Dear CEO, ready for Consumer Duty phase 2?

The Financial Conduct Authority (FCA) and other financial regulatory bodies regularly publish letters addressed to the CEOs of regulated firms (called “Dear CEO” or “Portfolio” Letters).

These letters are usually published when the regulator has either identified an issue or can foresee a potential problem in the market, and they aim to help the improve the industry, both culturally and financially.

The FCA have sent 46 Dear CEO and Portfolio letters to Financial Services firms over the course of the last year and a half.

20 of those have concerned the implementation of the Consumer Duty.

The FCA’s repeated efforts to set out their expectations show they really want to make sure that firms are taking the Duty seriously.

Source: FCA publications, Jan 2023-July 2024

Following the introduction of the Consumer Duty for open products and services last July, the Duty will be expanded today (31st July 2024) to also cover closed products and services, so time has largely run out for firms to get fully compliant.

The FCA defines a closed product or service as one that has existing customers, but that hasn’t continued to be marketed or distributed (including by renewal) on or after 31 July 2023. Firms were given an extra year to address any issues with closed products due to the greater amount of work required to bring them up to speed, and the added difficulties that come with tackling older systems.

In mid-May, the FCA published six Dear CEO letters addressed to various parts of the industry setting out the top-priority issues and actions that affected firms should have been considering. The regulator’s key focus in the lead up to the roll-out – in light of the various complexities that come with older products, systems and frameworks – has been on the pro-active assessment of consumer outcomes, as well as continued engagement with customers despite products being closed to new customers.

In the letters, the FCA broadly set out five things that it expected firms to give sufficient thought to ahead of the deadline today:

1. Where information held for customers is incomplete or out of date, firms are expected to have taken steps to fill gaps and update old details. Where gaps can’t be filled, firms should consider any other action that needs to be taken to ensure that their closed products are delivering good outcomes for customers.
2. Firms should have assessed the price of closed products against the benefit to the customer and made sure that they are applying their fair value framework consistently across open and closed products.
3. Firms should have considered particularly whether any of their customers have vulnerable characteristics and whether those vulnerable customers are getting poor outcomes from their closed product.
4. Firms should have assessed the effectiveness of their efforts to contact gone-away or disengaged customers (of which there are likely to be a fairly high proportion, due to the relative age of most closed products).
5. Firms should have considered what alternative actions they can take where vested rights are causing customer harm (e.g. by offering to support customers in switching to a new product or service instead of charging an exit fee).

Punter Southall commends the FCA’s continued momentum throughout the Consumer Duty implementation and its commitment to pushing firms to redesign outdated strategies and processes. Having the right systems in place will help the industry to keep developing in the right direction, putting consumer outcomes at the centre of Financial Services governance.

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