As the countdown to the July 2024 deadline for closed products begins, Sheldon Mills, FCA Executive Director of Consumers & Competition, shares insights into the progress made, the challenges encountered, and the strategic roadmap for the financial services industry.
It has been just over half a year since the Financial Conduct Authority’s Consumer Duty came into force for open products. Mandated by Parliament after cross-party support, it has rapidly become our most talked about piece of regulation.
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By the end of July, it will have been a year since the introduction of the Consumer Duty. This is also the deadline for compliance for all closed products. And I will say more about closed products later.
No one likes a looming deadline. But don’t panic. A lot can be achieved in 6 months to a year – some of our greatest inventions were created, our most important monuments erected, and our world connected in just that time frame. And besides, you are not starting from scratch unlike many of our inventors.
When naval engineer Richard James accidentally knocked a tension spring off a shelf, he watched as it mesmerisingly ‘walked’ across the floor. Six months later in 1943, the Slinky was launched at a toy fair and remains a hit to this day.
In 1989, a British computer scientist proposed the creation of a global hypertext system that would let users easily access information. He spent the next 3 months developing the World Wide Web. That’s right, it took Tim Berners-Lee 3 months to start the internet.
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By GlobalDataThe Churchill War Rooms, the underground network of bunkers that served as the headquarters for masterminding Britain’s response to World War II, took just 8 months to create with a workforce of 600 builders.
That is fewer bodies than the number of consultants some have had in to advise on the Consumer Duty. Not that we have anything against consultants, I hasten to add.
Progress so far
Today I wanted to touch on the progress we have seen 6 months on since the first Consumer Duty deadline, identify some of the challenges and look ahead to the deadline for closed products.
We need to remember that the Consumer Duty is not just in the interests of consumers – it is in the interests of firms and our economy too.
As it is an outcomes-based regulation, it aims to give firms space to create an environment for healthy competition and innovation based on high standards.
Those high standards – driving competitiveness overseas – protect our consumers and the integrity of our markets and should fuel greater confidence in our financial services and products, in turn growing our financial services sector.
A bit of upfront effort now, should mean fewer rules down the line.
Recently, we have published our findings of good and bad practice in a report. Many firms have already made great progress on the Duty. For example, they are offering the right products and services to the right customers; eradicating jargon and moving clients to less bespoke and cheaper options where that is a better fit.
We have seen board-level leaders giving serious consideration to what the Duty means for them culturally and operationally. Separately, we have seen some firms offering fairer value too, by increasing value received by savers, reducing fees, and maximising benefits to customers.
We also published results from a survey of smaller firms, looking at their progress on implementation. We were pleased to see significant progress since the last time small firms were surveyed.
Of course, we have identified there is still much room for improvement.
We do not want to see firms waiting to see if we will intervene to address an issue. Firms also need to get serious about their data and not assume they can just re-package existing information. And we want to see the Duty embedded across every firm at every level, with leadership from boards.
Price and value
Perhaps the most challenging outcome of the Consumer Duty for firms to meet is that of fair price and value.
We do not set prices: Our job is to make sure that markets can work well. They can’t if products and services fail to offer fair value, or if they offer features that lead to foreseeable harm.
On a positive note, it has been reported that an impressive 37% of advice firms have reviewed or changed their fees structure since the Consumer Duty was introduced.
But there are areas where firms could do better.
Many of the fair value assessments we have seen are not relying on solid data and other credible evidence to justify the products’ value to retail customers.
Some firms for example have relied solely on benchmarking against the market when considering their pricing, rather than considering a fuller range including the real value that a consumer derives compared to the price they pay. The equivalent of a Google Shopping search does not prove to us that a customer is getting a fair deal.
We want to see firms considering all the aspects of fair value at the product level and considering the impact on different consumers.
Board reports will come under greater scrutiny as we look to these to evidence the steps firms are taking to drive good outcomes.
Opening up on closed products
We know many firms have applied their laser focus on open-book products ahead of the Consumer Duty coming into force.
But the clock is also ticking for closed products which will come under the scope of the Consumer Duty at the end of July.
Under the Consumer Duty, closed products are ones that were sold before 31 of July 2023, but have not been marketed or sold to new customers since.
We gave firms an extra year to get to grips with the complexity of older systems and the increased work involved.
There may be gaps in the data you hold from legacy systems for example.
We know you may not have every answer. But you need to have a plan for how you will produce one, and how your firm will evidence that it is delivering good outcomes for customers who hold closed products.
From the end of July, the requirements of the Duty will apply to closed products as they do to open products.
The main challenges firms have identified around closed products include:
- Being able to evidence you’re delivering good outcomes for consumers, and addressing gaps in the customer data you hold.
- Determining fair value on closed products.
- Taking action relating to less engaged and the ‘gone away’ customers, including the support offered and how you assess whether these customers understand the products they hold.
- Ensuring that the design of your products and services deliver good consumer outcomes over the long haul, even where your firm has vested rights.
Let me go into each of these in a little more detail.
Gaps in monitoring data
First, gaps in monitoring data.
A key part of the Duty is that firms are able to evidence the outcomes their customers are receiving, whether that relates to life insurance, mortgages, cash savings, funeral plans or any other open or closed product. We know that one of the challenges firms face are out-of-date or incomplete client records for closed products.
They may not have on file the consumers’ characteristics and needs, sales records, or historic performance of the product.
This could make it harder to serve consumers appropriately – particularly those with characteristics of vulnerability.
Where a firm can’t fill gaps in its records, it should take additional steps to mitigate the risk of harm to consumers – for example through enhanced outcomes testing for these customers.
Fair value in closed products
The second challenging area is fair value in closed products.
We know some closed products may offer poor value.
In some cases, customers in legacy products might pay higher charges than they would for open products, where firms are competing for new business.
In all situations, firms must assess, and be able to demonstrate, that their closed products provide fair value to customers.
Firms should be confident that they don’t exploit consumers’ lack of knowledge or behavioural biases.
Firms can take into account the costs and benefits that were incurred before the Duty came into force.
We will not judge firms with the benefit of hindsight.
We don’t necessarily expect firms to re-price products or to repeat underwriting in every case if conditions such as life expectancy or economic conditions have changed.
However, if a firm could have reasonably known that its assumptions were significantly wrong at the time a product was sold, we will consider if the firm complied with rules that were in place at the time.
Keeping the customer connection
A third challenge is how to engage with customers, particularly the elusive ones.
Many firms do their best to track down less engaged customers. Some do more than others.
We know sometimes if a firm has lost contact with a customer because the customer does not want to be contacted or does not engage with the product.
The key issue is that the lack of engagement either by a firm or customers may lead to problems such as:
- Customers paying for products they no longer need or want.
- Customers paying for products they are no longer eligible for.
- Customers not being aware of key changes to products over time – this may mean they are not able to use it as expected.
This isn’t a new problem, but we still expect firms to go further to drive good outcomes for these customers.
They can do this by communicating more effectively; providing consumers with the information they need, at the right time, presented in the way they understand.
Firms will need to test, monitor, and adapt their communications approach if these are not driving the right outcomes for consumers.
Vested rights
A fourth challenge is vested rights.
Vested rights could include annual fees that are due or exit charges.
For example, a life insurance policy might have an exit charge written into the contract, that consumers must pay if they want to cancel the policy.
Sometimes these terms enshrined in vested rights may lead to poor outcomes for consumers with closed products – for instance, if a fee is significant and undermines the benefits of the product.
Where a problem is identified in a closed product, we expect firms to take appropriate action to mitigate harm.
Some firms may take the view that giving up their ‘vested right’ and reconsidering fees or charges, for example, is the most appropriate way of delivering a good outcome to their customers.
Others may decide they can best support their customers through clearer communications on what other deals are available and support on how to switch.
Closed book life-time mortgages is one product area where we may see more customers develop characteristics of vulnerability over the life cycle of the product.
It is particularly important to offer extra support where firms see an intersection of vulnerability of consumer and complexity of product or service.
Firms’ capacity for the Duty
By now, firms should have a clear roadmap to comply with the Duty by the deadline for closed products which is 31 July 2024. At this point, all products will be inside the scope of the Consumer Duty.
Firms should have reflected on what lessons they learned in the run up to the first deadline, filled in the gaps on open products, and made sure closed products will comply by the deadline.
We expect sectors that will be impacted more by the closed products and services deadline to include life insurance, funeral plans, consumer investments, consumer finance and retail banking.
Some firms have suggested decommissioning some of their closed products, with the aim to migrate customers to alternative open products.
If firms are considering withdrawing closed products, they need to consider the impact this will have on consumer outcomes and make sure they are not causing foreseeable harm.
If firms are experiencing problems, we would like to hear from them sooner rather than later so we can tackle this together. You can expect further communication from us in the weeks ahead targeting closed products.
At all times, when supervising and enforcing the Duty, we will be informed by data and metrics as to where we prioritise our focus. It is not a once and done exercise for firms, or for us.
We know that firms’ capacity is not infinite and that many will be working on open products. They may be concerned that they now have to tackle closed products too.
At all times, we expect firms to take a risk-based approach to prioritisation. You do need to get it all done by July but if you are struggling with the order, ask: Which products or services are likely to cause the greatest harm? Where is the most work needed? This, rather than if a product is open or closed, should be the key factor – particularly once the July deadline has passed.
This is where your board report will be key: it will be used to assess and evidence how firms have provided good outcomes for consumers under the Duty. The first one will be due by the end of July.
It is worth reminding ourselves that we have been given an extra day to implement the closed product aspects of the Duty, as it is a Leap Year.
Now if it took under a year to create the Slinky, build the Churchill War Rooms and yes, even the internet, it is not beyond all our capability to apply the same grit, determination, and consistency to make all our products and services Consumer Duty compliant.
Getting it right for consumers means higher standards and healthier competition. It means improving trust in our sector, it means supporting growth and innovation, and it means boosting the UK’s competitiveness on a global stage. Competitiveness comes from being a beacon of high standards and fair value – and from entrenching consumer trust. This in turns attracts investment.
The prize is huge if we can get this right.
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