Product monitoring and governance

General

A key part of the Consumer Duty is that firms assess, test, understand and are able to evidence the outcomes their customers are receiving.  Without this, it will be impossible for firms to know that their products and services are working as they and their customers would have expected and in a way that is consistent with the Consumer Duty.[1]

As a baseline, a firm must regularly monitor the outcomes retail customers receive from:

1. the products the firm manufactures or distributes,
2. the communications the firm has with retail customers, and
3. the customer support the firm provides to retail customers.[2]

However, firms should be aware that “customer outcomes” in this context are broader than the areas covered by the four outcome rules under the Consumer Duty. They also include the overall outcomes that consumers receive when they buy a product or service, or interact with a financial services firm, such as whether they use the products or service as expected, the benefits that they receive, and whether they are incurring harm.[3]

Firms can expect at every stage of the regulatory lifecycle to be asked to demonstrate how their business models, the actions they have taken, and their culture are focused on good customer outcomes.[4]  To this end, this must maintain records and provide the same to the FCA on request.[5]

Developing a strategy towards monitoring

Firms will need to develop a strategy to gather the relevant information and data to inform their assessment of whether they are delivering good outcomes for customers and to meet their governance obligations. As part of this, firms must have in place processes to identify the root causes of any failure to deliver the outcomes required by the Consumer Duty for retail customers.  The FCA expects firms to continually review and develop their frameworks.[6]

Monitoring objectives

Firms are specifically required to:

1. monitor whether retail customers are being, or have been, sold products that have been designed to meet their needs, characteristics and objectives,
2. monitor whether the products that retail customers purchase provide fair value and appropriate action has been taken to address products identified as not providing fair value,
3. monitor whether retail customers are equipped with the right information to make effective, timely and properly informed decisions,
4. monitor whether retail customers receive the support they need,[7]
5. monitor and regularly review the outcomes their customers are experiencing to ensure that the products and services that firms provide are delivering outcomes consistent with the Consumer Duty,[8]
6. identify whether for any product the firm manufactures or distributes, any group of retail customers is experiencing DIFFERENT outcomes compared to another group of retail customers of the same product,
7. identify where customers or groups of customers are not getting GOOD OUTOMES or are suffering HARM and understand why this is the case (groups that firms could consider might include longstanding customers, customers from a particular geographical region or customers who buy a product through a particular distribution channel),[9]
8. have processes in place to investigate the causes of poor outcomes, to adapt and change products and services, or policies and practices, to address any risks or issues identified and stop it occurring again in the future,[10]
9. be able to demonstrate how they have identified and addressed issues leading to poor outcomes,[11] and
10. explain (if asked) how they reached a decision on the most appropriate intervention, demonstrate how it has delivered good outcomes and, if not, what they have done further to address the issue.[12]

Monitoring communications

Firms should monitor whether their communications are supporting customer understanding and helping their customers make effective, timely and properly informed decisions.[13]

Beyond simply testing their communications, firms are also expected to consider the impact they expect communications to have, monitor whether this is the case in practice, and carry out further investigation where this is not the case, to identify and remedy any issues to support good customer outcomes.[14]

Firms should have appropriate governance processes in place to oversee this process and consider keeping a record of any relevant actions taken.[15]

Action required of firms

Firms must take “appropriate action” where they identify that:

1. retail customers do not (or there is a RISK that they will not) receive the outcomes required under the Consumer Duty,
2. any group of retail customers for a product are receiving worse outcomes than another group of retail customers for the same product, or
3. the firm is otherwise not complying with the requirements of the Consumer Duty.[16]

Nonetheless, this does not require a firm to take action to remove the effects of risks inherent in a product that the firm reasonably believed the retail customer understood and accepted.[17]

“Reasonableness” in the context of monitoring

The FCA’s expectations apply based on what is “reasonable”. Firms will need to produce and regularly review MI on customer outcomes, but the frequency of monitoring, and the nature of the information a firm should collect should be appropriate to the nature, scale and complexity of their business, considering the size of the firm, the products and services they offer, and the customer base they serve.[18]  However, even in the context of ‘what is reasonable’, some forms of monitoring will undoubtedly be more frequent than others. For example, the FCA expects firms to gather and review customer support data, transaction data and complaints data on an ongoing basis whereas file reviews, sludge audits and focus groups are more likely to be carried out at regular intervals or on an ad hoc basis.[19]

In addition, the FCA does not expect firms to exhaustively segment their customer base to identify differences in outcomes between all possible groups of customers.[20]  Moreover, it is possible for distinct groups of customers to receive different outcomes within a framework that remains compatible with the Consumer Duty (for example, because of risk-based pricing).  However, where this occurs, the firm would need to be able to evidence compliance.[21]

As with the whole Consumer Duty, one good rule-of-thumb question firms can ask themselves is whether they are applying the same standards and capabilities to monitoring customer outcomes as they are to generating sales and revenue. For example, is the firm using the same levels of segmentation and analysis to monitor outcomes as they are to target sales?[22]

Types of data used in monitoring

There is no prescribed format for the way in which firms evidence their monitoring of customer outcomes.[23]  The type of information firms use will vary depending on their size, client base, and the types of products or services they offer. Firms should tailor the information to these factors.  The objective for firms is to ensure that they have sufficient information to be able to identify whether they are delivering good customer outcomes.[24]  However, in order to monitor the products and services outcome, firms could consider data such as:

1. sales information and information on business persistency,
2. customer feedback,
3. complaints received about the product or service, and the results of root-cause analysis of those complaints,
4. analysis of whether the product or service functions as expected at outset, including whether customers use product or service features as expected, and
5. where appropriate, consumer research, such as focus groups or new testing.[25]

Firms could use the following types of data to monitor whether their communications are meeting expectations under the consumer understanding outcome:

1. the findings from any testing of their communications,
2. customer response rates to communications which prompt action,
3. broader analysis of whether customers are following instructions in communications,
4. analysis of responses to communications during customer journeys, including responses and drop-out rates at each stage,
5. product take-up rates,
6. product switching rates,
7. claim rates, including analysis of declined claims, and
8. relevant complaints data.[26]

Monitoring within distribution chains

The monitoring obligation applies proportionately to a firm’s role in the distribution chain.

Where a firm does not have direct contact with retail customers it should monitor the outcomes of the service it provides, having regard to any information it has about the outcomes experienced by retail customers at the end of the distribution chain.  A firm that does not have direct contact with retail customers should act reasonably to obtain information about the outcomes experienced by retail customers of the products the firm has distributed.[27]

Monitoring outcomes for vulnerable consumers

Firms should produce and regularly review MI on the outcomes they are delivering for customers with characteristics of vulnerability. MI should be of sufficient quality and depth for firms to be able to identify which products and processes are working well, and which might be causing detriment and need changing to improve outcomes.[28]

Firms must have the ability to capture information about customer needs (such as communication needs or information about customers’ characteristics of vulnerability).  It is highly UNLIKELY that firms will be able to meet the needs of all of their customers if they are not capturing such information.[29]

Nonetheless, firms are NOT required to systematically collect data about customers’ protected characteristics (e.g. ethnicity). However, where firms do already collect data about customers’ protected characteristics, they are expected to use this data to monitor differences in outcomes between different groups, where possible.[30]  There are a number of ways that firms can gain insight into the experiences and outcomes of customers who share protected characteristics, without requiring their customers to disclose this information. For example, firms could consider:

1. conducting research into the experiences and needs of a particular group of customers (e.g. a focus group with older customers),
2. working with a consumer organisation that represents a particular group of consumers in order to gain insight into the needs and experiences of that group,
3. conducting an audit of customer journeys which could identify differences in experience or frictions that affect certain groups of customers but not others,
4. drawing on the diversity of their staff (for example, a network of staff with a particular sexual orientation could provide insight into the experiences that this group has when dealing with financial services), and
5. using proxy data to infer outcomes experienced by different groups of customers (for example, it may be possible for firms to use customer name and post code as a proxy for ethnicity in certain circumstances). [31]

Monitoring requirements under different regulations

Where relevant existing requirements for investment funds, insurance and funeral plans meet the FCA’s outcome rules, then the associated monitoring requirements will be sufficient to meet the monitoring requirements of the Consumer Duty for that outcome.[32]

Key questions for firms

Below are a set of questions which the FCA recommends firms consider in terms of managing their compliance with the products and services outcome:

1. Has the firm specified the target market of its products and services to the level of granularity necessary?
2. How has the firm satisfied itself that its products and services are well designed to meet the needs of consumers in the target market, and perform as expected? What testing has been conducted?
3. How has the firm identified if the product or service has features that could risk harm for groups of customers with characteristics of vulnerability? What changes to the design of its products and services is it making as a result?
4. Is the firm sharing all necessary information with other firms in the distribution chain, and receiving all necessary information itself?
5. How is the firm monitoring that distribution strategies are being followed and that products and services are being correctly distributed to the target market?
6. What data and management information is the firm using to monitor whether products and services continue to meet the needs of customers and contribute to good consumer outcomes? How regularly is it reviewing this data and what action is being taken as a result?
7. Where the firm is planning to withdraw a product or service from the market, has the firm considered whether this could lead to foreseeable harm? What action is it taking to mitigate this risk?[33]

Next time

Next time, we’ll be turning our attention to look at fiduciary relationships within the context of the Consumer Duty, so stay tuned!

[1] FG22/5, 11.1

[2] PRIN 2A.9.8R

[3] FG22/5, 11.17

[4] FG22/5, 11.3

[5] FG22/5, 11.26

[6] FG22/5, 11.21; PRIN 2A.9.11R

[7] PRIN 2A.9.9R

[8] Policy Statement PS22/9, 13.1

[9] FG22/5, 11.12; PRIN 2A.9.10R

[10] FG22/5, 11.4; FG22/5, 11.11; Policy Statement PS22/9, 13.11; FG22/5, 1.28

[11] FG22/5, 11.7

[12] FG22/5, 11.9; FG22/5, 11.27

[13] FG22/5, 8.59

[14] FG22/5, 8.60

[15] FG22/5, 8.68

[16] PRIN 2A.9.12R

[17] PRIN 2A.9.13R

[18] FG22/5, 11.19; PRIN 2A.9.3G

[19] FG22/5, 11.24

[20] Policy Statement PS22/9, 13.11

[21] FG22/5, 11.14

[22] FG22/5, 11.13; FG22/5, 11.20

[23] FG22/5, 11.26

[24] FG22/5, 11.32

[25] FG 22/5, 6.77

[26] FG22/5, 8.69

[27] PRIN 2A.9.4G

[28] FG22/5, 11.36

[29] FG22/5, 11.37

[30] FG22/5, 11.38

[31] FG22/5, 11.42

[32] Policy Statement PS22/9, 13.9

[33] FG 22/5, 6.80