Legacy life product simplification can support Consumer Duty compliance

What is the Consumer Duty?

The Consumer Duty is the Financial Conduct Authority (FCA)’s flagship initiative to raise the standard of care for retail financial services customers. It comprises a new principle for business and specific rules and guidance which explain and define the FCA’s expectations. The current requirement to “treat customers fairly” has been extended to require the proactive pursuit of good customer outcomes by all parts of a firm’s business.

To meet the duty, firms must test and measure that identified good outcomes are being met and adjust accordingly to avoid or minimise any harms detected. The new rules will apply to open products and services from 31 July 2023 and to closed books from 31 July 2024.

Scale of the challenge for closed books

While much of the Consumer Duty is concerned with ensuring products are designed for and sold to appropriate target markets, it also raises the bar for ongoing servicing of existing customers. The FCA wants firms to ask themselves whether they “are applying the same standards and capabilities to delivering good customer outcomes as they are to generating sales and revenue”. In other words – is the quality of customer support post-sale as good as the support and engagement provided pre-sale?

This question has a particular relevance to the life and pensions sector due to the long-term nature of the products and so the length of time that customers are serviced.

Over the product lifecycle, the rapid evolution of legal and regulatory requirements and changes in business models has resulted in large “legacy” books of closed products. These products and their features can appear unfamiliar in comparison with the current open suite available from time to time. Reviewing these older, closed products in accordance with the Consumer Duty is expected to be a particularly challenging exercise, not least because many of those products will be subject to review for the first time. The FCA appears to recognise the scale of the challenge in that it has allowed firms an additional year before the duty bites on closed products.

Recently, Matt Brewis, the FCA’s director of insurance, commented at the ABI conference on the scale of the challenge facing manufacturers of closed books. Even with the additional year to implementation, Brewis warned that firms should expect “significant issues” in aligning closed books to the new standard. There was also some suggestion of further output from the FCA to clarify further its expectations for the closed book deadline.

Technological capability as an enabler of compliance

Efficiently meeting ongoing review requirements and delivering any changes and improvements needed over time will place demands on the administration systems underpinning products and services. Some ways in which technological enhancements could be most beneficial in meeting the Consumer Duty include:

• adopting data-driven approaches to drive improvements in outcomes: for example, identifying and reacting to customer behavioural trends, enhancing real-time information capabilities, and providing information and product options at the right times;
• monitoring and evidence of delivery: the duty introduces an enormous evidential burden for firms. Firms must identify target good outcomes and monitor performance in the delivery of these. Technological solutions can be deployed to help mitigate the resource intensity of this activity – but such solutions will tend to require robust product and customer administration systems in the first place;
• automated reporting: an important device aimed at driving improvements in culture is that firms must report at least annually to their board on their performance in delivering good outcomes. As with other regular reporting cycles, such as financial reporting, TCFD reporting and regulatory returns, technological solutions can help collate and present findings in addition to providing a robust basis for report findings.

This is a real challenge for some legacy books of business. In particular, the FCA has highlighted the following core issues to be overcome if firms are to deliver good outcomes to their long-standing customers:

• ·out of date legacy IT systems;
• high volumes of manual processes which increase likelihood of errors;
• large numbers of closed products and variations increasing overall complexity of review;
• data quality – customer records and other information to assist in monitoring activity;
• extent of firm reliance on outsourced service providers (OSPs), and their IT systems and processes, for administration.

Legacy simplification could help

The term “legacy simplification” means making changes to legacy products and processes aimed at delivering operational efficiencies and increased operational resilience. We have identified some examples of how firms might implement legacy simplification in practice.

Administration system upgrades and migration of customers and policies

This could involve rationalising a complicated estate of legacy systems down to a smaller number with improved functionality and flexibility. In addition to offering improved customer facing options, this could support and reduce the burden associated with monitoring and reporting activity.

Fund consolidation

Some legacy books can be linked to closed funds. We have worked with clients on exercises to close and consolidate funds with core alternatives which can create efficiencies for the firm.

Rationalising product range

Some firms may have many distinct products which serve similar purposes and may be suited to a product rationalisation exercise. This would create fewer products to keep under review and could ultimately align legacy with core offerings and so offer greater flexibility when making changes in bulk in future. Such an exercise could be all the more attractive in view of the ongoing review and reporting obligations imposed by the Consumer Duty and could also make OSP arrangements more straightforward.

Inaction is an increasing risk

The FCA has promised to engage actively with firms this year around Consumer Duty implementation plans for closed books in advance of the 2024 deadline. The toolkit of legal techniques, mechanisms, and processes to achieve such changes include schemes of arrangement which require a court to approve some give and take with customers and using powers in legacy customer policies to effect change by way of endorsement or similar methods.

With such projects being time and resource intensive, time is very much of the essence if firms intend to deliver large scale changes before the Consumer Duty applies to closed books. While no form of legacy simplification is easy to achieve, the duty, and its focus on the proactive avoidance of poor outcomes, has increased the risk of passivity. To put it another way, the risk of doing nothing is becoming more acute.