Consumer Duty View - Newsflash: FCA publishes Dear CEO letters

Yesterday (16 May) the FCA published 6 Dear CEO letters to firms in the sectors of retail banking, asset management, consumer investments, consumer finance, life insurance and all other firms, available at the following links:

Dear CEO letter: Retail banking
Dear CEO letter: Asset management
Dear CEO letter: Consumer investments
Dear CEO letter: Consumer finance
Dear CEO letter: Life insurance
Dear CEO letter: All other firms

These letters focus on the implementation of the Consumer Duty for closed products (the deadline for which is 31 July 2024). The FCA explicitly states that boards will need to satisfy themselves that their firms have prepared adequately for the 31 July 2024 implementation deadline and should challenge the business on areas of non-compliance as outlined further below.

These letters pull out 5 priority areas that firms should focus on in their implementation of closed products. In each of the 5 priority areas the FCA sets out “action prompts” to help firms to prepare for the end of July deadline. Firms should consider how they would respond to these questions if asked by the FCA, or their Consumer Duty Champion, and how responses might be recorded as part of its ongoing data and monitoring.

The FCA also calls for firms to consider assurance work via an independent function, such as their internal audit function, on how they are implementing the Duty in due course.

1. Priority areas and action prompts

1. Gaps in firms' customer data

Firms must address any material gaps in customer data. As closed products are by their nature older, there may be challenges with legacy systems etc. A firm must evidence that it has taken proportionate steps to address those gaps.

• FCA example of an action prompt for firms: Have you explored different ways to identify and fill material data gaps, and to cleanse and update existing data?

2. Fair value:

Applies on a forward-looking basis only. There must be a reasonable relationship between price and the benefits of a product/service.

• FCA example of an action prompt for firms: Have you applied your fair value framework consistently to open and closed products and services?

3. Treatment of customers with characteristics of vulnerability:

Firms must consider if any vulnerable customers experience poor outcomes. Closed products may present a particular risk of harm, e.g. gaps in data, legacy systems etc. and particular types of closed products e.g. lifetime mortgages.

• FCA example of an action prompt for firms: Is any enhanced action, monitoring or support needed for potentially vulnerable customers of closed products compared to open products?

4. Gone-away or disengaged customers:

Firms should identify less engaged and gone-away customers of closed products and services, and take appropriate action. This can be more of an issue with closed products and there is potential for customer harm. Firms must be able to evidence any actions they take and why.

• FCA example of an action prompt for firms: Has your firm assessed the effectiveness of its activities and channels to re-contact customers marked as gone away?

5. Vested contractual rights:

If a firm does not want to give up a vested right it must consider alternative ways to manage potential harm to consumers (e.g. helping a customer switch to a new product).

• FCA example of an action prompt for firms: Where you have identified that your firm has vested rights and is causing foreseeable harm to the customers of a closed product or service, what alternative action could you take to deliver good outcomes for your customers and avoid the harm?

2. Sector-specific observations

The letters also highlight specific issues for certain firms in the sectors.

• Retail banking – Reliance on legacy systems, vulnerability and fair value are likely to be challenging themes. The FCA plans to publish further information on its work on fair value in the cash savings sector. The FCA lists poor practices seen in some retail banks regarding vulnerable customers, e.g. weak or absent processes for considering the needs of customers in vulnerable circumstances across product conception, design, and distribution.
• Asset management – This is the shortest of the letters, with little detail on the 5 priorities or action prompts included in the letter.
• Consumer investments – Data gaps, vulnerability and fair value are likely to be challenging themes. The FCA calls out that these firms must take steps to ensure basic customer details are held and updated. The FCA seems to question a recent Wealth Management data survey in which 49% of firms had not identified any vulnerable clients within their client base and less than 1% of retail clients appeared to present with characteristics of vulnerability. The FCA wants to better understand how these firms are identifying vulnerable customers.
• Consumer finance – Data gaps and vulnerability are likely to be challenging themes. The FCA calls out that these firms must take steps to ensure basic customer details are held and updated. As distributors, consumer finance firms must take proportionate steps to get the data they need from other parties in the chain. Some firms have work to do to identify vulnerable customers properly and to support customers with closed products appropriately.
• Life insurance – Life insurers are expected to be particularly effected because of their large books of closed products. Gaps in data, gone-away customers and vulnerability are likely to be challenging themes. The FCA cross refers to its insurance market priorities 2023-2025 letter (available here) and the thematic review it has been carrying out in the sector – the final report for which is due in the “coming months”. The FCA encourages long-term strategic investment to fill gaps in policyholder data. The FCA notes that life-insurance customers may face more challenges making the right decisions due to the long-term nature of their policies. The FCA encourages an increase in effort regarding gone-aways, but also suggests a proportionate approach should be taken to low value policies.

3. FCA expectations for non-compliance

The FCA’s expectations for areas that firms identify as not being in compliance are:

• Firms should be prioritising their reviews and taking actions in areas where there is the greatest level of harm / potential for harm. As part of this prioritisation, they should consider where such harm might be affecting vulnerable customers.
• Firms should have clear, timebound, resourced plans to address any gaps in implementing remedies where they have identified these are needed to ensure good outcomes.
• Firms should put in place clear mitigations to protect customers from known or possible harms in the period until they have fully implemented identified improvements.
• Firms' governing bodies should challenge their businesses on all the above.
• Firms should consider assurance work via an independent function, such as their internal audit function, on how they are implementing the Duty in due course.