With the Consumer Duty deadline for closed products looming, the Financial Conduct Authority has urged firms to devise a plan to evidence that they are delivering good outcomes for customers who hold closed products.
Under the Consumer Duty rules, closed products are ones that were sold before the 31 July 2023 but have not been marketed or sold to new customers since. Firms were given an extra year to get to grips with the complexity of older systems and the increased work involved.
The FCA said a key challenge for firms was out-of-date or incomplete client records for closed products. Not having access to consumers’ characteristics and needs, sales records or historic performance of the products could make it harder for firms to serve consumers appropriately, particularly for vulnerable consumers.
In a speech held at a KPMG event, Sheldon Mills, executive director, consumers and competition at the Financial Conduct Authority, said: “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.”
Mills said firms also face a challenge proving fair value in closed products. In some cases, customers in legacy products may pay higher charges than they would for open products, where firms are competing for new business.
Mills said: “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.
“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.”
A third challenge for firms is how to engage with customers. While the FCA acknowledged that a customer may not want to be contacted or engage with the product, it warned that a lack of contact can lead to numerous problems. These include customers paying for products they no longer want or need; paying for products they are no longer eligible for; or not being aware of key changes to products over time.
To overcome this challenge, the City watchdog urged firms to communicate more effectively, providing consumers with key information 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,” explained Mills.
Finally, firms will need to consider vested interests. Sometimes, the terms enshrined in vested rights may lead to poor outcomes for consumers with closed products, for example if a fee is significant and undermines the benefits of the product, the watchdog said.
Firms will be expected to take appropriate action where a problem is identified. For some firms, this may mean giving up their “vested right” and reconsidering fees or charges. For others, it may lead to firms supporting their customers through clearer communications on what other deals are available and support on how to switch, the FCA said.
Mills added: “By now, firms should have a clear roadmap to comply with the Duty by the deadline for closed products. 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.
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.”
