Closed product reviews – What now?

The return of the sunny weather harks back to this time last year, when we were in the run-up to the implementation of the Financial Conduct Authority’s Consumer Duty. This year there’s one last aspect of the duty to implement: closed product reviews.

The duty is one of the most significant regulatory changes this decade, aimed at enhancing consumer protections and designed to nudge the industry towards prioritising consumer outcomes above all else.

The FCA is serious about the duty and hasn’t rested on its laurels since introducing it. It has conducted a number of reviews, written Dear CEO letters on a number of topics, and has signalled its intention to use and expand its enforcement powers to bring poor performers into check.

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The focus now needs to be on delivering good outcomes for customers, ensuring that financial products and services are fair, that they meet clear needs, and are sold in a manner that supports and avoids causing confusion. 

So, ensuring that continued compliance is at the forefront of business is important. As has been repeated many times, the Consumer Duty is not just a ‘one and done’ endeavour.

Closed products are products which have not been marketed or distributed to retail customers (including through renewal) after 31 July 2023 but for which there are existing contracts with customers that were entered into before 31 July 2023. In short, a product that exists for customers who bought it before 31 July 2023, but it has not been available (or able to be renewed) on the market since that date.

The Consumer Duty will apply to these products from 31 July 2024.

The extension was implemented to allow firms to upgrade their systems and practices to be able to apply the duty to those historic products. With the deadline almost two months away, the closed product review project should be well underway.

So, what needs to be done?

First up is understanding the July 2023 implementation. If there were any issues or problems, what were they, what can be learned from them, what were the root causes, and would fixes up front solve those issues? Use what worked well last time to inform the closed product review implementation.

Understanding the differences between the open product review and the closed product review is the next step; the framework is similar, but there are critical differences. See our article on this subject for more detail.

A gap audit will shed light on the information you currently hold, and how it differs from the requirements of the consumer duty. The FCA have published plenty of guidance around consumer duty implementation and continued compliance, and one big recurring theme is that firms should work on the biggest issues first. 

The duty is based around customer needs and characteristics and the ability to evidence the actual outcomes that customers are receiving, so one of the most important issues will be to tackle any gaps in data, particularly around the target market, customer characteristics, needs and vulnerabilities. Sheldon Mills, Executive Director for Consumers and Competition, acknowledges that out-of-date or incomplete client records can be a real challenge for closed products, so suggests that in this case, firms take “additional steps to mitigate the risk of harm to consumers – for example through enhanced outcomes testing for these customers.”

Additional testing methods might include customer surveys to gather direct feedback on their experiences and outcomes, or the development of specific KPIs to measure customer outcomes such as financial wellbeing, achievement of goals, and long-term benefits. For some products, it may also be possible to benchmark, comparing customer outcomes with industry benchmarks to identify whether customer outcomes are in line with similar products. Enhancing customer support for closed products, with proactive outreach and follow-up programmes to monitor customer progress and outcomes over time are also good options.

Another clear priority should be aiming to evidence fair value. The FCA understands that some closed products may offer poor value, as customers may be paying higher charges than they would for open products which are subject to competition from other firms and products. But evidencing fair value in those closed products is still a requirement, particularly showing that they don’t exploit customers’ lack of knowledge or behavioural biases. Mills confirms that “we will not judge firms with the benefit of hindsight” but does say that if a firm could have reasonably known that its assumptions were significantly wrong at the time a product was sold, the regulator will consider whether the firm complied with the rules that were in place at the time.

It’s now time to undertake your closed product review, if you want to save time take a look at our template which can be downloaded here.

Our full range of Consumer Duty compliance resources – including webinars and downloadable content – are available to browse and buy here: Consumer Duty Compliance Resources | RB Compliance Consultancy