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Consumer Duty: Rules set standard for identifying target markets, distribution and info sharing

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  • 27/07/2022
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Manufacturers and distributors of products and services need to ensure they appropriately identify a target market and distribution strategy and review them frequently to avoid foreseeable harm.

The Financial Conduct Authority finalised guidance for consumer duty, product and services outcome says firms should ensure that the design of a product or service meets the needs, characteristics and objectives of a customer in the “identified target market”.

It also states  firms should make sure the distribution strategy is “appropriate for the target market” and companies should carry out “regular reviews” to ensure the product continues to meet the needs of the consumers it is aimed at.

The rules apply to companies that manufacture products and services, as well as firms who distribute them.

This latest FCA guidance is aimed at “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”.

The regulator said it can be “unclear” whether a product is new or existing, and cited the examples of a mortgage lender offering deals for a limited period and then replacing them with new deals, but with the same charging structure.

In these cases, the FCA said that unless there were “significant additional changes” to product terms and conditions, it would not expect the change to amount to a new product.

 

Manufacturers need to identify target market at ‘granular level’

The regulator said a “manufacturer must identify a target market and their needs and objectives at a sufficiently granular level”, and that customer needs, characteristics and objectives should be included at “all stages of the design process”.

Firms’ products and services should not negatively impact customers in the target market, including vulnerable customers, and should avoid “causing foreseeable harm”.

If a product does not meet its target market needs, then companies should take “appropriate action” to mitigate the situation and lessen harm.

They should also look at past performance and consider future outcomes, how the product will “function over the proposed term” and undergo consumer testing and consumer research on an “ongoing basis”.

It added that for complex or niche products firms need to define target markets in more detail, considering increased risk of consumer harm.

“The more complicated a product or service structure and features, the more difficult it is likely to be to explain without risk of consumer misunderstanding. This may have an impact on the target market for the product or service. Material conditions or limitations for a product or service should be clear to the target market and, where appropriate, firms should test consumer understanding,” the regulator explained.

The FCA continued that testing the target market was important, and firms should consider if customers might “suffer harm” from the product or service and use this to refine their target market.

Manufacturers should consider if a change to a product or service is “significant” and would have to consider the potential impact on consumers, it added. For instance, if features are added or removed, there are changes to the target market or changes to terms and conditions.

They should also regularly review the approval process to ensure it was “valid and up to date” and amend “where necessary”. If a firm withdraws a product, they would need to consider the duty and what impact it could have on customer outcomes.

From a vulnerability perspective, firms need to design products or services to account for “needs, characteristics and objectives of all groups within the target market” and consider if certain features could risk harm to this group.

 

Fair treatment of customers

Firms should take “active steps” to encourage customers to share information about needs and circumstances.

Potential actions firms could take to ensure fair treatment of vulnerable customers include: focus groups with customers with vulnerable characteristics, resources and consultations from specialist organisations on how vulnerable customer needs can be met at design stage, consulting with customer or representative groups when looking to change or withdraw a product and getting third sector organisations to review products.

Manufacturers must regularly review whether their products or services meet relevant target market needs, characteristics and objectives, distribution strategy and whether they have been distributed to appropriate customers.

 

Distributors need ‘necessary understanding’ of products and services

From a distribution perspective, the regulator said that distributors need to understand characteristics of identified target markets for products or services and ensure distribution strategy is “appropriate”.

Distributors should be mindful of needs, characteristics and objectives of customers, potential vulnerability, intended distribution strategy and that the product or service will be distributed in line with the target market.

The regulator added that distribution arrangements should avoid causing foreseeable harm, and support management of conflict of interests.

The report said that manufacturers were not responsible for the activities of distributors, but appropriate information should be given to distributors to ensure they have the “necessary understanding” of products or services they are selling.

“Firms should not distribute a product or service if they do not understand it sufficiently,” the regulator said.

Distributor firms should also regularly review if their distribution arrangements are “appropriate and up to date” and products and services are being marketed at the customers in the target market.

The FCA said that distributors should provide manufacturers with sales information, information on cancellation, and regular review of distribution arrangements “upon request”.

If harm is identified then distributors need to “inform other relevant parties”, including the manufacturer.

The FCA added that if harm is identified firms should take “appropriate action to mitigate the situation and prevent further harm from occurring”.

This can include making changes to the product or service, providing additional information to distributor or customers, amending distribution or offering existing customers option to exit or mitigation for harm suffered.

It said that the products and services outcome rule does not mean firms have to exclude particular groups, ensure products or services are suitable for individual customers in a target market unless relevant and mitigate harm that was not foreseeable.

For the full report follow this link.

 

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