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FCA will not judge firms on ‘benefit of hindsight’ with Consumer Duty closed products

  • 20/02/2024
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FCA will not judge firms on ‘benefit of hindsight’ with Consumer Duty closed products
The regulator will not judge firms’ approach to closed products regarding Consumer Duty with the benefit of hindsight, it has said.

In a speech delivered at KPMG, Sheldon Mills, executive director of consumers and competition at the Financial Conduct Authority (FCA), said firms applied a “laser focus” to open-book products before the duty came in, but the “clock is also ticking for closed products that will come under the scope of the Consumer Duty at the end of July”. 

Mills said the main challenges the regulator had seen when it came to closed products were evidencing good outcomes, taking action with less-engaged customers, ensuring products and services were designed to deliver good outcomes in the long term and determining fair value.

Regarding fair value, Mills said the regulator knew some products would not deliver this principle, but firms should be sure they did not exploit consumers’ lack of knowledge or behaviour biases, and took costs and benefits that were incurred before the duty into account. 

He added: “We will not judge firms with the benefit of hindsight.

“We don’t necessarily expect firms to re-price products or to repeat underwriting in every case if conditions such as life expectancy or economic conditions have changed.

“However, if a firm could have reasonably known that its assumptions were significantly wrong at the time a product was sold, we will consider whether the firm complied with rules that were in place at the time.” 

Mills said the regulator had identified gaps in monitoring data as some firms held incomplete or out-of-date information. It was also aware that firms did not always know how to track down elusive customers, and Mills said firms should “go further to drive good outcomes for these customers”. 

“They can do this by communicating more effectively; providing consumers with the information they need, at the right time, presented in the way they understand.

“Firms will need to test, monitor, and adapt their communications approach if these are not driving the right outcomes for consumers,” he added. 

He said vested rights, such as exit or annual fees, were also noted as a challenge for firms and these did not always deliver good outcomes. Mills said some firms may need to give up their vested rights, while others could focus on clearer communications. 


Good progress with Consumer Duty 

Mills said the FCA saw that many firms had made good progress with Consumer Duty, and today, a report was published with the regulator’s findings of good and poor practice. 

However, he said there was still room for improvement and highlighted fair value as a main challenge. 

He said 37 per cent of advice firms had reviewed their pricing, but “there are areas where firms could do better”. 

Mills added: “Many of the fair value assessments we have seen are not relying on solid data and other credible evidence to justify the products’ value to retail customers

“Some firms, for example, have relied solely on benchmarking against the market when considering their pricing, rather than considering a fuller range, including the real value that a consumer derives compared to the price they pay. The equivalent of a Google shopping search does not prove to us that a customer is getting a fair deal.” 

“We want to see firms considering all the aspects of fair value at the product level and considering the impact on different consumers.

“Board reports will come under greater scrutiny as we look to these to evidence the steps firms are taking to drive good outcomes,” Mills said. 

He said Consumer Duty was not a “one-and-done exercise”, and noted that some firms were still working on open products, so were yet to assess closed products. 

“You do need to get it all done by July but if you are struggling with the order, ask: ‘Which products or services are likely to cause the greatest harm? Where is the most work needed?’ This, rather than if a product is open or closed, should be the key factor – particularly once the July deadline has passed,” Mills said. 

The FCA’s deadline to make sure closed products comply with Consumer Duty is 31 July. 

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