The six 'Dear CEO' letters are addressed to the CEOs of firms in the following sectors:
- Consumer Finance;
- Consumer Investment;
- Life Insurance;
- Retail Banking;
- Asset Management; and
- All other firms.
In this article we consider general themes, as well as sector specific messages.
Priority Areas for Consideration:
Across the six letters, the FCA highlights several common priority areas for firms to address before the implementation deadline:
Gaps in Customer Data: Ensuring all customer data is complete and accurate so that good outcomes continue to be delivered. In addition, firms should be assessing, testing, understanding, and evidencing the outcomes that customers are receiving.
In particular, by their nature, closed products will be older and so historic data or legacy systems, as well as previously inadequate record keeping (we all remember the old days of paper records in a box under a desk) may present challenges to firms.
However, it is clear these will not be valid excuses and the FCA sets out its expectation that firms should pro-actively tackle these challenges and take proportionate steps to achieve the best possible outcomes for customers.
Fair Value: Ensuring that all products and services offer fair value to consumers. For closed products this is on a forward-looking basis, so the Duty will not be applied retrospectively. However, moving forward from the implementation date, firms need to ensure there remains a reasonable relationship between the price and the benefits of the closed product, with general fair value guidance for open products remaining relevant.
Vulnerable Consumers: Providing appropriate treatment for consumers with characteristics of vulnerability.
FCA notes that it considers customers which hold closed products are at particular risk of harm and for there to be characteristics of vulnerability. Gaps in data, the age and complexity of some old products and legacy systems are all considered to be drivers of harm and more impactful as consumers age and circumstances change.
The FCA provides examples of good practice. This includes closed product agreements receiving individual reviews where a vulnerability was flagged in the system, or firms using the same operations support processes as for open products.
Disengaged Customers: Addressing issues related to customers who have gone away or become disengaged. Ensuring they identify those that falling into these categories and considering how they support and communicate with them.
The FCA notes that the age profile of the products, and therefore the product holders, may mean there is risk that they are paying for products they no longer need or may now be ineligible for. Firms need to consider the appropriate actions, be clear on what decisions have been taken and why they did so, with the express purpose of providing good outcomes.
In terms of actions to consider, one important suggestion made by FCA is for firms to consider what proportionate action they take when trying to trace gone-away or unresponsive customers. It has long been an expectation of the FCA that when delivering redress for historic misconduct, firms should trace individuals to provide refunds and if necessary to use specialist third parties to do so – and it is interesting to see that used as an example here for the ongoing management of a product.
Vested Contractual Rights: Respecting and upholding all vested contractual rights, and firms should consider alternative ways to prevent or manage any harms for existing customers.
Ensuring Good Customer Outcomes
Once the Duty is implemented for closed products and services, firms must demonstrate their commitment to delivering good customer outcomes. The FCA will monitor compliance, focusing on the most serious breaches and taking swift, assertive action when necessary. The guidance aims to ensure firms are prepared to meet the Consumer Duty requirements and promote fair treatment and positive outcomes for all customers.
Any communications issued by firms after the 31 July 2024 for closed products or services must adhere to the Duty's higher standards. However, there are notable differences in how the rules are applied compared to products and services that remain open for sale or renewal. Specifically, for closed products and services, the requirements differ as there are no further sales involved. Consequently, firms are not required to maintain a target market or distribution strategy for these closed products and services, unlike those that are still available for purchase or renewal.
Annex 1 of the letters includes a reminder of the definition of closed products and services. Examples of what constitutes as a closed product are:
- Life insurance portfolios acquired from other firms;
- Mortgages from lenders that have exited the equity release market but still service existing customers;
- Easy access savings accounts no longer available to new customers;
- Structured products sold in 2022 with unique terms not replicated in new offerings.
The FCA's example of a closed service is a wealth manager who previously offered both a mass affluent managed portfolio service and a high-net-worth service with distinct terms. Prior to 31 July 2023, the wealth manager decided to focus solely on high-net-worth investors but continues managing existing mass affluent portfolios without accepting new mass affluent customers.
Sector specific points
Consumer Finance
The FCA understand data gaps and consumer vulnerability are likely to be the most challenging themes for consumer finance firms. To address these issues, firms should proactively ensure that they hold up-to-date basic details. Since many firms are distributors, data gaps can arise when relationships in the distribution chain end. Both manufacturers and distributors must take steps to obtain necessary information from past and current partners or find ways to work around these gaps to ensure good customer outcomes.
Closed products and services pose specific risks to vulnerable customers due to:
- data gaps;
- product complexity;
- inflexible legacy systems;
- changing customer needs.
Firms should review closed-product agreements flagged for vulnerabilities to ensure customers receive appropriate support. Engaging with customers can be difficult, especially with outdated contact details or disengaged customers, which is more common with older closed products. This can lead to potential harm, such as customers paying for unwanted products or not utilising beneficial features.
Firms are not expected to forgo vested contractual rights to address customer harm, though they may choose to do so. Instead, they should consider alternative ways to mitigate harms without altering contractual rights, such as non-contractual actions or contract changes that do not affect remuneration or exit fees.
Consumer Investment
Along with data gaps and consumer vulnerability, fair value is another theme the FCA believe will be challenging for consumer investment firms. The fair value outcome applies to closed products and services on a forward-looking basis. Firms must assess and be able to demonstrate that they are providing fair value to customers in closed products and services.
Life Insurance
Life insurers are expected to face significant challenges due to their extensive portfolios of closed products, which will require numerous product reviews, fair value assessments, and communication tests before the deadline. Key issues for the insurance sector also include data gaps, customers who cannot be contacted, and customer vulnerability.
Retail Banking
Banks, in particular, have shown weaknesses in handling vulnerable customers, even in their open books. Issues identified include:
- Inadequate gap analysis regarding the treatment of vulnerable customers;
- Weak processes for addressing their needs in product design and distribution;
- Limited understanding of vulnerability in target markets;
- Poor identification and recording of customer vulnerabilities.
Additionally, banks struggle with data sharing, insufficient front-line staff training, lack of inclusive communication channels, inadequate testing of customer outcomes, and unclear ownership of customer outcomes. These challenges are likely to be more pronounced in closed books due to older records and less engaged customers. Extra support is crucial when customer vulnerability intersects with complex products or services.
For some banking firms, the challenge of legacy systems remains. This may affect their ability to extract relevant data into current dashboards and management information. Firms should be pro-actively taking steps to ensure they hold basic details which are up to date. Where gaps remain the FCA expect firms to pro-actively work around them to ensure they are achieving good outcomes for customers, for example, through enhanced outcomes-testing for those customers in closed books.
Asset management
The FCA expect firms’ senior management to carefully consider the contents of the letter and take steps to ensure their firm is compliant with the Duty by the deadline. In 2024, the FCA will evaluate how asset managers have addressed the price and value of products and services offered to unit-linked funds. The purpose of this is to assess the measures firms have implemented under the Consumer Duty to enhance outcomes.
All other firms
Firms need to recognise that challenges associated with managing closed products and services such as outdated data, complex products, rigid systems, and changing customer needs can increase risks for vulnerable customers. It is crucial for firms to adhere to the Guidance on the fair treatment of vulnerable customers (FG21/1), ensuring they meet expectations to avoid breaches of regulatory principles. All firms must be adaptable and flexible, offering various support options to meet the needs of vulnerable customers.
