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The UK financial services watchdog is urging firms to ensure that their legacy products comply with the Consumer Duty in areas such as customer data, vulnerabilities and fair value.
The Financial Conduct Authority (FCA) published a “Dear CEO/Director” letter on May 16 on implementing the Consumer Duty for “closed” products and services by July 31, 2024.
This is the second and final of the Consumer Duty deadlines. Closed products are defined as those that were sold before July 31, 2023, when the Consumer Duty entered into force, but have not been marketed or sold to new customers since.
“For those with work to do, there is time to make any changes necessary,” the letter, signed by Sheldon Mills, the FCA’s consumer chief, said. “That includes ensuring both that your firm is compliant for its own activities and that it shares relevant information with other firms in its distribution chain to enable them to comply.”
The Consumer Duty has become a staple of the FCA’s work. But across the financial sector, compliance has been a struggle. One source in asset management told Vixio that upon leaving a training session on how to comply, a member of staff said “what are we actually supposed to do?”.
The struggle for compliance is particularly true for payments and e-money firms. The Consumer Duty strives to deliver good outcomes for consumers. However, this is something much more manageable for a wealth management portfolio or a mortgage broker. These products have longevity in a way that a payment, often over in seconds, does not.
The Consumer Duty may be more applicable to payment and e-money firms through other issues, such as accessibility of strong customer authentication, so that products are not excluded from smartphones.
Ticking clock
With less than three months until the closed product deadline, the FCA said that firms should already be considering several key themes, including data protection, fair value and customer vulnerabilities, which are likely to be more widespread or acute in this context.
Drawing on supervisory insights and feedback from firms, trade bodies and other stakeholders, the FCA has emphasised the importance of addressing gaps in customer data.
“Closed products and services may by nature be older, and the data firms hold about their customers may be incomplete, for example, due to challenges with complex legacy systems, back book purchases, and inadequate record-keeping practices at the time of sale,” the letter says.
The regulator also said that where a firm has material gaps in its customer records that affect its ability to comply with the requirements of the duty, it expects it to be able to demonstrate that it has taken proportionate steps either to address the gaps, or to proactively work around these limitations to ensure it is achieving good outcomes for its customers.
In terms of what to do now, the FCA has recommended that firms should identify material data gaps and explore various methods to address and fill these gaps, as well as to cleanse and update existing data.
In instances where data is unavailable, firms need to take proactive measures to ensure they are delivering good outcomes for their customers, both in preparation for the July 31 deadline and continuously thereafter.
To ensure fair value, the FCA has said that firms “must assess and be able to demonstrate that they are providing fair value to customers in closed products and services”.
Firms should apply their fair value framework consistently to both open and closed products and services, providing justification for any differing approaches taken, according to the FCA, which says that firms must assess the expected total price to be paid by or become due from retail customers, ensuring that it is reasonable in relation to the potential benefits provided by the product or service to these customers.
Meanwhile, to ensure customer vulnerabilities are managed effectively, the FCA advises firms to implement enhanced action, monitoring, or support for potentially vulnerable customers of closed products compared with those with open products.
To manage gone-away or disengaged customers, the FCA tells firms to follow all reasonable and proportionate avenues to contact these consumers, including enhanced tracing activities through specialist third parties.
Firms will also need to assess the effectiveness of their activities and channels used to re-contact customers marked as gone-away.
Additionally, the letter advises firms to establish processes to determine the appropriate course of action when they cannot successfully contact a customer, as well as procedures for responding when a gone-away customer makes contact.
The letter also raises the issue of vested contractual rights, saying that when a firm does not wish to give up a vested right, it should consider alternative ways to prevent or manage any harms for existing customers.
The FCA advises that firms might be able to take actions that do not require contractual changes or make changes to contracts that do not alter vested rights to remuneration or interfere with pre-existing rights to charge an exit fee.
Depending on the situation, these changes could include providing greater flexibility on how customers can engage with a product, helping customers switch to a new product or service that does not have the same issues, or providing increased customer support to help customers avoid the risk of poor outcomes.
The FCA advises firms to identify any vested rights that might cause foreseeable harm to customers of a closed product or service and take alternative actions to deliver good outcomes and avoid the harm.
