Dear CEO: Implementing Consumer Duty for Closed Services by July 2024
As the additional year given to complete closed product reviews draws to a close, the FCA have engaged with firms by way of a Dear CEO letter, issued in May 2024. This is in keeping with the communication strategy employed by the FCA during the implementation period of the Consumer Duty, the regulator taking the view that enhanced engagement and information sharing will improve compliance with the duty.
The FCA has released a number of versions of this letter, each sector specific, but the general messages are consistent across them all. This article will focus on that message.
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The letter offers important insights into the thinking and expectations of the FCA, setting out:
the application of the Duty to closed products and services;
priority issues that are particularly acute or widespread in closed products and services;
vulnerable customers
action prompts to ensure firms are prepared for the 31 July 2024 deadline for closed products and services, and
a reminder of the definition of closed products and services and an overview of the rules.
Application of the Duty to Closed Products
Remember that closed products are those which are not open for sale or renewal but still have a number of customers engaged with the product. The duty applies to those products from 31st July 2024, meaning that from this date firms must ensure their actions are consistent with the duty. The starting point is to conduct a closed product review which aims to identify its intended benefits, risks and potential harms to its customer base. Where foreseeable harm is identified then steps must be taken to remove that harm, or if it is not possible to remove the harm, mitigate it before the end of July. It is for this reason that the FCA has previously encouraged firms not to wait to conduct their reviews as time will be needed to complete the mitigating actions.
Furthermore, the review should also focus on identifying where there is a lack of good faith in the product design or delivery, such as customer support, as well as indications there is a lack of value which could prevent customers from pursuing their financial objectives. Again, mitigation is required before the implementation date.
In the letter the FCA does repeat some messages they have given previously, including the differences between the closed and open product reviews. The FCA doesn't expect the target market to be identified (although many are still doing this as it helps firms to understand the needs of their customer base) nor a distribution strategy to be created.
Priority Issues
The Dear CEO letter contained some really interesting points, including the areas the regulator expects organisations to be focusing on right now, these include:
gaps in firms’ customer data
fair value
treatment of consumers with characteristics of vulnerability
gone-away or disengaged customers
vested contractual rights.
Data Gaps
The main objective of the closed product review is to assess whether customers are receiving good outcomes. As this is a new requirement there is likely to be data gaps, especially where data is older or relationships with others in the distribution chain are no longer in place. The Dear CEO letter makes it clear that firms are expected to take reasonable steps to obtain the information they need to properly assess the outcomes received by customers.
Some interesting questions are raised in the letter, designed to help firms ascertain the action steps they should be taking:
Have you identified any material data gaps for your firm?
Have you explored different ways to identify and fill material data gaps, and to cleanse and update existing data?
Where data is not available, what action can you take to ensure your firm is delivering good outcomes for customers, both in advance of the 31 July 2024 deadline and ongoing?
Fair Value
Customers must receive fair value, this applies to customers on closed products as well as open. Therefore, firms should ask themselves whether they have applied the fair value framework to closed products in the same way that they did for open products. This should include understanding the total cost paid by customers and checking whether this is fair in comparison to the product or service provided.
Vulnerable Customers
An entire section is dedicated to vulnerable customers, highlighting just how important the treatment of such customers is to the regulator. They quote from their financial lives survey which states that 47% of adults will show vulnerability at some point and use this to press the message that all firms will encounter vulnerable customers. As a result, reviews should not state that a firm, or product, does not have any vulnerable customers.
The regulator's concern in respect of vulnerable customers is two-fold. Firstly, whether legacy systems are preventing the proper recording of vulnerability, repeating the data point referred to earlier in this article and, secondly, consistency of treatment of customers – customers of closed products should receive the same support as other vulnerable customers.
Action Prompts
Threaded throughout the Dear CEO letter are action prompts for firms, some of which are genuinely interesting because they demonstrate the way in which the regulator is looking at the duty. For example, they ask if the firm has assessed the effectiveness of its activities and channels to re-contact customers marked as gone away? This particular question reflects the detail the regulator expects firms to use when looking at the processes related to products and services, seeking out areas for improvement.
They also say “where you have identified that your firm has vested rights and is causing foreseeable harm to the customers of a closed product or service, what alternative action could you take to deliver good outcomes for your customers and avoid the harm?” demonstrating they will not allow anything, including vested interests, to stand in the way of avoiding harm, instead expecting firms to find another way to reduce that harm.
The Dear CEO letters can be found on the FCA website here.
Next Steps
You may be interested in our closed product review template and/or Board Report template. Both of which can be found here.
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