FCA PRIN 2A.3 – Consumer Duty: Products and Services Outcome
Plain English Guide to Product Governance Requirements
This section sets out the FCA’s Consumer Duty requirements for how financial firms must design, test, and distribute their products and services. These rules ensure that companies create products that genuinely meet customer needs and avoid foreseeable harm. The requirements apply differently depending on whether you manufacture products, distribute them, or both, with special considerations for vulnerable customers throughout.
Product Manufacturers – Core Requirements
General Product Approval Process
Rule PRIN 2A.3.2R – All product manufacturers must establish and maintain a robust approval process before any product reaches retail customers. This applies to both new products launched after July 31, 2023, and existing products that continue to be marketed or distributed.
Detailed Product Approval Requirements (Non-Closed Products)
Rule PRIN 2A.3.4R – For products that aren’t closed to new customers, manufacturers must ensure their approval process covers six key areas:
- Target Market Definition: Clearly identify who the product is designed for, considering the product’s characteristics, risk level, and complexity.
- Vulnerable Customer Consideration: Specifically assess the additional needs and characteristics of vulnerable customers within your target market.
- Risk Assessment: Thoroughly evaluate all relevant risks to your target market, including specific risks to vulnerable customers.
- Product Design Validation: Ensure your product actually meets the needs of your target market, doesn’t harm any customer groups, and avoids causing foreseeable harm.
- Distribution Strategy: Confirm that your planned distribution approach suits your target market.
- Distribution Control: Take reasonable steps to ensure the product only reaches your intended target market.
Special Rules for Closed Products
Rules PRIN 2A.3.5R and 2A.3.6R – If you manufacture products that are closed to new customers, you must regularly assess whether any aspect of the product prevents you from meeting Consumer Duty obligations. You must also check whether the product affects different customer groups differently, particularly vulnerable customers. These closed products don’t need to follow all the standard product approval rules.
Regular Product Reviews
Rule PRIN 2A.3.7R – Manufacturers must regularly review their products, especially when events could materially affect risks to the target market. Reviews must assess whether the product still meets customer needs and whether the distribution strategy remains appropriate.
Rule PRIN 2A.3.8R – When reviews identify circumstances that could harm retail customers, manufacturers must take immediate action to mitigate the situation and inform others in the distribution chain about both the problem and the solution.
Product Testing Requirements
Rules PRIN 2A.3.9R and 2A.3.10R – All manufacturers must appropriately test their products, including scenario analysis where relevant. Testing must verify that products meet the target market’s needs, including vulnerable customers’ needs. Testing should be both qualitative and, depending on the product and risk level, quantitative.
If testing shows a product doesn’t meet target market needs:
- New products: Cannot be launched
- Existing products: Must immediately stop marketing and distribution, cease renewals (if customers can easily switch to equivalent alternatives), and make necessary changes before continuing
Collaboration Between Manufacturers
Rule PRIN 2A.3.11R – When multiple firms collaborate to manufacture a product, they must have a written agreement clearly setting out each party’s roles and responsibilities in the product approval process.
Distribution Channel Management
Rule PRIN 2A.3.12R – Manufacturers must select appropriate distribution channels for their target market and provide distributors with adequate information to enable compliance with these rules. This includes all relevant product information and details about the approval process.
Product Distributors – Core Requirements
When Manufacturer Isn’t FCA-Regulated
Rule PRIN 2A.3.13R – If you distribute products made by unregulated manufacturers, you must take reasonable steps to comply with all the distributor rules that would normally apply.
Distribution Arrangements
Rule PRIN 2A.3.14R – All distributors must maintain distribution arrangements that avoid or mitigate foreseeable harm to customers, properly manage conflicts of interest, and ensure the target market’s needs are properly considered. This applies to both new products distributed after July 31, 2023, and existing products, including contract renewals.
Information Gathering from Manufacturers
Rule PRIN 2A.3.16R – Distributors must have effective procedures to obtain sufficient information from manufacturers about products, including understanding product characteristics, target markets, vulnerable customer needs, distribution strategies, and ensuring appropriate distribution.
Distribution Strategy Alignment
Rule PRIN 2A.3.17R – When distributors create their own distribution strategy to supplement the manufacturer’s approach, it must be consistent with both the manufacturer’s intended strategy and the identified target market.
Supporting Manufacturer Reviews
Rule PRIN 2A.3.18R – Distributors must provide manufacturers with relevant information upon request to support product reviews, including sales data and information about distribution arrangement reviews.
Regular Review of Distribution Arrangements
Rule PRIN 2A.3.19R – Distributors must regularly review their distribution arrangements to ensure they remain appropriate and verify they’re only distributing products to the intended target market.
Rule PRIN 2A.3.20R – When reviews identify issues, distributors must amend their arrangements, take action to mitigate harm, and promptly inform relevant parties in the distribution chain.
Special Provisions and Exceptions
Existing Contract Rights
Rules PRIN 2A.3.21R to 2A.3.23G – For contracts entered before July 31, 2023, firms don’t need to waive existing vested rights when taking appropriate action, unless there was a breach of rules in force at the time. Vested rights typically include payments already due, remuneration for services provided, and contractual early termination charges.
Application Scope
Rules PRIN 2A.3.24R to 2A.3.28R – These rules don’t apply to firms already subject to specific PROD regulations for products within those scopes. However, closed products not already covered by PROD rules must follow the specific closed product requirements. The rules also don’t apply to funds in the process of winding up or termination.
Alternative Compliance Routes
Rules PRIN 2A.3.29E to 2A.3.30E – Some firms may choose to comply with either these Consumer Duty rules or relevant PROD chapter requirements. If choosing PROD compliance, any contravention of PROD rules may indicate contravention of these Consumer Duty provisions.
This guide provides a plain English interpretation of the FCA regulations. For legal compliance, always refer to the official FCA Handbook text.