Between the Lines: FCA feedback on the products and services outcome vs its reform agenda

Key area for improvement (FCA Feedback)

Position in the Reform CP

Product and service design and target markets: Some firms continue to rely on broad or generic target markets, making it harder to assess product suitability across different consumer groups or to identify underperformance. When asked how they adapted design and distribution for vulnerable customers, some firms focused on their processes for identifying those customers rather than on how they responded to their needs.

• The Reform CP makes clear that manufacturers are not expected to address individual customers’ needs: that responsibility rests with distributors. However, the FCA proposes to clarify in the Handbook that manufacturers must consider whether any product or service feature could cause foreseeable harm to groups within the target market, with particular attention to those groups with the most prevalent and impactful vulnerability characteristics.
  
  Where a manufacturer reasonably concludes that product features present no particular risks to consumers in the target market, the FCA states that good outcomes could be secured by distributors ensuring the product is offered, explained, and accessed in a way that meets customers' needs, including those in vulnerable circumstances. However, more complex, higher-risk, or untested products – and those with a high proportion of vulnerable customers in their target market – will require greater ongoing scrutiny by manufacturers, including potential revisions to product design, target market assessments, and distribution arrangements where harm is apparent.

Monitoring and review: Good practice requires firms not only to collect data but to use it to identify emerging risks and improve products, services, and customer journeys. Where this worked well, firms were better placed to prevent harm proactively. In weaker examples, firms could not demonstrate how monitoring insights were escalated, tested through governance, or used to improve outcomes across different customer groups.

• This is consistent with the Reform CP, under which manufacturers are expected to assess whether information uncovered through monitoring – for example, distribution outside the target market – poses a material risk of harm, and to undertake root-cause analysis where it does. Where harm is attributable to factors within the manufacturer’s control, they are expected to remedy it.

Distribution and third-party oversight: The FCA noted progress in how firms oversee products and services across distribution chains, with good practice including clear expectations for distributors, appropriate information sharing, and testing of third-party compliance. However, gaps remain: some firms had limited visibility of what happened to products once distributed, increasing the risk that poor outcomes go undetected.

• This sits in tension with aspects of the Reform CP. Many firms operating in distribution chains are uncertain how to meet their obligations under the Duty where they have limited visibility of product performance. The Reform CP seeks to address this by confirming that firms may reasonably rely on statements made by others in the distribution chain and are not required to police other parties' compliance.
  
  The expectation in the Feedback that manufacturers achieve full visibility of post-distribution outcomes is difficult to reconcile with the proportionality framework proposed in the Reform CP. In one draft case study – concerning a bank manufacturing retail structured products – the FCA explicitly states that the bank need not collect granular or customer-level data, track individual customer outcomes, or assess distributors’ compliance to discharge its manufacturer obligations. The Reform CP indicates that manufacturers should focus on themes and trends at target market level rather than individual customers or cases. Whether that standard constitutes 'full visibility’ remains to be seen.