The FCA issued a series of Dear CEO letters on 16 May 2024 setting out the priority issues and actions firms should focus on ahead of the July 2024 Consumer Duty closed book deadline.
The letters are addressed to all firms in scope of the Consumer Duty, with tailored letters sent to retail banks, asset managers, life insurers, consumer investment and consumer finance firms.
The letters remind firms of FCA expectations in relation to five key themes it identifies as most relevant to closed book products and services: gaps in customer data, fair value, treatment of vulnerable customers, gone-away or disengaged customers, and vested contractual rights.
The Dear CEO letters seek to provide firms with support as they finalise preparations for the 31 July 2024 Consumer Duty implementation deadline for closed products and services.
The FCA reminds firms they must address any material gaps in customer data and ensure they are taking proactive measures to make sure they hold basic details which are up to date.
The regulator recognises challenges relating to legacy systems and back book purchases, but expects firms to take steps to work around any data gaps to ensure they are delivering good customer outcomes.
Manufacturers and distributors are expected to be able to evidence they have taken proportionate steps to source information from other parties they have worked with, both historically and currently.
For life insurers particularly, the FCA wants firms to challenge themselves to improve core data quality and flow for monitoring. It notes that longer-term strategic investment may be required e.g. through system upgrades, and that firms should have robust processes to monitor customer outcomes in the interim.
Firms are expected to have applied their fair value framework consistently to open and closed products and be able to justify any differences. In particular, the FCA reminds firms to ensure they have assessed the expected total price to be paid by or become due from retail customers across the full distribution chain.
The regulator plans to publish further information on its work in the easy access cash savings sector, including areas where firms need to make further improvements.
The FCA highlights the heightened risk of harm for vulnerable customers in the closed book. It reminds firms of its existing expectations set out in its FG21/1 guidance and expects firms to have robust processes to identify vulnerable customers, record their needs, and support them in a consistent manner including through different channels.
For retail banks, the FCA notes observed weaknesses in approaches to vulnerable customers in the open book. This includes failures to consider vulnerable customer needs at product conception, design and distribution, weaknesses in sharing data across journeys and across the business, and poor front line staff training. The FCA notes these issues are likely to be reflected even more in banks’ closed books, and expects them to consider what further action, monitoring, or support may be needed to support their vulnerable customer cohort.
The FCA also highlights a particular focus on the treatment of vulnerable customers in the life insurance and consumer investment sectors.
Following a recent FCA survey which found that 49% of wealth management firms had not identified any vulnerable clients within their retail client base, the FCA is carrying out follow-up work to understand how firms are: identifying and categorising vulnerable clients, and modifying their product or service offering to meet those clients’ needs.
The FCA expects firms to identify less engaged or gone-away customers and take all reasonable and proportionate steps to contact gone-away customers, assess the effectiveness of their approaches, and have established processes for when contact is unsuccessful and when a gone-away customer contacts the firm.
The FCA notes this issue is a particular challenge for life insurers and expects firms to undertake appropriate customer tracing and consider adopting any further measures where existing outreach methods are unsuccessful.
The FCA reiterates that firms are not expected to give up vested rights, but expects firms to consider alternative ways to prevent or manage any customer harm. This includes providing increased support, or helping customers switch products/services.
Identify gaps and apply the learnings from open book implementation.
Prioritise action to address the greatest level of actual or potential harm.
Allow sufficient time to challenge and review firms’ first annual Consumer Duty board report.
Firms’ boards and senior management should carefully consider their approach to addressing the risks highlighted in the letters for their closed book. Firms should apply learnings from the first stage of implementation for open books, including lessons learnt from their outcomes monitoring and the most effective means of communication and support.
Where gaps are identified, firms should prioritise and take action where the greatest level of harm is identified, giving special consideration to vulnerable customers, and have clear, timebound, resourced plans to implement remedies and ensure the delivery of good customer outcomes.
Firms should assess their approach to gone-away or disengaged customers, carefully considering what course of action is most appropriate for their different customer cohorts and the impact on the outcomes they will receive.
Firms should also be underway with the preparation of their first annual Consumer Duty board report. Firms should have allowed sufficient time for the collection of key management information and embedded processes and procedures to ensure robust challenge and review. Firms’ reports should also reflect a plan to continuously learn from and improve the consumer outcomes they deliver for both open and closed books.
The Consumer Duty will fully enter into force following the closed book implementation deadline on 31 July 2024. The FCA plans to undertake ongoing supervisory analysis of firms’ compliance, including through multi-firm and thematic reviews, for instance on how swiftly the insurance industry responds to claims. The regulator is also carrying out a review of how firms treat vulnerable customers, and is due to report its findings by the end of this year.
