Whilst in some ways 31 July 2023, and the commencement of Consumer Duty, seems like yesterday, it’s likely (hopefully!) now well embedded across most regulated entities.
The FCA has also issued a number of updates in relation to Consumer Duty, and it’s been regularly referenced in ‘Dear CEO’ letters. Examples of good practice, and areas for improvement, were also published in February 2024.
Documentation, contracts, processes and communications were reviewed and updated, and all projects, decisions, changes and reviews are being given detailed consideration through the Consumer Duty lens. This work will form the basis of the Consumer Duty board report which must be approved by the board every 12 months, which means that the first Consumer Duty board report needs to be reviewed and approved by 31 July 2024 The report should include results of the monitoring being undertaken and any evidence of poor outcomes. It will also be a key part of any review by the FCA to assess compliance with Consumer Duty, so the board report should be thorough and evidence-based.
From 31 July 2024, Consumer Duty also applies to closed books of business (those products not open to new clients). As ever, the implications of this for entities will vary immensely across the financial services sector.
For some it will have no additional impact (if Consumer Duty already applies to all areas of the business), but for many others it may be even more challenging than the work that has already been carried out.
Further considerations or complications include:
- If the closed book has been bought and sold by different entities along the way, this may impact the availability of background information and subject matter experts on the products may no longer be available. From a Consumer Duty perspective, this may make it more difficult to identify and implement changes.
- The extent to which there are clear and documented terms and conditions in place. These may have been drafted in a very different regulatory landscape and require to be updated. Variation provisions may not be as clear as in current sets of terms and conditions.
- High margins and/or low benefits. There has been no shortage of stern warnings from the FCA recently in relation to fees and value for money throughout the distribution chain, and older products historically have higher margins and/or initial benefits/discounts which no longer apply. Whilst clients may have been in these products for years on this basis, the ongoing compliance of these products should be revisited.
- Complex features of closed products and whether these features are still compliant and/or are clearly and fairly described. This will be exacerbated for clients who were originally advised in relation to the product and have since become non-advised.
- Difficulties making changes to aged systems/technology if closed books have not been migrated onto new systems. Some closed books date back to the 1980s and 90s and may not be managed on systems that are compatible with updates.
- The ability to report product information to the data-hungry FCA – most closed books will not have been set up in a conducive way to pulling, consolidating and reviewing data. This will also be a relevant consideration when drafting summaries of closed books for the annual board report.
Final thoughts
To the extent that changes need to be made to closed books, it’s important to consider what the options are to make the products compliant, and what external options might be available to support that objective. Each option will likely involve weighing up and balancing other factors, risks and costs, and the 31 July 2024 deadline is fast approaching.
It remains to be seen whether there will be more activity in selling and consolidating closed books as some providers concentrate their focus away from these products (and the difficulties in making them compliant), and others try to bring scale and value to resolving those difficulties.
If you’d like to discuss any aspects of Consumer Duty, please do not hesitate to contact us.
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