Consumer Duty for Life and Pensions Firms

February 2023

With Consumer Duty deadlines edging nearer the FCA has provided much needed views on its expectations of life and pensions (L&P) firms, including regulated outsourced service providers (OSPs) in the sector.

The FCA has issued strong warnings to the sector not to be complacent; whilst recognising the unique features that make implementing Consumer Duty more complex and operationally challenging than in other sub-sectors.

There is a clear call to action from the FCA and we explore here some of the key focus areas for firms.

Immediate actions L&P firms should take

Following the FCA’s Dear CEO letter there are some clear, overarching, actions firms should take to ensure they are proceeding in line with the regulator’s expectations, including:

Ensuring implementation plans reflect any specific feedback provided by the FCA to the firm, including the need to consider culture change.
Engaging in detailed discussions with OSPs (and OSPs with their clients) about how they will meet Consumer Duty, with clear specific actions and timelines agreed. Actions required by OSPs should be clearly set out in sufficient detail in implementation plans and contracts with OSPs actively reviewed.
Undertaking a detailed review of existing frameworks and policies, if not completed already. Where firms have considered that existing frameworks meet Consumer Duty with few or no changes required, we would suggest they revisit this and critically assess before concluding. Given the FCA’s overarching message that this is a significant shift in expectations, it is unlikely that there will be large numbers of firms who can fully rely on existing frameworks without changes.
Ensuring customer journeys are mapped out and key risk areas are identified for outcomes. This is critical for open and existing products, but also given the challenges of mapping customer journeys for closed products, this should be started early.

These are in addition to the specific areas that will get specific FCA focus below.

OSPs

The FCA, unusually, took the approach of addressing its portfolio letter to both manufacturers and OSPs including a call to action for both parties. This recognises the significant role OSPs play in the sector, particularly with closed books.

The FCA sees two-way proactive communication between manufacturers and OSPs as essential, and as such will be monitoring how this engagement is taking place. Both parties will need to demonstrate a proactive approach that does not risk leaving implementation to the last minute. The FCA raised a number of areas where it is concerned a lack of engagement or oversight could cause risks, including:

Closed book implementation (more on this later).
Mapping customer journeys.
Communications.
Data and MI (and challenges with older systems).
Adequacy of customer service and approach to vulnerable customers.

The FCA has specifically stated it expects OSP contracts to be reviewed by firms and OSPs in the context of consumer duty. The key message coming from the FCA is that both parties, as regulated entities, will be held to account for customer outcomes, and they must work together to agree mutual plans to meet Consumer Duty obligations. This does not remove the need for manufacturers to oversee their OSPs and they are reminded of the fact they cannot outsource responsibility.

Closed products

The FCA has recognised the unique complexity and challenges that L&P firms face with their closed books. However, this came alongside stark warnings against complacency, and a direction for firms to start work on this early. The FCA’s letter strongly suggests an expectation that closed products will need review on a large scale in order to achieve compliance for Consumer Duty. Key areas of focus include:

Fair value and how this is being assessed for closed products. We caution firms who believe their current approach, much of which will have come out of the previous legacy review, meets FCA expectations. Given past FCA statements about their concerns on unit-linked fair value assessments and statements in recent correspondence, firms who rely solely on current approaches are at risk of falling short.
Mapping customer journeys and ensuring closed book customers get the right level of support, taking into account the channels they can access, the level of resourcing available to provide the servicing, and the needs of these customers.
Developing a plan to engage customers who are disengaged.
Reviewing customer communications and prioritising for review those that carry the highest impact to customer outcomes. This links closely with the FCA’s statements that firms should go beyond compliance with current rules in the retirement journey to meet Consumer Duty expectations (also relevant for open business).

We appreciate that many firms are considering more strategic approaches to managing Consumer Duty compliance for closed books, including simplification exercises. Firms taking this approach will still need to comply with Consumer Duty from end July 2024 as it is likely that any such exercises will complete after this deadline.

Distribution

The end of April deadline for manufacturers to share fair value assessments with distributors is fast approaching. The FCA has stated very strongly in its recent letter to the sector that it does not expect to see delays in this information sharing, as it saw with firms in the general insurance market. This is likely to create the most challenges for firms who have assumed their existing fair value assessments (excluding pure protection) require no changes but need to revisit this in light of the FCA’s recent correspondence.

The FCA also raised the need for firms to be less cautious about the advice/guidance boundary, whilst committing to continue to work with the sector in this space. This suggests that the FCA is unlikely to be sympathetic to firms saying they could not help customers more because of the boundary when they have not sought to test how far they really can go within a guidance environment. The FCA believes firms can go further without straying into advice.

Equity release

It is important L&P firms don’t forget the role they may play in respect of equity release for Consumer Duty; whether this be as a funder, manufacturer or distributor. The FCA’s letter to mortgage administrators raised very clearly the challenge of fair value in this market. This is in the context of current house price uncertainties, interest rate volatility and how this may have an impact on fair value. This is something we know firms are grappling with and does not sit in a vacuum from the impact the current economic environment has on the desirability of other assets (for matching adjustment) or upcoming Solvency II changes.

Additionally, in our experience, equity release funders may be underestimating the influence they have on end customer outcomes. It is fairly clear that a funder will have a direct influence on pricing in the market but we believe that funding contracts often provide for greater influence around customer support and communications, for example by setting service levels for customer facing activities or agreeing standard documentation. It is essential that funders and manufacturers discuss and agree how Consumer Duty will be implemented between them. Some funders who currently see equity release as an asset may find they need to make a significant shift in approach depending on the specific nature of the contracts and arrangements in place.