Consumer Duty – Ensuring Effective Product Management
In the first of our series on the Consumer Duty, we consider what the impacts will be on the manufacture and distribution of products within firms.
As the dust settles on the FCA’s Consumer Duty Policy Statement announcement, the focus will swiftly turn to implementation of the new rules. Whilst an extension to the implementation timescales is welcome, the FCA have also set an October deadline for plans to be in place for delivery. This does not give senior managers much time to consider how the rules will impact them.
So, from a product perspective, what should be top of the agenda for those manufacturing and distributing products?
- Open books versus legacy books
The FCA have provided a much needed extension to all open products to July 2023, and an extra 12 months for legacy products. Considering the potential scale of changes this does seem a sensible decision, especially for those on antiquated systems, and legacy policy terms. However, it is perhaps counter-intuitive for customers in those legacy products, who may be most in need of changes that put their interests at the forefront.
Some firms who have been captured by earlier regulatory changes, such as MIFIDII and IDD, will recognise many of the requirements. The Consumer Duty will however extend the rules around product manufacturing and distribution beyond the previous scope. Those without effective product governance will need to put in place the correct structure to oversee them. Definition of target markets and product lifecycle management will be key, as will a data-led approach to oversee the products.
The FCA have previously provided examples of where they feel these requirements are not being met, such as small pension pots held in SIPPs, which may not represent value for money compared to other products available to the customer. Firms will need to quickly identify if and where this may be the case and put plans in place to correct the situation accordingly.
- Value for Money
The FCA have named four outcomes that they will look to measure the overall compliance with Consumer Principle, one of these being ‘Price and Value’. Firms will need to ensure that products are structured to clearly articulate the charges and ensure these are effectively communicated. Prices also need to be competitive. The question of value, which is harder to define, will need to be carefully considered. Firms will need to show how they are providing value for money within their products, and the metrics they will rely on to measure this.
We have already seen instances of platforms reviewing the charges on the products they distribute. It may be that manufacturers need to respond to how distributors are measuring value, potentially adjusting their charges as a result. It is important however, that this doesn’t become a race to the bottom with a focus purely on costs, as products with higher charges can in many instances justify higher costs by pointing to the relative performance of the product to establish the value provided to customers.
Delivering good outcomes to customers should be at the forefront of pricing products and services. Legacy charging practices still in place following RDR will need reviewing, whilst they may still be considered compliant with the RDR rules, it will become increasingly difficult to justify them under the Consumer Duty. Firms will need to ensure that all retail customers are in the best share class offered, and any additional services are identified as a distinct charge which is clear to customers and allows for appropriate comparison with other equivalent products.
We will hear plenty about proportionality over the next few months. As the FCA looks to govern by principle, there will not be clear mandates for specific actions in many circumstances. Firms will need to consider not only their size, but also the types of products they offer, and the information they collect about their customers. For example, an execution only product is likely to know comparatively less about their customers and desired outcomes than a discretionary managed product. Not only does this mean a different level of service provided, but also how key product decisions and oversight is conducted between firms, or between various products within the same firm.
By extension, there will also be a need to consider proportionality within the customer base, how should a firm treat distinct types of customers, not least those considered vulnerable. We will explore this further when we look at other impacts of the Consumer Duty on things like Communications, Oversight and Servicing, but from a product perspective, firms will need to identify those customer groups and ensure that how they treat them is proportionate and provides good outcomes.
Getting the product management element of Consumer Duty is vital as it underpins the other areas that we will explore further in later weeks. Getting the specifics are going to be key, but so will the embedding of the Consumer Duty into the firm’s culture. People will need to feel empowered to challenge existing norms and ensure that the customer is at the heart of the decision making.