FCA product governance review: what firms must do now to get product design right under Consumer Duty

Some firms gave simplistic or generic target market explanations that were not appropriate for the product or service in question, suggesting a lack of understanding of prospective customers' needs or insufficient assurance that the target market aligned with the product or service's risk profile.  Manufacturers are required under PRIN 2A.3.4R to operate product approval procedures that specify the target market at a sufficiently granular level, take account of additional or different customer needs, and assess relevant risks.

Many of the stronger firms began their product or service design process by researching their prospective customers' needs, characteristics, objectives and likely behaviour, with several synthesising this research into customer profiles, for instance, one firm developed seven customer profiles based on behaviour, motivation and service expectations, then categorised customers under each profile to ensure products met their identified needs.  Some firms also used a 'negative target market' to help identify customers for whom the product or service would not be appropriate based on their particular needs, objectives or characteristics.

The FCA found that some firms, when asked to explain how they adapted products and services for customers in vulnerable circumstances, focused instead on their processes to identify those customers. for example, emphasising 'vulnerable customer flags' or signposting customers to third parties, rather than explaining how they then met those additional needs once identified.  Firms should take vulnerable consumers into account at all stages of the product and service design process, in line with paragraph 1.10 of FG21/1.

Many firms enhanced their management information by capturing trends in customer behaviour as potential indicators of poor outcomes, for instance, monitoring product usage and reminding customers of available benefits if they were not using them, as well as tracking spikes in early cancellations, which may indicate that customers did not understand the product they were purchasing at the point of onboarding.  The FCA saw a smaller firm appearing to rely almost entirely on complaint volumes as an indicator of customer outcomes, which risked limited visibility of potential issues that may not have resulted in complaints but may still have led to poor outcomes; firms should use their judgement to identify relevant sources of data to give them the insights they need.

The FCA saw several instances of meaningful changes to products, services or customer journeys, but at times firms appeared not to have validated the impact of their actions.  One firm that introduced clearer ATM withdrawal information in its app and new training for customer support teams saw a 45% reduction in complaints relating to ATM withdrawals in the three months that followed, demonstrating that firms which do close this loop can demonstrate measurable benefit to both customers and regulators.

Positively, many firms had established clear structures for engagement with distributors, for instance, one firm had arrangements where a distributor periodically submitted management information for review in relevant governance forums and provided complaints data on a weekly basis; another firm's distributor engagement enabled it to identify an instance of a distributor making false guarantees about loan benefits, leading to a remediation plan and improved consumer understanding.  However, gaps remain, with some firms having limited visibility over what happened once products were distributed through third parties, increasing the risk that poor outcomes could go unnoticed for longer.

The FCA saw many firms providing limited rationales for their distribution strategies, some treated the strategy as self-explanatory, others explained due diligence of third-party distributors in respect of legal and regulatory requirements but did not fully explain how they were assured that the distribution channels were appropriate for the target market.  Where firms identified out-of-target market distribution and took corrective action, in some cases it was not clear how they had measured the impact of their interventions; the FCA encourages firms to measure and quantify the impact of adaptations to their distribution strategy to assure themselves that they are having a positive effect on customer outcomes.

Smaller firms may have fewer resources and may therefore apply the Duty in a way that fits their size and customer base, and the FCA has included examples of good practice from smaller firms to reflect this flexibility.  One smaller firm supplemented customer feedback and complaints with intelligence from experienced frontline staff, drawing on their knowledge of the customer base and given fewer layers between frontline staff and senior management, sharing that feedback directly with senior management to provide assurance or challenge over the appropriateness of the target market.

The FCA is also consulting on changes to how the Duty applies (CP26/23), including measures to provide greater certainty on where it applies and how it applies proportionately (see our insight on the consultation paper), for instance, proposing greater clarity over how different firms might need to consider customer vulnerability in different ways, and firms may wish to review that consultation before considering major process changes.  However, the examples in the FCA's good and poor practice report do not introduce new regulatory requirements, meaning the existing obligations apply in full now and action should not be deferred pending the consultation outcome.