To determine whether the standard of reasonableness has been met, the FCA will apply an objective test, asking: “Has the firm met the standard that could reasonably be expected of a prudent firm carrying on the same activity in relation to the same product or service, and with the necessary understanding of the needs and characteristics of its customers?”
Despite these welcome clarifications, the draft rules still lack detail, so at this stage businesses may find it challenging to get to grips with the nuances of the new duty and decide what steps they should be taking before the final rules are published later next year.
There are several areas businesses can focus on, depending on their role in the product development and distribution chain.
Companies should consider how central a fair value assessment is to their product oversight and governance processes.
Fair value will need to become central to product oversight and governance processes and must be a key consideration for any business setting product pricing, product fees and charges, advice fees or platform fees.
Businesses providing advice will need to look at their own advice charges (including website disclosures about fees), and consider a product’s overall cost to a customer by reference to all the product and distribution charges in the distribution chain.
Businesses should consider if they can demonstrate how customer feedback (and testing customer understanding) is translated into continuous improvements in products and services.
Although businesses are already expected to ensure individual communications are fair, clear and not misleading, meeting the new communications outcome will require them to look again at their overall approach to communicating information.
They will need to make sure they equip their customers to make effective, timely and properly informed decisions.
Businesses must also monitor their communications on an ongoing basis, and tailor and adapt them where necessary to make sure they are suitable.
Businesses should review existing compliance monitoring frameworks to assess if there is sufficient focus on outcomes testing rather than narrow compliance with specific rules.
Across all areas of the product lifecycle, companies will be expected to monitor and regularly review the outcomes their customers are experiencing.
Outcomes testing should form a key part of first and second-line compliance monitoring, alongside monitoring compliance with specific rules.
Businesses should consider what proportion of their complaints relate to product switching, product cancellation and customer service levels.
It is clear that these continue to be key areas of interest for the FCA. Companies should ensure they are using complaints data appropriately to identify and address any concerns in these areas.