1 A threesixty guide to July 2022 The Consumer Duty Products and services threesixty
2 The right mix of expertise and experience to support your business Find out more at www.threesixtyservices.co.uk
3 Supporting firms with the Consumer Duty and beyond ... The FCA’s Consumer Duty has the potential to be a game-changer for regulated firms. The Regulator is clear that the new duty represents a ‘significant shift’ in culture and behaviour’ and a higher standard of care and expectation’. It’s a significant FCA initiative – firms need to take it seriously. To help firms prepare, and meet the FCA’s expectations in this area, the following support is available to threesixty clients. • Consumer Duty action plans Our action plans are designed to help you record your firm’s approach to the new Consumer Duty and cover the entire Consumer Duty framework, including its principle, three cross-cutting rules and four outcomes. • Online guidance A comprehensive library of guidance material is available on our client portal, designed to help distributor firms that offer, sell, recommend, advise on, propose or provide a product or service, to understand and prepare for the new Consumer Duty. • Helpdesk support Our consultants can provide immediate assistance on a range of Consumer Duty issues by telephone and email. • Online webinars and downloadable guides For each of the four Consumer Duty outcomes threesixty is delivering training webinars, providing an overview of each outcome and practical advice on how to demonstrate each is being achieved. Each webinar will be complemented by a guide that explains the FCA’s expectations, shares examples of how firms can meet their requirements, and provides answers to the most commonly asked questions to our helpdesk. Following each webinar, recordings are uploaded to the Training area of our portal alongside copies of our guides. A sample of our full template action plan is available on request, covering the ‘Comsumer Principle’, ‘Cross Cutting rules’, and the ‘Products and services’ outcome is available. To request this sample, email talktous@threesixtyservices.co.uk The first of our Consumer Duty webinars took place in May and covered the ‘products and services’ outcome. A recording of this webinar is available. To request a link to watch the recording, at your leisure, email talktous@threesixtyservices.co.uk
4 Contents Products and services, and the consumer duty framework What do the FCA proposals involve How to achieve FCA achievements (extracts from threesixty’s Consumer Duty action plan Commonly asked questions Contents and introduction This is the first in a series of guides designed is to assist firms when preparing for the FCA’s new Consumer Duty. It is intended for distributor firms that offer, sell, recommend, advise on, propose or provide a product or service. It does not cover requirements for product manufacturers. Product manufacturers should contact us for guidance if required. There will be a total of four guides in this series, each covering one of the outcomes under the Consumer Duty framework. Each guide will adopt the same format i.e. an overview of a consumer duty outcome, advice on how to demonstrate that the outcome is being achieved, and answers to the commonly asked questions we receive to our helpdesks. Additional guides in this series will include: • Price and value • Consumer understanding • Consumer support For the products and services outcome, the FCA wants all products and services for retail customers to be fit for purpose. These should be designed to meet consumers’ needs and targeted at those consumers. Note Firms have until 31 July 2023 to fully implement the Consumer Duty in relation to new and existing products or services. This is the date that will apply to the majority of services provided by intermediary firms. Manufacturers are also required to share key information with distributors three months ahead of this deadline to enable all firms to comply in time. By the end of October 2022 the FCA expects firms to have implementation plans in place. These plans should be agreed by the firm’s board/senior management team who will be overseeing implementation. Firms have until 31 July 2024 to apply the Consumer Duty in respect of products and services held in closed books, for example legacy products. 5 6 7 14
5 Products and services, and the consumer duty framework The consumer duty framework comprises: • One principle Which reflects the overall standards of behaviour that the FCA wants from firms • Three cross-cutting rules Which develop overarching expectations that apply across all areas of firm conduct • Four outcomes Which give more detailed expectations for the key elements of the firm-consumer relationship The aim of the products and services outcome is that all products and services for retail customers should be fit for purpose. They need to be designed to meet consumers’ needs and targeted at those consumers. Figure one - The Consumer Duty Structure threesixty comment The product and services outcome complements the other outcomes. It is critical that products and services are well designed and targeted appropriately so that they can then be offered at fair value, suitably communicated and supported throughout their full lifecycle.
6 What do the FCA proposals involve? The FCA is clear that its proposals in this area do not amount to product regulation and it doesn’t expect the proposed rules to restrict access to products or services. There are separate proposals for distributors and for manufacturers. Proposed requirements for distributors Distributors need to: • Develop distribution arrangements for each product or service distributed • Obtain information from the manufacturer to understand the product or service, its target market and its intended distribution strategy • Regularly review the distribution arrangements to ensure they are appropriate and, if they identify issues, take appropriate action to mitigate the situation and prevent any further harm • Share relevant sales information with manufacturers When selling a product or service that was manufactured by a person not subject to the Consumer Duty, the FCA proposes that the distributor must take all reasonable steps to comply with these obligations. Proposed requirements for manufacturers Manufacturers need to develop approval and testing processes for their products or services, identify target markets and select appropriate distribution channels. There is also an obligation to regularly review their product and services. Manufacturers of investment and insurance products will already have procedures in place for this as part of their existing product governance procedures. However, some product manufacturers such as mortgage lenders or providers of contract-based pensions, will not previously have had formal product governance obligations for these products and may have more work to do to prepare for the requirements of the products and services outcome. We are reaching out to a range of product manufacturers to establish to what extent they are ready to support our clients and will provide an update you when we have more information.
7 How to achieve FCA requirements To help threesixty client firms record their approach to the proposed new Consumer Duty an action plan is available covering the entire Consumer Duty framework, including its principle, three cross-cutting rules and four outcomes. Our action plans can be used either in conjunction with our comprehensive online guidance, or alongside the information available within our shorter downloadable guides, to prompt your thoughts on how your firmwill be able to demonstrate that you put your clients at the heart of your business, offer products and services that are fit for purpose and which represent fair value. On pages 9 to 13 we include an extract from the products and services section of our action plan. It includes questions that you can use to self-assess your current position in meeting the FCA proposed requirements. We have included some examples of evidence that may be relevant to demonstrate that your firm is meeting a particular requirement. The points noted are not exhaustive and depending on your firm’s activities and business model, you may need to consider other areas. It’s important to critically asses your current position and make sure that any evidence documented reflects what it happening in practice. Where more work is needed, our action plan includes space to document capture where action is still required. The product and services outcome complements the other outcomes. It is critical that products and services are well designed and targeted appropriately so that they can then be offered at fair value, suitably communicated and supported throughout their full lifecycle. threesixty comment A sample of our full template action plan is available on request, covering the ‘Comsumer Principle’, ‘Cross Cutting rules’, and the ‘Products and services’ outcome is available on request from our website. To request this sample, email talktous@threesixtyservices.co.uk
8 How to achieve FCA requirements Note Product distributors are not usually involved directly in the design of products, but will play a part in the remuneration arrangements associated with distributing products such as agreeing adviser charges, commission and procuration fees. Distributors do however offer services and are able to influence the design, price and communication of their services. Before looking at the table on pages 8 to 11 it may be useful to reflect on the following service-related questions. The responses to these questions can be used to stimulate debate and inform your firm’s approach to the product and services outcome. • Do you always deliver your basic service promises such as provision of ongoing advice or portfolio valuations, or making contact near the end of a mortgage deal? – If not, is this because of external factors outside your control or due to internal systems and controls? • Do you offer any services that you believe should no longer be offered? • Would you recommend your firm’s services to your friends and family? – If not, why not and what would need to change so that you would feel happier to recommend? • Do you have different service levels to meet the requirements of your target market (clients)? • Do you think any of your services are under- or over-priced? • Do you think any of your services offer particularly good or poor value for your clients bearing in mind that value is about more than just price? • Have you benchmarked the price of your fees against your competitors? – If you charge less for the same service, is there a reason for this and is this sustainable? – If you charge more for the same service, is there a justifiable reason for this? • Are your client retention rates higher or lower than you would like?
9 Points to consider Can you demonstrate, with appropriate evidence, that your firm: Specific examples as to how to achieve this These examples will not be relevant to all firm types Fully understands its PROD obligations? • A documented product governance policy is in place and is regularly reviewed in Compliance, Board or Investment Committee meetings. • The firm has identified a distribution strategy for each product/service to ensure the product/ service is distributed appropriately. For example, complex products are recommended over three appointments. Less complex solutions are delivered online or by remote consultation in one or two appointments. • Use of a documented Advice and Investment Process, with special emphasis on higher risk products, such as Equity Release / VCT / EIS. Use third party expertise where appropriate. • Use of a Centralised Retirement Income Proposition (CRIP) decumulation process. • Staff training records on how the firm selects funds/products/platforms. Is able to extend its PROD obligations to all retail products and services that clients may use? • Documented advice and admin process covering all products and services offered, such as an annual pension review process or mortgage review processes. • Providing staff training on how the scope of PROD rules differs from the scope of the Consumer Duty. How to achieve FCA requirements
10 How to achieve FCA requirements Points to consider Can you demonstrate, with appropriate evidence, that your firm: Specific examples as to how to achieve this These examples will not be relevant to all firm types Makes sure that its charges for services represent fair value for clients? • Documented rationale in place for the firm’s charging structure clarifying how services are priced (for example, ‘cost plus’ and/or ‘value based’) to demonstrate the value of the firm’s services in tangible terms • Regular tests of the charging model by checking the time and cost to deliver different types of advice / service • Use of a fee cap or fee collar • A procedure is in place for recording the time spent with each client and confirming that each client is in the right service proposition • Records are kept of the ‘add-on value’ being provided by the firm in terms of generic information, for example, lasting power of attorneys, wills, trusts, generic tax tips and basic debt counselling Considers the requirements of all client segments and varies its charging structures as appropriate? • Apply different, easy to understand, charging structures to different segments of the client bank to limit cross subsidy • A periodic review that the services listed under each service proposition are relevant, can be easily understood and add value • Use client surveys or an Advisory Board to establish the service components that clients value most
11 How to achieve FCA requirements Points to consider Can you demonstrate, with appropriate evidence, that your firm: Specific examples as to how to achieve this These examples will not be relevant to all firm types Does not have any barriers to stop clients using its services? For example, it should be at least as easy to exit a service as it is to purchase it in the first place. • Platform due diligence checks for exit penalties. • Implementing an Advisory Board with client involvement to provide an opportunity for client input on the firm’s services. • Monitoring adviser/client ratios so that each adviser is able to properly service each client. • Contingency procedures are in place in the event that an adviser leaves the firm (especially a specialist adviser) to ensure continuity of client servicing. • Suitable business continuity processes in place to address loss of access to or evacuation from your offices, fire, flooding, extended loss of electrics or communications, loss of key staff, loss or damage to IT systems. • Clients are given opportunities to feedback or voice concerns. A complaints process is in place and complaints are handled within required timeframes. Can extend its PROD obligations to all retail products and services that clients may use? • Documented advice and admin process covering all products and services offered, such as an annual pension review process or mortgage review processes. • Providing staff training on how the scope of PROD rules differs from the scope of the Consumer Duty.
12 How to achieve FCA requirements Points to consider Can you demonstrate, with appropriate evidence, that your firm: Specific examples as to how to achieve this These examples will not be relevant to all firm types Fully understands its PROD obligations as a distributor? • A documented product governance policy is in place and is regularly reviewed in Compliance, Board or Investment Committee meetings. • The firm has identified a distribution strategy for each product/service to ensure the product/ service is distributed appropriately. For example, complex products are recommended over three appointments. Less complex solutions are delivered online or by remote consultation in one or two appointments. • Use of a documented Advice and Investment Process, with special emphasis on higher risk products, such as Equity Release / VCT / EIS. Use third party expertise where appropriate. • Use of a Centralised Retirement Income Proposition (CRIP) decumulation process. • Staff training records on how the firm selects funds/products/platforms. Can extend its PROD obligations to all retail products and services that clients may use? • Documented advice and admin process covering all products and services offered, such as an annual pension review process or mortgage review processes. • Providing staff training on how the scope of PROD rules differs from the scope of the Consumer Duty.
13 How to achieve FCA requirements Points to consider Can you demonstrate, with appropriate evidence, that your firm: Specific examples as to how to achieve this These examples will not be relevant to all firm types Monitors its services to make sure they remain consistent with the identified target market(s)? • Identify a client each month to ensure that the characteristics are within one of the firm’s identified segments and the products and services meet their needs • Senior manager monthly random checks to assess whether the firm’s review process has been followed and the client has obtained the correct product and service outcome • Monitoring Adviser KPIs to ensure annual reviews are being delivered in line with the client agreement Has transparent charging structures? • Use client surveys or an Advisory Board to test clarity of the firm’s charging structures in its client agreement and other marketing material • Apply different, easy to understand, charging structures to different segments of the client bank to limit cross subsidy • Document any concessions on investment advice fees, which are signed off by a senior manager and reviewed in Board meetings • Publish the firm’s charging structure on its website • Provide regular training and T&C assessments to ensure all advisers can explain the firm’s charging structure correctly
14 Commonly asked questions We charge adviser fees on a percentage of funds invested basis. Is it compulsory for us to use a fee cap and fee collar to demonstrate that we offer fair value to our retail clients? The FCA believes that products or services would not represent fair value to a client if the benefits received aren’t reasonable relative to the price they pay. Remuneration must bear a reasonable relationship to the costs and workload involved in distributing a product however it is not compulsory for firms to have a fee cap and fee collar to demonstrate that they offer fair value to retail clients. Where a percentage basis of charging is being used you need to be careful about how it’s applied across your client segments. A universal structure for all client segments may be difficult to justify. Other options to consider include: • Using a tiered charging structure • Applying a different charging structure to segments of your client bank with different requirements and expectations • Setting a decency limit so that no client charge can exceed the limit irrespective of the amount of funds advised on/managed • Senior management sign off for fees under or over a certain level • Administration checks or file review checks which flag cases that have fees under or over a certain level for further scrutiny You should review your firm’s charging structure on a regular basis and have a documented rationale for your charging structure.
15 When distributing financial instruments, how should our firm determine a distribution strategy and ensure the strategy is appropriate for the target market? As a distributor you must ensure that the products and funds you wish to include within your proposition are broadly consistent with your target market of clients. This is an existing product governance requirement that is echoed in the Consumer Duty. Obtaining information from the manufacturer should be relatively straightforward as most fund groups use the product manufacturer’s European MiFID Template (EMT) to state the appropriate distribution strategy, from the perspective of the manufacturer. For example, whether a product should only be sold with advice, or whether (for non-advised sales) the product in question requires an appropriateness test. Other factors should be considered alongside based on your knowledge of your own client base. For example: • Should the product only be recommended by specialist advisers? • Should the product be withheld from certain categories of vulnerable client? • Does the product or service trigger a conflict of interest for clients in the target market? • Will all of the available product options or add-ons be made available to the firm’s clients or should you restrict some? You should regularly review your distribution arrangements to ensure they remain appropriate. Where issues are identified, you should take appropriate action to mitigate the situation and prevent any further harm. This may involve the firm sharing relevant sales information with manufacturers. Commonly asked questions
16 Commonly asked questions What is the difference between the scope of the product and services outcome and the existing product governance (PROD) rules? The consumer duty will be compatible with, but will not replace product governance (PROD). The products and services outcome will apply in a proportionate way to different sectors than those covered in PROD rules. The products and services outcome applies to all products and services offered to ‘retail customers’ This will include, for example investment, insurance, mortgage, payment services and consumer credit products and services. It also applies, in line with the Consumer Duty generally, to prospective as well as existing customers. The PROD rules are more granular and apply to investment and insurance products and services only. For example: • MiFID investment products, for example, unit trusts, Open-Ended Investment Companies (OEICs), investment trusts, structured products etc. • MiFID services, such as investment advice and portfolio management • Non-investment insurance contracts (pure protection contracts and life policies such as long-term insurance contracts and annuities) • Insurance-Based Investment Products (IBIPs) • Insurance based pensions • General insurance The PROD rules already set out specific requirements for the design, approval, marketing and management of the above products and services. Under the consumer duty there will be an overarching requirement set out in the FCA’s Principles (PRIN) sourcebook that all products and services sold to customers must be fit for purpose and targeted at the retail clients whose needs they are designed to meet. Firms will therefore need to consider both their consumer duty obligations and, if relevant, the specific obligations set out in the PROD rules.
17 How do we ensure that relevant individuals have the required knowledge and understanding of the firm’s products and services? All relevant staff involved in product distribution must have the appropriate knowledge and competence to: • Understand the characteristics and risks of the products your firm distributes to its clients • The needs, characteristics and objectives of the firm’s target clients • The services you provide to clients This can be achieved by establishing training and competence arrangements which may vary to cater for different roles within the firm. These arrangements should provide continuing professional development opportunities for staff to learn about the firm’s client proposition and product distribution. Staff should have ongoing access to up to date information about the products approved for use. This information should be periodically reviewed with staff updated as and when changes occur, for example where products are removed, added or changed. Training will be required for senior managers, compliance staff, advisers and investment managers, and is also likely to be required for certain paraplanning, investment committee, research and administration staff. Commonly asked questions
18 Telephone: 03707 360 360 Email: info@threesixtyservices.co.uk Web: www.threesixtyservices.co.uk Contact Us threesixty services LLP The Royals, Altrincham Road, Manchester, M22 4BJ threesixty
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