FSA discussion paper: The responsibilities of providers and distributors for the fair treatment of customers (DP06/4)

The FSA has issued a discussion paper (link below) presenting its views on the respective responsibilities of providers and distributors to ensure that customers are treated fairly.

The paper, which includes case studies relating to the sale of a sub-prime mortgage and the sale of PPI at Annex 2, is in line with the FSA’s principle-based approach to regulation and is designed to clarify responsibilities, not to create any new rules or obligations.

Feedback was required by 29 December 2006 The final ‘Statement of responsibilities of providers and distributors’ is expected to be published in final form in March 2007.

Background

The FSA has provided guidance on how firms can address TCF during the ‘product life cycle’, which includes product design, marketing, sales and advice, remuneration, after sales service and complaints, however, it is the FSA’s experience that problems persist at the ‘interface’ between the provider and distributor.

What the FSA wants to achieve

The FSA is looking to increase the effectiveness of retail financial services for the benefit of consumers, helping to ensure that the quality of a customer’s experience is not affected by the channel through which the product is bought - ie direct or through a broker/intermediary.

Summary of responsibilities

The summary of responsibilities below is applicable to both the mortgage and general insurance industries.

Product provider (eg lender)

In essence product providers must ensure that their products meet the needs of the target market, contain clear and understandable information, and are sold through appropriate distribution channels (eg direct, through intermediaries, on-line, on an ‘advice only’ basis etc).

Key responsibilities include:

• the design and testing of products and an assessment in broad terms of their suitability for different types of customers
• selection of appropriate distribution channels
• provision of appropriate information to distributors and, where relevant, customers
• monitoring of the end result, ie in broad terms, to monitor whether there are any indications that products are ending up with the right type of customer, whether the products continue to deliver what the provider promised, and taking appropriate action when concerns are raised
• delivering prompt post-sale service eg when handling customer complaints
• Where a lender designs a product to meet the criteria of a distributor (eg packager) many of the responsibilities, particularly in respect of product design, fall to the commissioning distributor as ‘retail manufacturer’ of the product. The lender, however, must still act with due skill, care and diligence and, where the lender enters into a regulated activity with the customer, it must also have due regard to the interests of the customer and treat them fairly.

Distributor (eg broker/intermediary)

Responsibilities include ensuring that the customer has information that they understand, a suitable product is recommended for an advised sale, and that a post-sale service the customer expected to receive is provided.

In summary distributors must:

• ensure that they understand the provider’s product information and, if not, question the provider and consider whether to distribute the product
• fully consider customer needs and circumstances (where advised) so that a suitable product can be recommended
• ensure that post-sale service is consistent with that the consumer has been led to expect

Where the broker/intermediary creates its own financial promotions it must ensure that they are clear, fair and not misleading. If the broker/intermediary uses a lender’s financial promotions it will not contravene financial promotion rules as long as it can show that it was reasonable to rely on the lender.