Consumer Duty: Six Month Update

It took naval engineer, Richard James, six months from watching a dropped tension spring move mesmerizingly across the floor to the ‘Slinky’ being launched at a toy fair.

A fascinating titbit, used by the UK’s Financial Conduct Authority (FCA) in a recent speech marking ‘the art of the possible in a year’. This was given roughly six months since the first Consumer Duty deadline (31 July 2023) with the next deadline in relation to closed products also coming up in around six months. The inference being that a lot can be achieved in 6 months to a year.

While many UK financial institutions may feel that Consumer Duty requirements are perhaps slightly more involved than putting a spring in a box (see this Celent blog for more detail on requirements), of greater note in the speech was a reference to a new FCA paper reviewing good practice and areas for improvement six months into the new requirements. This review (as are the requirements) is a broad one, but there are a few interesting regulatory ‘titbits’ worth noting from a pricing and product management perspective.

Assessing fair value in pricing needs to be more than benchmarking rates and fees against peers

One of the more challenging aspects of Consumer Duty is that firms need to evaluate the concept of fair value, that is, whether likely costs over the lifetime of a product are commensurate to benefits. This needs to be considered at the product level, and in relation to different customer groups (particularly vulnerable customers).

The key feedback here is that price evaluation needs to be more than evaluating price against market benchmarks (e.g., whether price is higher or lower than peer averages). The FCA considers this to be the equivalent on doing a Google Shopping search, not a consideration of all aspects of fair value. Fair value is about more than just price. It should include consideration of terms and limitations of a product, total costs over product lifetime, and whether customers need, or indeed are actually receiving, services they are paying for (example provided of annual review charges, where annual reviews were not always taking place).

The clock is ticking on closed products and firms need to address data gaps in legacy systems

The UK Consumer Duty requirements have been phased in, with open products (those continuing to be sold) coming under its scope last July. Closed products (those that are no longer marketed or sold but are still held by customers) come under scope from end of this July. The rationale being the increased work involved with such products where there is often complexity with legacy systems.

Highlighted here are potential challenges with data gaps that often occur in older systems, such as out-of-date or incomplete client records. This may relate to data such as customer characteristics and needs, sales records, as well as historic product performance. Here, firms need to look to fill in gaps where possible or take appropriate steps to mitigate the risk of harm to consumers through enhanced outcomes testing. Again, the ability to identify and assess outcomes for vulnerable customers was emphasized here.

While firms don’t necessarily need to re-price closed products, they should still assess whether good customer outcomes will occur

There is an expectation from the FCA that some closed products may offer poor value to customers. For example, many legacy products have higher charges than current open ones. While the FCA states that it will not judge firms with the benefit of hindsight, and therefore that it does not necessarily expect firms to re-price or repeat underwriting in every case if key conditions have changed, there is still quite an onus here on firms to ensure good customer outcomes. Firms need to consider firstly whether any key assumptions made with older product were significantly wrong at the time and whether these could have been reasonably known or foreseen.

Secondly, firms should consider vested rights (such as annual or exit fees) and determine whether these may be resulting in poor customer outcomes (such as deterring customers from switching to better products or if these are undermining benefits received). While it is suggested some firms might want to ‘reconsider’ such fees or charges, the focus is on ensuring good outcomes, so could be tackled through clear communication to inform customers of other deals and how to switch.

Banks need strategies for engaging with elusive customers

Another challenge identified by the FCA is that not all customers are engaged with their financial providers. Many do not particularly want to be contacted or be engaged with a product. The issue here being that this lack of engagement may lead to customers paying for products they no longer need or want, potentially no longer be eligible for, or be not aware of key product changes.

The FCA recognized that this is not new problem but highlighted that some firms go further than others in tracking down and engaging with such customers. The expectation being that firms need to test, monitor, and then adapt their communication strategies. This is particularly in terms of presenting the information the customer needs, at the right time(s), and in a way that they understand.

Banks should take a risk-based approach to prioritization

With the deadline of 31 July 2024 for full implementation of Consumer Duty fast approaching the final titbit from the FCA is that 2024 is a leap year so banks have an extra day. While this may not be of tremendous comfort, the FCA did suggest that firms should take a risk-based approach to prioritizing product assessment (particularly between new products and closed ones). Key questions suggested here were: Which products or services are likely to cause the greatest harm? Where is most work needed? While this is not ‘a get out of jail free’ card from the FCA (as the Slinky was indeed launched in six months), the FCA does see this as a continuing process, with the FCA keen to see how banks assess and evidence work here in board reports due shortly after.