The Financial Conduct Authority (FCA) has challenged firms to improve how they oversee third parties delivering products and services on their behalf.
The call comes as the regulator identified a number of ways firms can better meet customer needs under Consumer Duty.
The regulator also called on firms to better define their target markets to make sure products were suitable and worked as intended from the outset, and improve their identification of emerging risks from unsuitable products and services which lead to poor customer outcomes.
In its Products and services: good practice and areas for improvement review the FCA explored how a range of financial services firms had responded to the Consumer Duty implementation.
Limited rationales for distribution strategy
Touching on how firms could improve how they oversaw third parties that delivered products and services to customers on their behalf, the regulator revealed it saw many firms providing only limited rationales for their distribution strategies, with some firms giving overly generic explanations of their distribution strategies.
It noted, many firms who had identified instances of products or services being distributed to customers outside the target market, had identified whether the manufacturer or distributor, or both, needed to make changes based on a root cause analysis.
They then took action to attempt to rectify the issue.
However, in some cases it was not clear how the firm had measured the impact of its interventions.
Simplistic target market explanations
The FCA urged firms to better define their target markets to make sure products were suitable and worked as intended from the outset.
In this area, the regulator added some firms gave simplistic or generic target market explanations that were not appropriate for the product or service in question.
It suggested a lack of understanding of prospective customers’ needs, or insufficient assurance that the target market aligned with the product or service’s risk profile.
Furthermore, when asked to explain how they adapted products and services to meet the needs of customers in vulnerable circumstances, some firms focused instead on their processes to identify those customers.
MI inaction and reducing poor outcomes
But the regulator also found that while many firms tracked defined outcome metrics through both routine and risk-driven reviews, some firms appeared not to use management information (MI) to trigger targeted, risk-driven reviews when potential issues emerged in relation to customer outcomes.
It added firms were required to act in good faith and take appropriate action on potential harm identified in their MI.
However, the review also found improvements in how firms designed, monitored and distributed products and services under the Consumer Duty, which reduced the risk that people received poor outcomes from buying unsuitable products.
In one example, complaints about ATM withdrawals fell by 45% in three months after a firm made app information clearer and improved staff training.
Many firms were also found to have improved product governance, strengthened how they monitored customer outcomes, and took greater responsibility for how products and services were distributed.
‘Good practice really matters’
Charlotte Clark, director of dross-cutting policy at the FCA, said: “Consumers should be able to trust that the products and services they rely on to navigate their financial lives are designed for their needs, monitored properly, and deliver the outcomes they expect.
“The good practice we’ve found really matters because where products are poorly targeted, or firms lose sight of what’s happening across their distribution chains, consumers can lose out – whether that’s poorly performing products, slow complaint resolution, or paying for services that don’t meet their needs”.
Rebecca Deegan, director at Fair By Design, said: “We see the every-day impact when products and services aren’t designed around people’s lives, and how it can contribute to financial exclusion and the poverty premium.
“This report is a welcome and practical contribution to improving consumer outcomes.
“The examples it highlights, including the use of inclusive design principles, show how firms can move beyond identifying vulnerability to designing, monitoring and adapting services that work better for everyone.”
