As the financial services sector approaches the closed products and services Consumer Duty deadline of 31 July 2024, the Financial Conduct Authority (FCA) has issued a reminder to firms managing closed products and services. The deadline marks the one-year anniversary of the implementation of Consumer Duty for open products and services, and signifies a pivotal moment, mandating all FCA-regulated entities to comply fully with the Consumer Duty and act to deliver good outcomes for consumers across all products, whether new, current or closed.
The main distinguishing feature between open and closed products and services is whether the product or service is still available to customers on the market for sale or renewal. This means there are a wide range of products and services to which the new deadline applies, as any type of financial service or product may be “closed” if it remains in operation for the customer but the product is no longer available to be purchased or renewed. Obvious examples include closed books of mortgage business, equity release products and outstanding loans but this may also include longer term insurance policies or cash savings accounts that are no longer available to purchase or renew.
Background
The Consumer Duty is a core part of the FCA’s strategy which aims to set higher standards for consumer protection in the retail financial services industry. Since it came into force for open products and services in July 2023, firms have been busy integrating these regulations into their operations. With the deadline for closed products and services fast approaching, the FCA is urging firms to make final preparations for full implementation.
Key Challenges and Priorities
- Gaps in Customer Data
Many firms face significant challenges due to incomplete customer data, particularly for older products managed on complex legacy systems. Firms must identify material data gaps and take proactive steps to address them. This includes cleansing and updating existing data or finding alternative ways to deliver good customer outcomes.
- Fair Value
Whilst firms will not need to identify a target market or distribution strategy for products no longer being sold, it will still be critical for firms to provide fair value for closed products and services on a forward-looking basis. Firms need to consistently apply their fair value frameworks to both open and closed products, justifying any differences in approach. They must assess whether the total price paid by customers is and remains reasonable relative to the benefits provided.
- Treatment of Vulnerable Customers
Based on the FCA 2022 Financial Lives Survey, the FCA warns that almost half (47%) of adults show one or more characteristics of vulnerability. Customers with characteristics of vulnerability are at a higher risk of poor outcomes, particularly in the context of closed products. Firms must provide enhanced support and carry out adequate monitoring for potentially vulnerable customers. This includes ensuring communication channels are accessible and responsive to their needs. Firms should look to the FCA’s guidance on the fair treatment of vulnerable customers for assistance.
- Engagement with Disengaged Customers
Disengaged or “gone-away” customers pose a significant challenge, often resulting in potential harm due to a lack of engagement. This lack of engagement can also make it more difficult for firms to understand the needs and characteristics of those customers in order for firms to deliver good customer outcomes. Firms should implement enhanced tracing activities to re-engage these customers, ensuring that disengaged customers understand and can access the benefits of their products.
- Vested Contractual Rights
Firms need to manage vested rights without causing foreseeable harm to customers. While firms are not expected to surrender vested rights, they should explore alternative actions to mitigate potential harm, such as increased customer support, acting with caution in relation to exercising contractual rights or facilitating product switches.
Preparing for the 31 July 2024 Deadline
With the deadline approaching, firms must ensure they are fully compliant. Firms should review all closed products and services against the Consumer Duty standards and be prepared to fulfil and demonstrate compliance from 31 July 2024.
This includes:
- Conducting thorough reviews of customer data and addressing any gaps, especially where data is held on legacy systems.
- Preparing fair value assessments specifically in relation to closed products and services and ensuring that they meet Consumer Duty expectations.
- Assessing Consumer Duty implementation for closed products and services against the existing Consumer Duty compliance for open products and services to ensure alignment across all products.
- Implementing strategies to support vulnerable and disengaged customers effectively.
- Engaging at Board level to understand the changes needed before 31 July 2024 and to delegate relevant responsibilities to Senior Managers.
- Consider whether independent auditors need to be engaged to review implementation of the Duty across open and closed products and services.
- Documenting decisions and actions taken to comply with the Duty, providing evidence of good customer outcomes.
Be warned…
Firms that are not on track for compliance should act immediately. The FCA will prioritise acting against firms causing significant consumer harm or presenting a high risk of harm.
Firms can refer to the FCA’s Finalised Guidance or visit their Consumer Duty homepage for details of the upcoming changes.
If your business requires assistance or advice on the upcoming Consumer Duty deadline, please contact our Financial Services team.
