FCA issues ‘good implementation’ expectations for consumer duty

It follows six “Dear CEO” letters issued by the FCA highlighting the upcoming consumer duty implementation deadline of July for “closed” products and services. This applies to contracts entered into before 31 July 2023 for goods or services that are no longer marketed. 

Venetia Jackson, financial regulation expert at Pinsent Masons, said: “The new duty is a living piece of regulation. While firms may have done a lot already to implement the duty, the journey is far from over. The six letters are a crucial part of this journey with the FCA providing a useful guide on issues it expects firms to be working to address.”

The consumer duty mandates financial firms to act in good faith, avoid foreseeable harm, and support their customers to achieve their financial objectives. Firms must provide goods and services that are not only suitable but also provide fair value, ensuring customers receive understandable communications and appropriate support.

Elizabeth Budd, financial services expert at Pinsent Masons, said: “The duty is a challenge for firms, but also an opportunity to build trust and strengthen relationships with their customers. Customer re-engagement and addressing legacy products will give firms a strong base for future development.”

The letters highlight several “priority areas” for implementation that apply across the industry. These are gaps in firm’s customer data, the analysis of fair value, the treatment of vulnerable customers, “gone-away” or disengaged customers and vested contractual rights.

The duty requires firms to monitor, test and evidence customers outcomes. Firms can only meet these requirements for closed products where they have up to date basic details about their customers, with the FCA expecting firms to pro-actively try to fill data gaps or at least work around the limitations created to ensure they are achieving good outcomes for customers. 

Fair value may be a particular challenge for closed products. The FCA letters remind firms that even though the product is closed, there should still be a reasonable relationship between the price customers pay and the benefits they receive.

“Fair value frameworks should be applied consistently, and firms should be alert to whether products exploit behavioural biases and the complexity of products,” said Budd. 

Businesses must ensure that vulnerable customers also achieve good outcomes. The letters highlight this as a particular challenge for closed products which may have a greater proportion of vulnerable customers in their client base. Data gaps compound the problem and the FCA noted the need for firms to consider whether enhanced action, monitoring or support is needed for potentially vulnerable customers of closed products. 

The FCA expects firms to take “all reasonable and proportionate efforts” to trace and contact “gone-away” customers. These are consumers who have moved without notifying their financial institution, resulting in unclaimed assets. These efforts may include enhanced training, with firms required to assess the effectiveness of their activities ensuring that they have processes both for an inability to contact a customer and when a “gone-away” reconnects. The practical implications of this may be different for different products and services.

“The issue of gone-aways is a long-standing problem in financial services. The FCA highlights the need to maintain accurate and up-to-date customer records to meet the requirements of the consumer duty. These letters make it clear that the FCA expects firms to make real efforts to reconnect with customers, even where these may come with significant additional costs,” Budd said. 

“The letter also highlights that firms will need to consider their approach to vested rights carefully”, said Jackson. 

Vested rights refer to the pre-existing contractual rights firms have under their contracts with customers, typically to payments. These are legal rights existing before the duty came into force. The duty is not retrospective in effect and firms remain entitled to these rights. However, a vested right may interfere with a customer achieving a good outcome from their products. 

Firms do not have to give up any vested right, though the FCA notes that they are free to elect to do so. If a firm does not wish to give up a vested right, the FCA emphasises that they will need to consider alternative ways to prevent or manage harm for existing customers, which would include facilitating product switching or greater flexibility on engagement with a product.