In light of the FCA's "not once and done" speech,¹ it is clear that the Consumer Duty remains a top priority for the FCA and, whilst the deadline for implementation in relation to new and existing products and services that are open to sale or renewal (open products) expired on the 31 July 2023, the work for firms within its scope is not finished. Moreover, for firms which have products and services that are no longer on sale to new customers or available for renewal by existing customers (closed products), the implementation deadline of 31 July 2024 is fast approaching. This article provides an overview of the issues to which firms subject to the Consumer Duty should be turning their attention over the next few months and beyond.

What next for firms with open products?

Firms which were not on track to implement the Consumer Duty by the 31 July 2023 deadline may have prioritised actions according to the greatest impact on consumer outcomes.² These firms will now need to turn their attention to completing implementation and evidencing compliance with the Consumer Duty as soon as possible, or risk the FCA delivering on its promise to take "robust action" against them and their senior managers.³

Whilst all firms should have already embedded the Consumer Duty into their culture and implemented any actions identified to ensure good consumer outcomes, the FCA has made it clear that firms need to be revisiting their implementation plans and asking themselves whether the changes they set out to make go far enough to deliver the outcomes they set to achieve for consumers in their target market.

The Consumer Duty also creates ongoing obligations in relation to open products which firms should continue to take into account. For example, the cross-cutting rules apply at all stages of the customer journey and therefore firms should continue to act in good faith, avoid causing unforeseeable harm, and enable and support retail customers to pursue their financial objectives.⁴ This means that firms should consider these cross-cutting rules each time they design a product or service, or develop their customer communications and support.⁵

Moreover, the Consumer Duty requires firms to carry out monitoring and assessments to evidence whether the firm continues to deliver good outcomes to its customers.⁶ As part of this, firms will have appointed a Consumer Duty Champion who will be responsible, alongside the Chair of the Board and the CEO, for ensuring that the Consumer Duty is raised in all relevant discussions until at least 31 July 2024.⁷ Whilst the Consumer Duty Champion will not be a senior management function (SMF) in its own right, there may be consequences for an SMF insofar as its obligations are not complied with. For example, an SMF 16 which is responsible for a firm's compliance with FCA rules⁸ may be in breach of its obligations if a Consumer Duty Champion is not appointed or otherwise causes the firm to be non-compliant with the Consumer Duty.

Firms are required to document evidence that they continue to deliver good outcomes to their customers and report this to their board (or equivalent body) for sign-off at least annually.⁹ The FCA intends to request evidence of this report and sign-off, the management information sitting behind the same and a record of actions taken to remediate any issues identified, as part of its assessment as to whether a firm is complying with the Consumer Duty.¹⁰

The FCA has not prescribed what sources of data firms should use to assess whether they are delivering good outcomes. Instead, it sets an expectation that firms will use their judgment to create a strategy which is effective given the nature and size of the firm.¹¹ Some suggestions which the FCA provides include: 

• customer retention rates;
• the distribution of products, pricing, and fees and charges across its customer base;
• behavioural insights including customer interactions and drop-off rates;
• training and competence records;
• file reviews;
• customer feedback;
• number of complaints;
• complaints root cause analysis;
• feedback from other parties across the distribution chain;
• compliance reports;
• staff feedback;
• researching or testing customer experiences; and
• drawing on external sources (such as the FCA's Financial Lives survey) which provides granular data about the financial lives of different groups.¹²

At this point, firms will have started to find resolutions to some of the challenges faced when implementing the Consumer Duty, such as the practical and regulatory challenges of information sharing. For example, in its recent webinar, the FCA highlighted the need for information requests to be standardised to prevent firms becoming overwhelmed by their information-sharing obligations. It also re-emphasised the duty upon firms to notify the FCA if another firm in the distribution chain is not complying with the Consumer Duty including, for example, if it is not complying with information sharing requirements.¹³

What next for firms with closed products?

Firms should now also be directing their attention to closed products. Firms with closed products are likely to include life insurers, pensions companies, outsourcing providers and debt purchasers. The 31 July 2024 deadline for implementing the Consumer Duty in relation to closed products is fast approaching and the FCA clearly expects firms to "eat the frog" and ensure they are taking the necessary steps now to make sure they are on track.¹⁴

Whilst the Consumer Duty applies in full to closed products,¹⁵ some elements of the Consumer Duty will not apply in the same way as for open products. For example, given that the closed products and services are no longer for sale, there are no requirements for firms to identify the target market and develop a distribution strategy accordingly.¹⁶

As is the case in relation to existing products, firms are not expected to apply the Consumer Duty retrospectively to closed products, but rather on a forward-looking basis.¹⁷ The FCA's intention is for firms to bring closed products up to the same standards as products which are currently available. This will be achieved, in part, by firms reviewing their closed products against the cross-cutting rules which require them to:

• act in good faith towards retail customers;
• avoid causing foreseeable harm to retail customers; and
• enable and support retail customers to pursue their financial objectives.¹⁸

Where firms identify that a product does not comply with these cross-cutting rules, they must take appropriate action to remediate the harm.¹⁹

Firms will also be required to comply with the four outcomes, which are a suite of rules and guidance setting more detailed expectations for a firm's conduct in relation to the key elements of the firm-consumer relationship:²⁰ the products and services, price and value, consumer understanding, and consumer support. In relation to closed products, the implementation of some of these outcomes will be more straightforward than others.

For example, firms may be able to implement the consumer understanding and consumer support outcomes in respect of closed products using a fairly similar process as that undertaken for open products, because similar methods of reviewing, testing, monitoring and adapting a firm's communications and support services can be applied.

As is the case with open products, to be compliant with the consumer understanding outcome, firms should assess their communications to ensure that they are capable of supporting customers in making informed decisions about financial products and services.²¹ In particular, customers should be provided with the information they need, at the right time and in a way they can understand.²² With regard to the consumer support outcome, firms should ensure that they help customers to realize the benefits of the products and services, pursue their financial objectives and ensure that they can act in their own interests.²³

However, for customers of closed products, customer journeys and servicing have not always worked well for them, and the FCA has noted that it has seen practices by some firms that may cause harm, such as presenting information in a way that exploits behavioral biases given the long-term nature of certain products, and placing unreasonable barriers in customer journeys which prevent consumers from getting the assistance they need from firms to enable them to take further action or make timely decisions.²⁴ The FCA has also noted that, for long-term products, there is an increased risk of low customer engagement and understanding, which can amplify the risk of harm crystallizing.²⁵ We anticipate that customers with older or more complex closed products also have an increased risk of low engagement and understanding.

Although the process of implementation may be similar to that undertaken for open products, firms will likely have to deal with some more complex issues when ensuring compliance with the consumer understanding and the consumer support outcomes for closed products. Another challenge might include determining whether certain closed products are in-scope of the Consumer Duty.

Firms will need to comply with the "price and value outcome"²⁶ and are more likely to hit stumbling blocks when assessing whether closed products continue to offer fair value in compliance with these rules. This is because customers will have committed to a pricing structure in line with the applicable regulatory regime, market conditions and practices at the time of signing up to a product. To achieve this outcome, firms should be confident that there remains a reasonable relationship between the price customers pay and the benefits of the product or service.²⁷ This may involve revisiting terms and conditions and other documentation to understand the closed product and any associated risks to customers. ²⁸These could be complex and include terms which lack transparency.²⁹

In particular, the FCA has highlighted that firms should ensure that products do not have features which exploit customers, such as charging unjustifiably or unreasonably high fees or interest rates to groups such as those with a poor credit history, or older customers.³⁰ In relation to closed products, this will require a more nuanced approach which involves looking back at the assessment of the customers carried out at the time of entering the pricing structure, the way it would have been carried out by the firm at that time, and the risk of harm to the customer arising from the circumstances at the time that the agreement was entered into.

The FCA has also identified through its reviews, in the context of open products provided by wealth management and stockbroking firms, that there are firms charging for services which are not delivered (such as ongoing advice) and not passing on fair interest on client money balances, despite interest rates having risen, indicating failure to meet the price and value outcome.³¹

Additionally, the FCA has highlighted that firms should consider, as part of their review, that products or services do not exploit a lack of knowledge and/or behavioural biases to charge unfair prices³² and whether complex pricing and terms make it harder for customers to assess value.³³ In recognition of the fact that certain products and services may have additional benefits in early years, which are covered by costs paid in later years, the FCA has confirmed that firms may take into account the benefits provided and costs incurred prior to the Consumer Duty coming into force.³⁴

Further, the nature of closed products is likely to mean that business is housed on legacy IT systems,³⁵ and it may be that operational efficiency and administration systems have been left to decline in favour of ensuring profitability. This may cause some closed product providers with further challenges when considering the "product and services outcome", where it means that this information is not accessible or negatively impacts the accessibility of the service offered to customers.

While there is no requirement on firms to amend contractual terms, they may need to consider alternative ways of achieving fair value for consumers, such as changing non-vested fees or charges, providing additional support or information to customers, or offering forbearance such as a pause in payments.³⁶

What next for firms selling/buying books of open or closed products?

Firms that have purchased books of (open or closed) products prior to the implementation of the Consumer Duty are still required to comply, although the FCA acknowledges that firms will not necessarily have all of the relevant information for a complete review.³⁷ This might be the case in situations where, for example, the original product manufacturer/distributor has left the market but there are ongoing contracts to service. The FCA expects that firms will use their best endeavours to meet the obligations under the Consumer Duty.³⁸ It is anticipated that firms are more likely to experience more complex legacy issues when the products are closed products, for the reasons we identify above.

The seller of the book of products will be required, following implementation of the Consumer Duty, to provide the purchaser with all of the information required to comply with the Consumer Duty.³⁹ The purchaser must also gather this information and ensure that it is sufficient to enable it to meet its Consumer Duty requirements going forward.⁴⁰ The Consumer Duty will therefore be embedded as part of the transactions process for closed products which are subject to the Consumer Duty.

Where a product or service book was originally sold before the Consumer Duty came into effect and is being sold once more, firms should follow the approach as for books sold before the Consumer Duty came into effect.⁴¹ In particular, in relation to closed products, challenges may arise where information is stored on legacy IT systems⁴² which are no longer maintained (for example, because it is no longer profitable to do so as described above).

FCA engagement – a golden thread

The FCA has indicated that its supervisory and enforcement approach will be proportionate to the harm, or risk of harm, to consumers, but it has also indicated that its supervisory approach is becoming more targeted, intrusive and assertive,⁴³ making it clear that firms should expect it to take robust action, such as interventions or disciplinary sanctions where needed.⁴⁴ This makes it clear that firms need to prepare for all types of engagement including s.165 requests and thematic reviews, both of which we expect to see more of over the next few months, particularly in relation to fair value frameworks, an area which was a key focus in the FCA's webinar on 6 December 2023.

The FCA has stated that firms should expect the Consumer Duty to be "a golden thread that runs through all your conversations with us".⁴⁵ This means firms should consider the Consumer Duty as an integral part of the FCA's approach and mindset at every stage of the regulatory lifecycle, including authorisations, policy development, supervision and enforcement, and should be prepared to evidence compliance with the Consumer Duty in the course of any of their interactions with the FCA, even where the reason for engagement is not focused on the Consumer Duty itself.

Conclusion

Whilst the FCA has set its intention to ensure that consumers have a consistent level of protection to consumers across the market, the implications of this for firms incorporating the Consumer Duty will differ for closed and open products. Whilst some firms will be taking forward lessons learned from their work on open products, there will be some firms that do not offer open products which are grappling with implementation for the first time, and no doubt there will also be novel challenges which are specific to closed products on the horizon, especially given that firms are likely to have less budget and/or people devoted to the servicing of closed product business and there are likely to be more manual processes involved.⁴⁶

Therefore, whilst the FCA's initial focus may have been on the most serious breaches, going forward firms should not rely on being compliant with only the "substantive requirements"⁴⁷ of the Consumer Duty. More generally, the Consumer Duty comes at a time where the FCA describes one of its key themes as "setting and testing higher standards" for firms.⁴⁸ Almost a year and a half on from the publication of the policy statement and finalised guidance in July 2022, arguably this is plenty of time for firms to have meaningfully embedded the Consumer Duty into their organisation