Consumer Duty: the impending deadline for closed products and services

On 16 May 2024 the FCA published six “Dear CEO letters” addressed to the CEOs of regulated firms in the sectors of consumer finance, consumer investments, life insurance, retail banking and asset management, with a catch all letter to “all other firms”.

What are “Dear CEO” letters?

“Dear CEO” letters are official communications from the FCA and a tool that the FCA uses to communicate its expectations of the senior management of regulated firms, highlight regulatory risks, encourage high standards of conduct and prompt preparedness for forthcoming regulatory milestones.

These six letters were issued to highlight priority issues and actions required by regulated firms ahead of the impending 31 July deadline for the implementation of the Consumer Duty in relation to closed products and services. 

Closed products and services are those contracted for by customers prior to 31 July 2023 and which have not been further marketed or distributed since that date. The FCA provided firms with an additional year in which to manage and implement change in relation to closed products and services due to some of the unique challenges firms face in this area. It is hoped that affected firms will have benefited not only from the additional time but also from the learnings made over the time that implementation has been happening in relation to open products. This additional year is now drawing to a close and firms should be in the final stages of preparations.

Common themes

All six letters refer to five priority areas that firms need to be focusing on ahead of the July deadline and these are:

1. Gaps in customer data: firms must address any material gaps in customer data or pro-actively work around any limitations arising from such gaps to ensure that they can continue to deliver good outcomes for their customers. Firms should be identifying and filling material data gaps, cleaning up existing and legacy data and effecting solutions for situations where data is not available.
2. Fair value of products and services: firms will need to assess value and must be able to demonstrate that they are providing fair value to customers in closed products and services on a forward-looking basis. Firms should have a fair value framework and apply this consistently across the products and services that they offer, assess the fees due from retail clients for these products and services and be able to determine these as reasonable relative to the benefits of the products and services.
3. Treatment of consumers with characteristics of vulnerability: firms should consider if any of their customers who hold closed products and services are customers with characteristics of vulnerability and, if so, whether these customers might be adversely affected by any aspect of the product or service or are experiencing poor outcomes.  Firms should already be complying with the requirements of the FCA’s guidance on the fair treatment of customers with characteristics of vulnerability and supporting the needs of these customers (you can read more about this in our recent blog).
4. Gone-away or disengaged customers: firms must identify the less engaged and gone-away customers of closed products and services and take appropriate action to support and communicate with these customers including taking all reasonable and proportionate steps to contact these customers, assessing the efficacy of the methods used to make contact with these customers, enabling processes to deal with customers with whom contact cannot be made, and establishing processes to deal with any customers categorised as gone-away who later make contact.
5. Vested contractual rights: firms need to assess vested contractual rights such as entitlement to the payment of annual or exit fees to determine whether any of these rights could cause foreseeable harm to the customers of closed products or services and whether, as such, should be relinquished in light of the requirement to prevent and manage harms for existing customers, including for example, providing flexibility on how customers engage with a product or service, assisting customers to switch to alternative products or services, and proving customers with support to avoid the risk of poor outcomes. 

These issues are not unique to closed products and services but are more likely to be widespread or acute given that these products and services are likely to be older, include legacy systems, and contain data that may be incomplete and out-of-date.

Being well prepared

Firms which have closed products and services should consider the issues covered in these six Dear CEO letters and take all reasonable steps to ensure substantial compliance with the requirements by the 31 July deadline. Firms should ensure that they can evidence that they have considered and complied with all relevant regulatory requirements and, to the extent that they consider that any requirements are not applicable to their business model (because one size does not necessarily fit all), should document and evidence the reasoning behind any such decision. 

The FCA expects that firms will be:

• prioritising their reviews against the action points and taking relevant steps in priority order starting with the areas with the greatest level of harm or potential for harm;
• implementing clear timetabled and well-resourced plans to address any gaps in implementing identified remedies;
• putting in place clear mitigations to protect customers from harm or potential for harm throughout any period during which fully implemented identified improvements are pending;
• considering whether their business model requires that other relevant matters are considered given that the priority areas indicated by the FCA are not intended to be an exhaustive list; 
• considering not just their own direct customers but also their position in relation to their broader distribution chains; and
• effecting strong and sound governance by ensuring that senior management is fully involved in ensuring compliance with all relevant requirements including implementing robust self-challenge and/or internal audit to verify the levels of Consumer Duty implementation that are being achieved and effecting remedies to fill any gaps or weaknesses that are identified.

Any firm that identifies issues with its implementation planning or process, or considers that it will be unable to ensure that it is substantially compliant by the deadline, should be open and honest about that and the FCA encourages, in any such cases, the opening of a dialogue by firms with their regular supervisory contact(s) at the FCA.

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With thanks to Mopé Akinyemi for helping to put this short blog togther.