On 16 May 2024, the FCA published six ‘Dear CEO’ letters, setting out an overview of the priority issues and actions which it expects firms to consider prior to the 31 July 2024 deadline for implementing the Consumer Duty to closed products and services.
In this alert, we set out an overview of the key points made by the FCA in the letters, which are addressed to the CEOs and/or Directors of the following firms: asset management firms; consumer finance firms; consumer investment firms; life assurance firms; retail banking firms; and firms in all other sectors.
A. Application of the Consumer Duty to closed products and services
The letters each include a re-confirmation of the scope of application of the Consumer Duty to closed products and services. In summary:
- A product / service will be considered ‘closed’ within the meaning of the Consumer Duty if (i) existing customers took out a contract before 31 July 2023 and (ii) the product/service has not been marketed, distributed, or renewed since 31 July 2023.
- A helpful example provided by the FCA is where a wealth manager continues to provide portfolio management services to existing mass affluent customers (pre-31 July 2023 contracts), but has not taken on new mass affluent customers from 31 July 2023 in order to focus on an alternative high-net-worth investor portfolio management service.
- The application of the Consumer Duty to closed products and services will not be retrospective and will therefore not apply to past actions. Rather, the rules will apply to any action (including communications) taken by the firm from 31 July 2024.
- Not all of the Consumer Duty rules apply to closed products and services in the same way as they apply to open/new products and services (e.g. there is no requirement for a target market or distribution strategy). As part of their implementation projects, firms should have undertaken an exercise to understand: (i) which PRIN 2A rules will (and will not) apply to their closed products and services; and (ii) what gaps can be identified against the rules.
B. Priority areas and actions
As part of its regular evidence sessions with the House of Commons Treasury Committee, the FCA reported on 8 May 2024 that from a survey undertaken in April, 83% of firms within the survey population were aware of the incoming closed products implementation deadline. Amongst these firms, particular thematic issues have arisen in their implementation projects – the FCA has categorised these in the Dear CEO letters as the following five ‘priority areas’:
i. Gaps in customer data. As a result of legacy systems, inadequate record-keeping practices at point of sale, lack of information exchange across distribution chains (as mentioned in particular in relation to firms in the consumer finance market), or as a result of ‘gone away’ / disengaged customers (see (iv) below), firms may hold outdated information, or information with material gaps, regarding their customers (including basic details such as contact address and phone number, as well as information on those customers’ financial circumstances).
To comply with their obligations to assess, test, and evidence the outcomes consumers are getting, firms should: (i) identify any material gaps in customer information held; (ii) proactively take steps to fill any such gaps and to ensure information held is up-to-date; (including by approaching other parties in the distribution chain), and (iii) where information is not available, determine what action the firm will take to ensure good outcomes for those customers (ahead of 31 July and on an ongoing basis).
ii. Fair value. Firms must conduct fair value assessments on their closed products and services to demonstrate that the total price paid by a customer is commensurate to the benefits of the product or service. The FCA has suggested that they expect to see fair value frameworks applied consistently across a firm’s open and closed products and services – where different approaches are taken for closed products, there should be a reasonable (documented) justification for this.
iii. Treatment of vulnerable customers. Firms should determine whether they should take any action – including increased monitoring or support – for vulnerable customers of closed products or services. The FCA is mindful that the risks to vulnerable customers are often exacerbated by other issues identified in closed products and services, for example gaps in customer data, the inherent complexity of some of these products and services, and that consumers’ circumstances and needs may have changed without the firm’s awareness.
In particular, the FCA has highlighted the identification and monitoring mechanisms used by firms in the retail banking and wealth management sectors. For example, the FCA found in a recent survey of the wealth management sector that 49% of firms had not identified any vulnerable clients within their retail client base and that less that 1% of retail clients were reported to have characteristics of vulnerability (even if they were not themselves classified to be vulnerable overall). The FCA has also found that many retail banks do not have appropriate processes in place once a customer has been identified as vulnerable – including testing outcomes vis-à-vis other groups of customers, ensuring inclusive communication and support channels, and providing suitable training to front-line staff.
iv. Gone away / disengaged customers. Firms should have adequate systems and controls to identify when a customer is deemed gone away / disengaged. On identification of such a customer, the firm should consider taking reasonable and proportionate steps to re-contact gone away or disengaged customers – depending on the particular circumstances (and whether there is a risk of consumer harm, for example as a result of customers paying for products/services they no longer need), this might include using third party tracing services. Whilst it is sensible to have a protocol in place for what the firm does if it fails to reach a customer after a reasonable number of attempts, this should involve a flexible framework that allows for a case-by-case assessment of the particular circumstances, rather than a ‘one-size-fits-all’ approach.
v. Vested contractual rights. Interestingly, the FCA states that whilst it does not require firms to give up vested contractual rights (i.e. rights to which the firm is legally entitled, for example annual fees or exit charges), firms are “free to do so”. The regulator does expect firms to assess whether they should take action to prevent or mitigate harms to customers – including offering to switch the customer to an available open product or service which will better address their needs, or providing greater support. In practice, it will likely be difficult in most cases for firms to justify retaining a vested right where this may cause material consumer detriment that does not occur with comparable open products and services.
* * We note that in the asset management letter, the FCA has listed the priority areas but is silent on the application of these areas to asset management firms and the resulting actions they should take. This does not mean that there are no specific actions for asset management firms to take – rather, the prudent approach would be for firms to apply guidance provided to other sectors to the extent they apply, or can be adapted, to asset management.
C. Next steps
All firms should carry out the following actions ahead of 31 July:
i. Annual report: Boards (or equivalent) must review and approve their first Consumer Duty annual report with respect to all new and open products and services.
The annual report is expected to document: (a) the firm’s assessment of whether its products and services delivered good outcomes in line with the Consumer Duty; (b) where there has been evidence of poor outcomes, an evaluation of the impact and root causes of any identified issues; (c) the actions taken to remediate or mitigate any identified issues or risks to the delivery of good outcomes; and (d) whether the Board considers that its business strategy is consistent with the Consumer Duty.
The FCA has recently clarified that firms should be prepared to be asked to submit their annual reports to the FCA.
ii. Closed products implementation plan: Firms should have a good understanding of the Consumer Duty rules which will apply to their closed products and services, and have mapped and executed a clear, time-bound and well-resourced implementation plan accordingly.
As with the Consumer Duty implementation for open products and services, the FCA expects firms to progress their implementation plans in order of priority – i.e. addressing those areas which are likely to result in greater consumer harm.
iii. Information exchange: Firms should ensure that they continue to share relevant information with other firms in their distribution chains – this includes both manufacturers providing information to distributors about products and distributors providing feedback to manufacturers to assist with the manufacturers’ product review processes.
Whilst the FCA is expecting overall compliance with the rules by 31 July, it has made clear (for example in comments to the Treasury Select Committee on 8 May) that it will not enforce every technical breach identified; rather, it will focus on “the most egregious breaches and harms” with a view to aiding firms to adjust to the new regime in an orderly way.
Separately, the FCA has announced in its regulation round-up for April that it will be undertaking a two-stage multi-firm review to assess the delivery of the consumer support outcome, which it will report on in early 2025 –
- Stage 1, summer 2024: FCA will contact approximately 400 firms across various sectors to get insight into the levels of support being provided to customers.
- Stage 2, autumn 2024: FCA will request detailed information from a subset of the 400 firms on their consumer support offering, with the objective of identifying and sharing good (and bad) practices.
Our team would be happy to address any questions you may have.
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