The Financial Conduct Authority (FCA) has a new remit and is clearly presenting itself as a different regulator from its predecessor. Recent announcements by the organisation's CEO, Martin Wheatley, suggest that the next 12 months will see an increase in visible, high-profile actions to tackle market and conduct abuse. Step forward the new weapon in the regulator’s armoury: the widely debated ‘product intervention’ powers that mean the FCA can act first and ask questions later.
Although the gravity of these powers was raised as a key issue in a recent consultation, the FCA applied significant effort to obtain them in law, so they can apply them swiftly with no prior consultation. They should come as no surprise to a financial services market that still has issues ensuring that products are only marketed to those consumers for which they are suitable.
The implications are clear: firms need to act quickly to review at-risk portfolios and governance processes - the jaws of the FCA are ready to take their first bite.
Why should firms be concerned?
The product intervention rules (PIR) have been referred to as 'TCF with teeth'. They are. The FSA’s Treating Customers Fairly (TCF) principles were originally developed to embed a consumer focus at all stages of the product and service life-cycle. The new PIR, however, recognise this is simply not sufficient in a complex and dynamic market where firms devote huge resources to the marketing and launch of new products on a daily basis. The FCA has indicated that it will focus most closely on products such as unregulated collective investment schemes (UCIS), absolute return funds, traded life policy investments (a type of UCIS commonly referred to as ‘death bonds’) and exchange traded products.
Firms are still operating in a market where products can be marketed inappropriately to consumers in large volumes - something that should be a huge cause for concern to consumers, the regulator and the firms themselves. Internally, many organisations will be aware of product features or aspects of the sales or advice process which they would not wish to be given greater visibility (for example, slow settlement speeds on switching funds on legacy platforms or product features which require new policies to be set up where legacy platforms do not have the functionality implied by the existing contract terms). Indeed, many such issues never come to the attention of the regulator, being dealt with in good faith by the firms before issues become systemic. However, not all firms have the process, capability or desire to amend products if the errant features are not in widespread use, and/or the commercial implications make remediation commercially unattractive.
Where previously some firms may have judged that the risk of such a strategy was limited, the tide is turning. Where the FCA identifies the risk of widespread consumer detriment, it will move rapidly to ensure the offending products or features are withdrawn from the market.
Which organisations need to act quickly?
For many firms, the new legislation will not present a major issue. Those with flexible systems and sound product governance will be able to act swiftly to make amendments and ensure products either do not have to be withdrawn or, alternatively, will be able to restrict their offer from inappropriate market segments at speed.
However, there are a number of organisations that should be seriously concerned, particularly:
- firms where product amendments represent a long and laborious process that lacks speed and efficiency (for example, old personal pension contracts which need to be transferred internally to a new platform to facilitate drawdown)
- organisations that have significant legacy platforms, where amendments represent a real challenge (such as differences in fund-switching times between legacy platforms and new wrap platforms)
- organisations that would find it difficult to withdraw quickly from specific market segments.
Chief risk and compliance officers who recognise any of the above symptoms in their organisations should be very concerned. They need to take swift action.
What can firms do to resolve product issues and avoid the jaws of the FCA?
There are three immediate questions that firms should be considering as they shape their future conduct strategy:
- can you be sure that your products do not contain features that are inappropriate for the consumers to which they are marketed? For example, do packaged banking accounts contain insurance which customers may not be able to claim on? If so, what action is being taken to make customers aware the product may not be appropriate for them?
- where product features are known to be problematic, can you demonstrate a clear plan to remove or restrict their use to avoid detriment? It can be highly resource-intensive to conduct retrospective reviews of product appropriateness. However, it is better for firms to be in control of such activity, in order to plan and allocate resource appropriately. The alternative could be having action imposed, either through the FCA's intervention powers, or as a result of the findings from a Section 166 review
- could you respond rapidly to a request to remove offending features and how quickly could this be done across different platforms? It is well known that many firms have difficulty in isolating and removing individual product features if required (for example, ensuring fund charges have been properly calculated across legacy products and that illustrations correctly take into account historic charging structures such as loyalty mechanisms when migrating to new platforms). It is not uncommon for a product to need to be taken offline or for a new product to be created to deal with such issues – causing significant disruption if not managed if an effective way.
Firms will need to reassure themselves that they can deal with legacy issues quickly, by looking at previous examples where amendments have been required at speed. They need to ask: ‘would this be good enough if we were challenged by the FCA?’
The areas which cause issues here are complex and, as a result of legacy platforms still in use, present significant architectural challenges to the firms involved. PA has significant experience in providing review and assurance in this area, having mapped the architectural requirements arising from the FSA's retail distribution review for a large and complex multi-channel product provider and wealth manager.
To review potential problem areas in your firm, please contact us now.