The Financial Conduct Authority (FCA) has written to life insurance CEOs with key questions they must ask themselves ahead of the looming Consumer Duty deadline for closed products and services at the end of July.
The letter also includes a reminder about five key fair value challenges that were identified by the regulator’s director of competition Graeme Reynolds last month, who revealed that the FCA expects firms to address key challenges connected to gone-away customers, data gaps, vested rights and outcomes ahead of the deadline for closed books.
The regulator also warned leaders to contact the FCA as soon as possible if they fear their firm will not be substantially compliant by the July 2024 deadline.
The letter sent by executive director of consumers and competition Sheldon Mills (pictured) on Friday sets out:
- application of the duty to closed products and services;
- action prompts to ensure firms are prepared for the 31 July 2024 deadline for closed products and services
- a reminder of the definition of closed products and services and an overview of the rules.
Application of the Duty to closed products and services
Touching on application of the Duty, Mills told life insurance CEOs that their firms must review closed products and services against all aspects of the Duty before 31 July 2024 and then on an ongoing basis.
He warned boards will need to satisfy themselves that their firms have prepared adequately for the 31 July 2024 implementation deadline.
Mills also pointed out that while the Duty applies in full to closed products and services from the deadline, it does not apply to the past actions of firms and instead, applies to the ongoing actions of firms from 31 July 2024.
For example, communications issued by the firm from 31 July 2024 for a closed product or service will need to comply with the Duty’s higher standards.
But Mills further explained that there are some differences in the way the rules apply compared to products and services that are open for sale or renewal.
“Importantly, the products and services outcome does not apply in the same way for closed products and services.
“For example, as there would be no further sales for a closed product or service, there are no requirements for firms to have a target market or distribution strategy, as there are for open products and services.”
Five priority areas for consideration
Mills also reiterated that there are five key areas life insurance CEOs should be considering ahead of the deadline for closed books.
These include gaps, in firm’s customer data, fair value, treatment of consumers with characteristics of vulnerability, gone-away or disengaged customers and vested contractual rights.
Gaps in firms’ customer data
Mills said gaps in policyholder data may make it difficult for firms to understand the needs of, or outcomes for, groups of customers.
In these cases, he said firms should proactively challenge themselves to improve both the core data and the flow of data into monitoring. For example, firms should question if data issues are preventing them from providing the right support to vulnerable customers.
He added they should also ask if data not being available for monitoring could lead to harm to groups of customers that would not be identified through the regular monitoring and some of this may require longer-term strategic investment.
Mills said the FCA is encouraging firms to take active steps to ensure they have a plan to complete required system upgrades, and to ensure that there is a way to monitor customer outcomes in the interim.
Where a firm has material gaps in its customer records that affect its ability to comply with the requirements of the Duty, the FCA expects it to be able to evidence that it has taken proportionate steps either to address the gaps, or to pro-actively work around these limitations to ensure it is achieving good outcomes for its customers.
Mills told leaders they should be asking if they have identified what are material data gaps for their firm, if they have explored different ways to identify and fill material data gaps. They should also cleanse and update existing data and where data is not available, what action they can take to ensure their firm is delivering good outcomes for its customers, both in advance of the 31 July 2024 deadline and ongoing.
Fair value
On the fair value outcome, Mills pointed out that while firms’ actions from before the Duty came into force will be judged against the rules that applied at the time, from 31 July 2024, firms’ closed products and services will need to be compliant with our expectations under the Consumer Duty price and value outcome.
And this includes that there is and remains a reasonable relationship between the price customers pay and the benefits of the product or service.
Mills referred leaders to paragraphs 3.10 to 3.17 of its finalised guidance setting out expectations on assessing fair value for existing contracts made before the Duty came into force.
Consequently, Mills said leaders should be asking if they have applied their fair value framework consistently to open and closed products and services and justify any different approaches taken.
They should also ask if they have assessed the expected total price to be paid by or become due from retail customers and if this is reasonable relative to the potential benefits provided by the product or service to retail customers.
Treatment of consumers with characteristics of vulnerability
On treatment of consumers with characteristics of vulnerability, Mills told leaders they should be aware that the challenges vulnerable customers face working with closed products and services may create a particular risk of harm to customers with characteristics of vulnerability.
For example, challenges such as gaps in data, the age and complexity of many of these products, inflexible legacy systems, and the fact that consumers’ circumstances and needs change over time can all drive risks of harm, particularly if firms are not acting with appropriate levels of care.
He added the regulator recognises that customers within the life insurance sector with products and services may have different characteristics and needs than other groups of customers. They may face more challenges in making the right decisions due to the long-term nature of their policies.
Mills also pointed out that its guidance on the fair treatment of vulnerable customers (FG21/1) is relevant and firms should already be meeting the expectations set out in it.
He added a failure to act in accordance with this guidance that would have amounted to a breach of Principle 6 is also likely to breach the requirements set out under the Duty when it comes into force for closed products and services.
Mills said the guidance gives examples of how some characteristics of vulnerability can make it difficult for consumers to use certain communication or support channels.
He added the expectations the FCA outlines in the guidance apply both for open and closed products and services.
He said the FCA expects firms to respond flexibly to meet the needs of their customers with characteristics of vulnerability – so firms will usually need to be able to provide support to their customers through different channels or by appropriately adapting their usual approach.
On this point, Mills said leaders should ask if any enhanced action, monitoring or support is needed for potentially vulnerable customers of closed products compared to open products.
Gone-away or disengaged consumers
On gone-away or disengaged consumers, Mills pointed out that firms can struggle to get in touch with customers, either because they do not have up-to-date contact details or because the customer does not want to be contacted or does not engage with the firm’s communications.
He added the issue may be more acute in closed products and services due to their age profile which poses challenges for firms, and also the potential harm for their customers (including customers paying for products they no longer need, want or are eligible for, and customers failing to take advantage of product features).
He added gone-away customers are expected to be a particular issue for life insurance and that firms should challenge themselves to undertake appropriate tracing to find customers.
He said they should consider the success of their current efforts and what could be done to increase the success of these exercises where a minimal number of customers have responded.
Mills also said the regulator understands there are some policies that are worth relatively small amounts (smaller Industrial Branch (IB) policies in with-profits funds, for example). In these cases, the cost of tracing may have a disproportionate impact on other customers in comparison to the improvement in customer data.
But he said the FCA still expects firms to take reasonable steps in this area and note the additional considerations around this.
The most appropriate course of action for a firm to take, he added. will depend on the specific circumstances and a balance of different factors, including the regulatory permissions it holds.
He said it is important that firms carefully consider the actions they need to take, can evidence why they took the decisions they did, and how they track and act on the impact of these decisions, with the express purpose of delivering good outcomes for the customer.
Here Mills told leaders they should ask if their firm has followed all reasonable and proportionate avenues to contact gone-away or unresponsive consumers, Mills added this might include enhanced tracing activities, including through specialist third parties.
They should also ask if their firm has assessed the effectiveness of its activities and channels to re-contact customers marked as gone away, what processes their firm has in place to establish the appropriate course of action when it cannot successfully contact a customer, and what processes their firm has in place to establish the appropriate course of action when a ‘gone-away’ customer does contact their firm.
Vested contractual rights
On vested contractual rights, Mills pointed out that they include pre-existing contractual rights to which a firm already has legal entitlement (e.g. annual fees that are due) and rights to payments falling due in the case of a contractually specified event such as exit charges.
To help decide if a contractual term amounts to a vested right, he said firms should consider the contract length and whether either party can freely terminate the contract. Where a customer can terminate a contract without an exit charge, firms have no more than an expectation of the customer continuing the contract. In this case, the future payment of charges is not a vested right.
Where there is a vested right a firm does not wish to give up, he told leaders their firm should consider alternative ways to prevent or manage any harm for existing customers.
He added firms might be able to take actions that do not require any 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.
And depending on the case, he said these changes could include, for example:
- providing greater flexibility on how customers can engage with a product
- helping a customer switch to a new product or service that does not have the same issues
- providing increased customer support to help customers avoid the risk of poor outcomes materialising
So Mills suggested firms ask if they have identified that the firm has vested rights and is causing foreseeable harm to the customers of a closed product or service and what alternative action they can take to deliver good outcomes for their customers and avoid the harm.
Non-compliance
Mills told leaders if they fear their firm will not be substantially compliant by the July 2024 deadline, and/or if there are any significant issues that come to light, they should contact the FCA via their normal supervisory contact at the FCA as soon as possible. For the Supervision Hub they should contact firm.queries@fca.org.uk.
For any areas of non-compliance, the regulator’s expectations are that:
- 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.