Consumer Duty Webinar Part One - Products and Services Outcome, your questions answered
In the first webinar of this four-part series, we examined the Products and Services outcome under the Consumer Duty. The FCA rules described in the Products and Services outcome are meant to ensure that products and services are produced with a certain group of retail consumers in mind and that they are distributed in the right way.
Take a read below of the questions which were asked during the webinar and which our in-house experts have answered.
1. How would checking the consumer’s credit and financial profile, when looking to place a mortgage application to a lender, relate to the Consumer Duty?
This is a relatively big question, with lots to consider against each of the four Consumer Duty outcomes. In relation to the products and services outcome on which this webinar was based, the assessment might include, for example, what level of checks would need to be undertaken (soft, hard etc.) against the type of mortgage offered, whether those checks could then be shared with the lenders (assessing the manufacturer’s needs as part of your distributor responsibilities) etc. You will also consider the target market, for example, an appropriateness assessment on running a credit check on an individual who is unlikely to meet affordability requirements for lenders.
As part of our service, we would certainly be able to explore this question in more detail to understand you model and structure and then build out an appropriate Consumer Duty framework.
2. Do we need a Consumer Duty policy if we only service professional clients in execution only CFDs?
No, no policy is needed if the firm is not part of a distribution chain that does service retail clients.
3. What is a new “product” e.g. where a firm offers investments which are structured very similarly, what would make one investment a new and different product that requires an assessment?
The Final Guidance 22/5 issued by the FCA makes the following comments on this topic:
The rules apply to each product or service a firm markets or distributes. They apply to existing products or services, to new products or services a firm intends to launch, and to any significant changes a firm plans to make to products or services.
Whether a proposed change would be significant depends on the potential impact it could have on customers. Firms should consider features added or removed from the product or service, changes to the target market and any other changes to the terms and conditions.
• A firm broadening its investment platform service to offer a wider choice of investments of a similar type to those already included, might not be making a significant change to the service. However, if it makes available a new type of investment product that is more complex and carries additional risks that the target market might not understand, this is likely to amount to a significant change.
• A change to a product or service might, on its own, not amount to a significant alteration. However, if there are several small changes, either at one time or sequentially, together they may amount to a significant change.
4. What about (re: “avoiding foreseeable harm”) lenders who charge an Early Repayment Charge [ERC] where the cause of paying off the mortgage is the death or critical illness of the borrower?
This should very much be assessed on a case by case basis, and there is technically nothing in the Duty which would prevent a firm charging an ERC in any circumstances. The Consumer Duty puts the onus on lenders to justify any fees and charges they incorporate as part of their price and value and consumer understanding assessment. That said, these charges in the scenarios mentioned above would need to be closely considered as perhaps it would be inappropriate to enforce such charges in those circumstances. We would need to look into the particulars in further detail in order to make a full assessment.
5. How granular does the target market identification need to be?
Per the FCA’s Finalised Guidance 22/5; the rules require firms to identify the target market at a sufficiently granular level, considering the characteristics, risk profile, complexity and nature of the product or service. It is for the firm to identify what is “sufficiently granular” taking account of the considerations above.
6. Could you please talk about some examples of positive and negative friction which are mentioned in the FCAs Consumer Duty Guidelines related to the Products and Services outcome?
This would cover aspects mentioned in the Final Guidance, including;
Positive frictions introduced into the sale process for high-risk products, where doing so is in the customer’s interests;
What amounts to appropriate friction or an unreasonable barrier will depend on the circumstances. We expect firms to apply judgement and be able to distinguish between positive frictions or nudges that support good outcomes and harmful frictions that create unreasonable barriers (sludge practices). Firms should be mindful of the Duty’s cross-cutting rules and act in good faith, avoid causing foreseeable harm, and enable and support customers to pursue their financial objectives.
Firms’ consideration of friction points should also be informed by their monitoring activity, which will help them to understand how processes are working in practice and the outcomes they are delivering. We expect firms to be able to justify and evidence the customer benefits of additional steps in customer journeys. They should not be overly complicated or designed in a way that benefits firms but not customers.
Additional steps in customer journeys can therefore be in their interests. Where this is the case, the friction would not amount to an unreasonable barrier. For example, steps designed to prevent fraud or make sure customers are aware of the consequences of cancelling a contract can benefit customers. They can also help to prevent poor decisions. For example, when customers are making investment decisions, slowing the sales process may help avoid foreseeable harm, as highlighted in our communications around high-risk investments by immature investors.
On the other hand, there can be commercial incentives for firms to create friction points (often called ‘sludge’) that deter their customers from taking action in their interests, such as making a complaint or switching product or provider. Even where firms do not set out to create sludge, they can fail to give adequate attention and provide appropriate support where customers seek to take action that does not benefit the firm. This is not consistent with the Duty.
7. It seems larger that the scope of small money transfer companies, but still what are in it for them?
Firms do not need to have a direct relationship with the retail customer to be within the scope of the Duty – firms that can influence material aspects of the design, target market or performance of a retail financial services product or service must comply with the new rules.
The FCA applies a reasonability test to the application of the Consumer Duty, based on the firm’s role and position in the distribution chain. There are therefore more obligations for a firm with direct contact with retail customers than for one higher up the distribution chain. However, as a payment service firm you still have obligations with regard to product design, price and value.
8. I have a question specifically about mortgages, no mortgage lenders are providing fair value assessments for BTL mortgages, however their products can be taken out by consumer BTL clients, are these considered retail customers? And if so are the lenders not required to complete the assessments on the BTL products?
BTL, or specifically Consumer Buy to Let (CBTL), may not in a number of cases fall into the definition of a regulated mortgage contract and as such would not be captured by Consumer Duty requirements. Whilst this would need to be considered on a product-by-product basis as mentioned during the webinar, there is nothing preventing brokers and advisers from undertaking Consumer Duty assessments themselves and applying them accordingly, regardless of whether the agreements are regulated or not.
9. My question is what would be the difference in application of this policy to e-money/payment institutions?
In principle, application of the Consumer Duty is consistent across all firms. However, the emphasis is on firms determining how they can improve their approach to deliver good outcomes for consumers. Even firms that operate a B2B business model should consider the end user when selecting their customers as they are responsible for those outcomes. This would apply to both EMIs and APIs.
10. Will a firm that arranges for non-regulated loans to be made to SME/indviduals, will they be caught by the Duty?
If the loans are unregulated and therefore you as a firm are not regulated then no, Consumer Duty will not apply. We would be happy to discuss this in more detail given there may be further nuances if you are a regulated entity providing exempt loans to individuals, small partnerships or sole traders.
11. As an investment firm how should we evaluate how well our products or services perform against the promises and expectations set for the target consumer. For example how we assess customer reviews, complaints, returns or refunds, or other feedback.
All of the above issues would be relevant and also, consumer research/mystery shopping, where appropriate.
12. What is the main area of Financial Services that the FCA is targeting? Is there a clear problem area they are addressing?
The key issue that the FCA is seeking to address is the need for enhanced consumer protection and improved conduct within the financial services industry. There are several challenges and concerns that consumers face when dealing with financial services firms, and the new Duty aims to tackle these issues. These issues include lack of clarity, unsuitable products, poor customer service, lack of transparency, and aggressive sales practices.
13. Can you provide clarity on identifying and dealing with vulnerable customers?
Under the products and services outcome rules, firms are not expected to review the needs, characteristics and objectives of individual customers, to track potential vulnerability for each customer or to monitor the diverse needs of each customer.
Instead, the FCA expects firms to:
• design products or services to take account of the needs, characteristics and objectives of all groups within the target market., and
• consider whether a product or service has features that could risk harm for any group of customers, including those with characteristics of vulnerability.
The FCA does not expect firms to explore customers’ circumstances exhaustively or to identify every customer with characteristics of vulnerability. It does, however, expect firms to support their staff to identify signs of vulnerability.
Firms should consider the needs, characteristics and objectives of customers with characteristics of vulnerability at all stages of the design process, including idea generation, development, testing, launch and review, to ensure products and services meet their needs.
Firms should be aware that particular groups of customers may have, or be more likely to have, characteristics of vulnerability, for example older people. Data from the 2020 Financial Lives Survey also showed that minority ethnic adults were disproportionately likely to be in vulnerable circumstances. There is also evidence that people with certain protected characteristics, such as disabled and minority ethnic people, are more likely to be living in poverty, which can be an indicator of vulnerability when interacting with financial services. Where health is a driver of vulnerability it will likely have substantial overlap with the protected characteristic ‘disability’ under the Equality Act 2010.
14. How does consumer duty affect us as acting as a Credit Broker - not a lender?
As a consumer credit broker you are required to implement the Consumer Duty fully before the deadline at the end of July this year. Practically speaking, you will operate as a distributor and are required to consider the four Consumer Duty outcomes, as well as reviewing and considering manufacturers’ (lenders’) assessments as part of developing your own Consumer Duty framework.
15. How can we be sure that the FCA will enforce this "new" duty better than the existing TCF?
I don’t think that we can be fully sure of this, but all the indications to date are that the FCA is not treating the Duty simply as TCF Mark 2, but rather as the opportunity to bring about a step change in the way regulated firms treat retail clients.
TCF is an initiative that has in place for over fifteen years, but it has been subject to minimal obtrusive enforcement.
The Consumer Duty is different - Why?
- Its implementation is being driven from the top of the regulator, with executive directors such as Sheldon Mils regularly making speeches on it
- The FCA has been at pains to stress in advance that the Duty will be enforced and that strong enforcement is a possibility for firms that do not engage
- The Duty has been the subject of a major “marketing” and engagement exercise involving the FCA targeting firms by way of regional workshops
- The FCA started an implementation review well before the first implementation date - fair value assessments – see https://www.fca.org.uk/publications/good-and-poor-practice/consumer-duty-findings-our-review-fair-value-framework
- The FCA is reviewing the findings of a survey of 1100 firms, to better understand the progress smaller firms are making in different sectors and on different aspects of the Duty. It will use the findings to carry out targeted engagement with smaller firms.
16. How does Consumer Duty impact a brokerage?
To answer this question, it is assumed that the brokerage is one that deals directly or indirectly with retail clients, that is, that it is a manufacturer or a distributor of products for which the end customers are retail customers.
As far as the products and services outcome is concerned, the key considerations will be as follows.
Manufacturers must approve existing products or services, any significant adaptation to a product or service, or any new product or service they introduce. They should regularly review the approval process to ensure that it is still valid and up to date, considering their experience in manufacturing and reviewing products and services. They should amend the approval process where necessary.
A manufacturer must identify a target market of customers for whom a product or service is designed. It must consider while doing so the needs of customers with characteristics of vulnerability in its target market.
A manufacturer must ensure its products or services, including existing products and services, are designed to meet the target market’s needs, characteristics and objectives. To meet these requirements, the FCA expects firms to base their work on real consumer needs, characteristics and objectives. They should not merely look to copy other products or services in the market.
The rules require firms to undertake appropriate testing of their products or services. In doing so, they must assess whether the product or service will meet the identified needs, characteristics and objectives of the target market, including customers in the target market who have characteristics of vulnerability.
Firms should consider the appropriate level of testing. In all cases, they must test products and services in a qualitative manner. For example, they could consider likely changes to the target market’s needs in the future and whether the product or service would continue to meet those needs.
Where relevant, depending on the type and nature of the product or service and the risk of harm, firms must also conduct quantitative testing. This could include, for example, testing how investments would perform in different market conditions.
A manufacturer must develop a distribution strategy appropriate for the target market.
Distributors must have distribution arrangements for each product or service they distribute. The distribution arrangements must avoid causing and, where that is not practical, must mitigate foreseeable harm to customers. They must also support the management of conflicts of interest and ensure that the needs, characteristics and objectives of the target market are taken into account.
Distributors must understand the products or services they distribute and should identify or create a distribution strategy.
Manufacturers must regularly review whether their products and services meet the identified needs, characteristics and objectives of the target market, including any identified for customers with characteristics of vulnerability and whether their distribution strategy remains appropriate for the target market and whether products or services have been distributed to customers in the target market.
Distributors must regularly review whether their distribution arrangements are appropriate and up to date and whether products and services have been distributed to customers in the target market.
If firms identify issues in their review, they must take appropriate action to mitigate the situation and prevent further harm from occurring. Where appropriate, they must inform other firms in the distribution chain about their actions.
17. What needs to be in a Consumer Duty Implementation plan specific to a payments institution that only has B2B clients?
The duty only applies to those firms that service retail clients. If however there is an end customer who is deemed to be a retail client, you may need to apply the Duty.
How can we help you?
Thistle Initiatives has supported firms for over 10 years as a trusted compliance and regulatory advisor. In addition to assisting you as-and-when, our team of specialists can serve as your right hand in a meeting and complying with regulations. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.
For more information about this webinar series and how we can help you with your Consumer Duty arrangements, implementation support, framework review, or ongoing support speak to the team by calling 0207 436 0630 or send an email to firstname.lastname@example.org.