush of implementation to complete the review and move onto the next task. However, the rules set a requirement for regular reviews. Doing the groundwork now and setting up processes to ensure those reviews are carried out will save time when the next review comes round. As with all regulatory change, making sure your process is documented and your reviews recorded will also be important for satisfying the FCA of your compliance.”

According to the FCA’s finalised guidance (121 pages / 1.13MB PDF) at FG 6.4, a firm is a manufacturer if it creates, develops, designs, issues, manages, operates, carries out, or – for insurance or credit purposes – underwrites a product or service. More than one firm can be a manufacturer of a single product or service – a co-manufacturer is anyone who can determine or materially influence the manufacture of a product or service. This includes individual elements of that product or service.

The Consumer Duty only applies to FCA-authorised firms. If an FCA-authorised firm is working with a co-manufacturer who is not authorised, the Consumer Duty obligations will fall on the authorised firm. If the FCA-authorised firm is working with another authorised firm, there will need to be a written agreement between them setting out who is responsible for each part of the product governance and value assessments.

Jackson said: “For investment and insurance firms, this will be familiar ground as they already carry out this process under the FCA’s rules in PROD 3 and 4. Furthermore, the product and services and the price and value aspects of the consumer duty don’t apply where PROD 3 and 4 apply. For a large number of firms, in particular for banking, credit, payments, and other firms, this will be a new process to get to grips with.”

She added: “Even for investment and insurance firms, caution needs to be exercised as, while their products in the traditional sense of the bond, share, or the insurance policy may fall under PROD 3 or 4,  the Consumer Duty uses a wide definition of ‘product’ which captures all services as well. So, the platform service, the insurance distribution service and the financial advice service – to name a few examples – all need to be subjected to product governance and price and value assessments.”

“The products and services outcome in the Consumer Duty aims to ensure that products are appropriately designed for their target market and distributed to that target market.  The rules set out criteria that the product approval service must cover (PRIN 2A.3.4R). This includes defining the target market with sufficient granularity, identifying risks to the target market, ensuring the design of the product meets the needs and characteristics of the target market and that the distribution strategy is appropriate for the target market,” Jackson said.

“As can be seen, a key first step for firms is defining the target market for each of their ‘products’. The requirement for sufficient granularity and the need to take account of characteristics of vulnerability means that even in mass market products the defined target market will need to include detail on expected customer cohorts. For more bespoke or particular products careful delineation of the target market will be needed to carry through into the distribution strategy, ensuring the product is only distributed to that target market. Firms will need to ensure they have identified the needs and characteristics of customers in their target market so that they can then assess whether the features and benefits of their product meet those needs and characteristics,” Jackson said.

She added: “Bearing in mind the requirement for regular reviews of products and the ongoing obligation to monitor outcomes, firms should also have an eye on what information they will need from their distributors to help them comply with the Duty. Building in those expectations and obligations now will assist in the smooth operation of processes later. We are already seeing firms coming to us seeking assistance with review of their distribution agreements to ensure Consumer Duty expectations are built in and information flows set up.”

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