Article Consumer Duty: preparing for the next deadline and beyond

Nisha Arora, Director at the FCA, made it clear in a speech last November. The Consumer Duty is ‘not once and done’ – it’s very much here to stay. Since that speech and into 2024, the FCA has been ramping up its commentary and interventions around the Consumer Duty. These offer us a timely reminder of FCA expectations, with 31 July 2024 the date that closed products and services come into scope and the deadline by when for first Board compliance reports must be completed.

I’ve pulled together some key recent developments and where I see Consumer Duty going next, covering:

1. Considerations around closed products and services
2. Key recent FCA commentary and activity
3. Interactions with other regulatory initiatives
4. Labour Party views on Consumer Duty

You can also watch my latest webinar on this subject.

1.  Considerations around closed products and services

On 16 May, the FCA issued a pack of Dear CEO letters to various sectors entitled ‘Implementing the Consumer Duty for closed products and services by 31 July 2024’. This included a letter to Consumer Investments firms. This focuses on five key themes which may have particular relevance to closed books – gaps in data, fair value, vulnerable customers, gone-aways and vested contractual rights. The following draws on both these recent Dear CEO letters and previous commentary from the FCA.

Closed product and services are those where there are existing customers who took out a contract before 31 July 2023 – and where the product or service hasn’t been marketed or distributed (including by renewal) since then. The FCA expects closed customer groups to be receiving overall reasonable value. The consumer principle, the four outcomes and the cross-cutting rules all apply to closed books as they do to open books.

As for open books, there are some differences in the impact for different types of firm. I’ve looked at this under the broad headings of manufacturers and distributors. Note that an adviser firm can be the manufacturer of a (closed) service. The FCA provides an example of a mass-affluent managed portfolio service with existing customers but closed before 31 July 2023.

Manufacturers

Generally, the Consumer Duty applies in the same way to closed books as to open books, with two exceptions – target markets and distribution strategy aren’t relevant when the product isn’t available to new customers.

Data gaps and assessing value

The FCA recognises that for closed or legacy books, there may be data gaps. Firms may not hold as much data as they do for newer customers, or information such as customer vulnerabilities might not be as up to date, making it harder to provide the right support and evidence good outcomes. Firms need to evidence they’re taking proportionate steps either to address the gaps or to proactively work around them to achieve good outcomes.

Often, closed book products have valuable features, such as guaranteed returns or guaranteed annuity rates which simply aren’t available in new products. Despite this, firms should check there aren’t groups of customers who won’t benefit from these but are paying charges for them, meaning they may not be receiving fair value.

Characteristics of vulnerability

Legacy charging structures were often more complex than those used today. That doesn’t mean they’re unfair, but firms need to check there aren’t aspects which might lead to poor value for some customer groups, including those with characteristics of vulnerability. It’s also important to make sure charges are explainable.

I believe the industry has come on leaps and bounds regarding identifying and servicing customers with characteristics of vulnerabilities. Ahead of the closed book deadline, firms need to make sure these methods are being applied appropriately to closed book customers.

Communication material for closed books could have been designed many years ago and may not meet today’s standards. If so, proportionate improvements should be made.

Similarly, closed products might not have been supported by as wide a range of customer services, for example online or digital access. The FCA doesn’t expect all service routes to be created for closed books, but firms should test whether their overall customer service approach is adequate including for vulnerable customers.

Gone aways and vested rights

Within a closed book there’s a likelihood of having a higher proportion of less engaged customers or ‘gone aways’. It’s important such customers aren’t paying for something they don’t need or which they’re no longer eligible for.

The FCA also gives guidance on contractual vested rights. A policy wording may give a firm a right to take a certain charge, such as an exit fee. While the FCA doesn’t expect firms to give up vested contractual rights, the existence of such a right doesn’t mean you should exercise it, particularly if it would lead to a poor outcome or foreseeable harm for certain customer groups. Where not waiving such rights, the FCA suggests firms consider other action such as greater flexibility, helping switch to alternative products or increased consumer support.

Firms should also ask themselves why they took the decision to close a product. Was it because it was no longer working as intended in the current environment? Were there concerns over value? Had there been complaints? The answers could influence actions around closed book compliance.

Distributors

Many of the points covered for manufacturers may have some relevance to distributors, in particular communications and considerations around vulnerable customers as well as when manufacturing services.

One other aspect which applies to all firms, but is under particular scrutiny for distributors, is making sure services being charged for are always being delivered. The starkest example of this would be where a firm and a client have agreed an ongoing Adviser Charge or fees for ongoing advice, but this isn’t always delivered. Looking at closed products, some may still be paying renewal or trail commission. Firms should carefully consider if they’re comfortable that the customers for whom they’re receiving commission are getting good outcomes.

2.  Key recent FCA commentary and activity

In addition to the Dear CEO letters of 16 May on closed products and services, the FCA has been active elsewhere.

Speeches and webinars

I referred to Nisha Arora’s 1 November 2023 speech at the outset of this article. As well as stressing the Duty is ‘not once and done’, she drew a connection with the Government’s growth agenda. The FCA sees the Consumer Duty as encouraging positive competition which in turn is good for the UK economy.

On 6 December, the FCA held a major Next Steps webinar. The primary focus of this was bringing closed books into scope of the Duty. It was also to remind firms that they’d need to have produced their first annual compliance reports, signed off by their Boards, by 31 July 2024.

I’d also recommend reading Sheldon Mill’s February speech, ’Consumer Duty: the art of the possible in a year’.

Dear CEO letters and supervisory interventions

The FCA has talked of its regulatory and supervisory approach becoming more targeted, assertive, intrusive and data focused and that has been evident in recent Dear CEO letters. While these are directed primarily at a particular sector, the FCA stresses firms across all sectors can learn from them.

Wealth managers and stockbrokers

In November 2023, wealth managers and stockbrokers came in for some pretty strong criticisms in a Dear CEO letter addressed to them. Here are some of the FCA’s key findings:

• Many of this sector’s products were too complex – complexity needed to be justified.
• There were examples of firms obscuring risks or of the risks involved being misaligned with customer needs.
• Many firms were classing far too few customers as vulnerable. 49% of portfolio managers and 69% of stockbrokers identified no vulnerable consumers, even though the FCA expects 50% of us will be classified as vulnerable at some point over our lifetime.¹
• Examples of firms charging for ongoing services which weren’t being delivered – a theme running through much of the FCA’s Consumer Duty activity.
• Some discretionary offerings which looked overly expensive.

Retention of interest on cash balances

This Dear CEO letter to platforms and SIPP providers led to a ban on ‘double dipping’ – a charging approach which combined withholding some of the interest earned while also applying a platform charge to cash balances. Arguably this is more about complexity or clarity of communications than necessarily poor value – a combination of two low charges can be better value than a single higher charge.

Exit charges

The FCA also intervened regarding a particular firm’s charging structure, which involved exit penalties. Here too, it could be debated if this is primarily about poor value, or complexity and communications.

Good and poor practice

In February 2024, the FCA also published a document headed ‘Consumer Duty implementation: good practice and areas for improvement’ This is a good reminder of FCA expectations.

3. Interactions with other regulatory initiatives

Pension dashboard service providers

Consultation Paper CP24/4 on the regulatory framework for Pension Dashboard Service firms, makes it clear that as used by retail investors, all aspects of the Consumer Duty apply to commercial dashboards. The FCA calls out specifically the need for Pension Dashboard Service firms to test the communications within the choices architecture to make sure these are understandable.

Retirement Income Advice Thematic Review

The FCA has now published the results of this review. The original survey with its 87 questions gave many insights into the likely future direction of Consumer Duty. Some of the multiple-choice options gave clues to likely FCA views of good and bad practices.

Rightly, the FCA points out that the survey covered a period prior to the Consumer Duty going live, so it hasn’t assessed the results specifically against Consumer Duty. However, it says that if a firm currently has any of the weaknesses in approach highlighted in the review, then this is likely to point to Consumer Duty failings.

Read my fuller analysis of the thematic review of Retirement Income Advice.

Value for Money Framework

This joint regulatory initiative from the Department for Work and Pensions, the Pensions Regulator and the FCA aims to create a common Value for Money framework across all Defined Contribution pensions. The first phase will cover workplace default funds. For more detail, see my article covering a range of Government and regulatory proposals.

There are three mandatory elements – investment performance, costs and charges and what was previously labelled ‘quality of services’, now referred to as ‘other metrics’. These don’t ‘neatly’ map across to the four Consumer Duty outcomes. While the FCA’s involvement should ensure alignment, I’ll be watching closely – we can’t afford to have two different tests of value across pensions.

UK ISA

In his Spring 2024 Budget, the Chancellor proposed a new UK ISA, with an extra £5,000 per year allowance, aiming to encourage retail investors to invest more in the UK economy. The details are at time of writing being consulted on, but will centre around investments in companies incorporated and listed in the UK. There will also likely be a ban on transferring out into other forms of ISA to avoid misuse of the extra £5,000 allowance.

In Aegon’s response, I’m encouraging the Chancellor to bear in mind the Consumer Duty when finalising the design, as firms who design, manufacturer or distribute any retail products must follow this. First, the design must have a particular target market in mind. The market for UK ISA is likely to be those who have maxed out their £20,000 ISA allowance in stocks and shares ISAs – so pretty niche. Firms must also avoid causing foreseeable harm – so the lack of geographical diversification here needs to be considered. Firms must also ensure value for money. Development and monitoring costs could be substantial, and with the limited target market and a £5,000 maximum contribution, setting good value charges could prove challenging.

Advice Guidance Boundary Review

Of the three key proposals under consideration here, I view targeted support as particularly aligned to the Consumer Duty. Firms are required to help their customers achieve good outcomes and avoid foreseeable harm. Firms may hold data on individuals which raises concerns here. Currently, those without advice permissions are limited in what they can do, In particular, suggesting a course of action based on data held could be classed as advice. But firms who in future hold a ‘targeted support’ permission will be able to use limited data to suggest courses of action which could be beneficial for ‘people like you’.

You can read more of my thoughts on the advice guidance boundary in my analysis of the review paper.

4. Labour Party views on Consumer Duty

In January, the Labour Party published a document entitled Financing Growth – Labour’s Plan for Financial Services. This is well worth a read, with claims Labour will ‘unashamedly champion’ the financial service sector. Here. I’ll highlight their position on the Consumer Duty, but you can read my fuller analysis of the document in my update on Government and regulatory proposals.

I’m pleased to see that Labour recognises the value of the Consumer Duty as an example of outcomes-based regulation. However, it sees an opportunity to streamline what it calls the ‘duplicative and excessively procedural rules’ in the FCA’s 10,000-page handbook. While respecting the FCA’s independence, if elected it would ‘direct’ the FCA to issue an open call to industry, asking for suggestions of rules no longer needed because of Consumer Duty. You may wish to start thinking about what you see as unnecessarily prescriptive.

Next steps

The FCA is clear that the Consumer Duty is here to stay. Equally, its future is secure whoever is in power after the General Election. We all need to make sure it truly is Business as Usual. If you’re reading this while preparing for the 31 July 2024 deadline, or later as a check of actions you’ve taken, here are some suggestions:

• Make sure you have a plan in place for closed products and services and affected customers.
• Leave plenty time to draft your first compliance report and get Board approval ahead of 31 July 2024.
• Keep checking that the Management Information you use truly helps assess good outcomes.
• Keep evolving your approach towards vulnerable customers – from identification to tailored services to monitoring outcomes.
• Learn from all updates from the FCA – webinars, speeches, Dear CEO letters.
• Finally, make sure that any services you’re charging for are always delivered and of value.

Read more of my latest thoughts in the ‘Thinking Ahead’ section of our Adviser Insights hub, or boost your structured CPD time with our range of webinars.