Consumer Duty for Manufacturers and Distributors

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If distributors are concerned with a delay in the provision of the relevant information from manufacturers, and they've raised this with the firm and not received a reasonable explanation of when the information will be provided, then they should contact us about it, either through their usual supervisory contact or by contacting our supervision hub.

FCA Head of Competition Policy Ed Smith, March 2023

We are rapidly approaching the next milestone in the Consumer Duty journey – by the end of April 2023, manufacturers should have completed ‘all the reviews necessary to meet the four outcome rules for their existing open products and services’ and shared with distributors ‘the information necessary for them to meet their obligations under the Duty’

It is fair to say that, even on the basic requirements for the April deadline, the engagement between manufacturers and distributors has been somewhat limited. And firms should recognise that there is far, far more to do to meet the expectations of Consumer Duty. The level of interaction and engagement required between the two parties is significant and cuts across all areas of the business model – from contracts to culture.

Contracts and ToBAs

Manufacturer/distributor relationships (as with many other 3rd party relationships) can have a tendency to bump along without all the finer details of responsibilities being clarified. Things are fine until the regulator comes knocking, and then it rapidly escalates into a rather heated game of pass the parcel. It is far easier to get the details clear, before the FCA (and the lawyers…) get involved.

Consumer Duty has specific requirements for written agreements to be in place when firms co-manufacture products. But firms should take this opportunity to ensure there is clarity around all areas of the relationship. For example:

• Role of each party in the sales process
• Role of each party, post-sale
• Whether there is co-manufacturing
• Use of sub-brokers and relationships with other 3rd parties like outsourcing providers
• Right of access
• Notification
• What Consumer Duty actually means, in terms of scope and application
• Information sharing

Information sharing

Traditionally, there has been a reticence to share information between manufacturers and distributors. With both sides holding tight to what they consider to be commercially sensitive. Consumer Duty does not require firms to commercially disadvantage themselves (or breach competition rules), but there is a far greater expectation for information sharing.

Some of that is explicit – the requirements for manufacturers to share details on the target market and the fair value assessments. But some is implicit – how can I satisfy myself of X if I don’t know Y? And for these implicit information needs, the acid test should be – would I change my approach to the application of Consumer Duty if I did know Y? If the answer is yes, and the firm would change its approach if it had that information – should the firm not be seeking that information from their counterparty?

As part of the contract renegotiations, it should be made clear what information should be shared, at what level of detail, and how frequently. And this information sharing should be two-way. There has been a lot of focus on the information manufacturers should receive from distributors, but the information flow should go the other way too. As distributors will need to have confidence that the manufacturer they are sending their customers to is suitable – so would a credit broker place customers with a lender if they knew the lender had significant (and growing) complaints volumes in relation to arrears handling?

In developing their information requirements, firms should adopt a bottom-up approach, so not ‘what information do we have’, but rather ‘what information do we need’. The approach to information gathering should include:

• Mapping the Consumer Duty requirements to capture the potential risks (across the four outcomes and the cross-cutting rules)
• Determining what key risk indicators will be needed to determine whether the firm remains inside or outside risk tolerance
• Including a reasonable consideration of leading indicators and MI that could point towards potentially foreseeable harm in the future

Once the information needs are assessed, the firm can then determine what MI is available internally and what is required from the counterparty.

Product and value

Much of the focus in the run-up to the April milestone has been around outcomes one and two (price and value, and products and service outcomes) and the requirement for manufacturers to provide distributors with sufficient details regarding such things as target market and fair value assessment.

For some, already operating under the PROD requirements, there has been a degree of complacency in meeting this objective – with a dusting off of already produced material. In reality, firms should be considering whether their current assessments are fit for purpose (particularly in relation to some rather bland and high-level descriptions of the target market), and whether they will still be suitable under the Consumer Duty requirements.

Equally, whilst much of the focus has been on outcomes one and two, firms should consider whether the customer support and customer understanding outcomes are relevant too. For example, the way an insurance company services a claim is intrinsically part of the ‘value’ of the policy to the customer – so shouldn’t the distributor need insights into the service in order to be able to take a holistic view of the overall fair value of the product?

And firms should also ensure there is sufficient focus on the oft-overlooked requirements of the cross-cutting rules.

The cross-cutting rules

The cross-cutting rules are, in essence, the principles of the Principle and will more than likely be to the fore in the Regulator’s mind when they are considering future enforcement action.

Acting in good faith

There are inherent potential conflicts in the manufacturer/distributor model, which firms should consider:

• Manufacturers giving preference to particular distributors
• Distributors placing business with manufacturers based on their financial benefit, not the customer’s needs
• Manufacturers exerting undue influence over distributors, due to their relationships
• Distributors exploiting a customer’s lack of knowledge or experience in order to make a sale

Enable and support customers to pursue their financial objectives

There is an adage in the marketing world – customers don’t want ? inch drill bits, they want ? inch holes. And it holds for financial services too – a customer may use a distributor because of the service, but their objective is to access a product that will enable them to: buy a home, own a car or protect or grow their assets. Therefore, distributors need to have confidence that the manufacturer’s product will enable the customer to achieve these objectives – at the point of sale, and during the lifetime of use.

Avoid causing foreseeable harm

The cross-cutting rule of ‘foreseeable harm’ is closely linked to ‘pursuing financial objectives’. It is also where the regulator is likely to focus when they seek to take action against firms, in the future. For manufacturers and distributors, the FCA’s finalised guidance gives a steer on the regulator’s expectations:

• How is the firm monitoring that distribution strategies are being followed and that products and services are being correctly distributed to the target market?
• Can the firm demonstrate that its products and services are fair value for different groups of consumers, including those in vulnerable circumstances or with protected characteristics?
• What data does the firm have about its customers and how they use its products? Are there any gaps in the data? What steps is the firm taking to address them?
• What outcomes are customers getting? Are they getting good outcomes which align with their reasonable expectations?

Cultural fit

Beyond ToBAs and information sharing, the key determinant of whether a manufacturer/distributor relationship will deliver good outcomes is cultural fit: whether the firms have a clear agreement on what Consumer Duty means, and how good outcomes can be achieved. And how structurally aligned they are in terms of the scope and depth of the enhancement they are making.

Again, from the FCA’s finalised guidance, examples of some of the questions the regulator expects firms to consider:

• Does the firm’s purpose (whether publicly articulated or not) align with its obligations under the Duty? How is it embedded and understood throughout the organisation?
• Are staff empowered and feel safe to challenge and raise issues where they feel the firm might not be acting to deliver good outcomes for customers? Are those challenges listened to, and where necessary, acted on?
• Is the Duty being considered in all relevant discussions such as strategy and remuneration? Are customers’ outcomes a key lens for Risk and Internal Audit?
• How does the firm define good outcomes (over the short, medium and long term) for customers using its products and services?
• What actions is the firm taking to improve outcomes? (Who’s accountable for this work, what will improvement look like and when will it happen?)

?It is unfortunately the case that even now, in April 2023, these are not the conversations manufacturers and distributors are having with one another. There is insufficient active engagement to discuss, decide and ultimately deliver a view of Consumer Duty that works for the regulator, the customer and ultimately for their businesses.

Business model and strategy

I wrote at length about the impact of Consumer Duty on business models in a previous newsletter (Feb 2022). And these issues are particularly relevant to the intermediated customer journey – as it is a route to market the regulator has challenged on numerous occasions (IFA’s, Funeral Plans etc). The advent of Consumer Duty places greater pressure on the model. This is why it is so important that manufacturers and distributors have open and honest conversations. Because there are some hard questions to ask:

• Is this product suitable for an intermediated sales journey?
• Are the distributors adding sufficient value to justify their costs?
• Do I understand how my product is being distributed, and the potential risks for foreseeable customer harm?
• As a distributor, does this product offer good value to my customers?
• Do I understand enough about how the customers I send to a manufacturer are being treated? Is this product truly helping them meet their financial objectives?

Consumer Duty is based on the concept of ‘the standard that could reasonably be expected of a prudent firm’. And prudent firms will have to ask themselves whether, after July 2023, they can sell a particular product, or do business with a particular counterparty – if they can’t get satisfactory answers to questions like these.

Conclusion

The requirements to meet Consumer Duty are significant, particularly for intermediated distribution channels. It is therefore incredibly important that firms engage with their counterparties, and ensure there is an alignment in response. And most of this engagement will be happening 1st Line to 1st Line.

It is therefore equally important that staff and management in operational areas fully understand the rules. Because if the Consumer Duty project is being scoped, managed and overseen by Compliance it has a high probability of not meeting its objectives. As the true objective of the Consumer Duty project is not to meet a July 2023 deadline, it is to effect change within the BAU of the organisation. And the engine room of that change has to come from the 1st Line.

In truth, the real ‘Champion’ of Consumer Duty should be the most senior person in the 1st Line, whose most important role is to ‘sell in’ the Duty, and ‘make it real’ to operational staff – and not just those staff with direct customer-facing responsibilities. Because the necessary BAU change will not happen until:

• Product Management and Finance teams understand fair value, and how it should be applied
• Broker oversight teams understand that they should be focused on more than commercial metrics during onboarding and regular updates

Achieving this (and sustaining this) will be a heavy lift in most organisations, and require an in-depth assessment of the Capacity, Capability and most importantly Culture in the 1st Line