July 31, 2024, marked a significant regulatory milestone for financial firms as the Consumer Duty's scope expanded to include closed products and services. On this date, financial firms were also required to submit their first annual board report, assessing their implementation of the Consumer Duty. These developments highlight the unique challenges and responsibilities that come with ensuring compliance for closed products, along with other aspects of the Consumer Duty regulations and FCA’s data management requirements.
Understanding FCA's Closed Product Reports
Closed products are financial offerings that were sold before July 31, 2023, and are no longer marketed to new customers. Despite their discontinued status, these products still have existing policyholders or account holders, which means firms must ensure they continue to deliver fair outcomes. The FCA has released new reports focusing on these closed financial products, offering essential guidance on managing these legacy offerings under the updated Consumer Duty regulations.
Challenges in Managing Closed Products
The FCA’s recent reports identify several key challenges firms face in managing closed products:
- Data Gaps and Legacy Systems: One of the primary challenges is dealing with incomplete or fragmented data from older systems. This makes it difficult to assess and ensure fair value for these products, as firms often rely on outdated benchmarks.
- Fair Value Assessments: Accurate assessments are hindered by reliance on outdated benchmarks or incomplete data. The FCA stresses the importance of comprehensive and credible evidence to justify the value delivered to consumers.
- Consumer Engagement: Engaging less active or “gone away” customers poses another challenge. The FCA emphasises the need to maintain communication and support for all customers, even those who may not actively engage with their financial products.
Regulatory Expectations and Compliance
The FCA’s reports detail clear expectations for firms managing closed products:
- Ongoing Obligations: Firms must continue to meet regulatory obligations for closed products, ensuring they still deliver fair outcomes. This includes regular reviews and updates to product terms and customer communications.
- Consumer Duty Compliance: The Consumer Duty, which fully applies to closed products as of July 2024, requires firms to provide evidence of fair outcomes and value. The FCA expects firms to embed these requirements across all organisational levels.
- Board-Level Accountability: The FCA underscores the importance of board-level leadership in overseeing the management of closed products. Boards must ensure that robust processes and controls are in place to comply with the Consumer Duty.
By addressing data gaps, enhancing fair value assessments, and ensuring robust consumer engagement, firms can better manage closed products and uphold their regulatory obligations.
FCA Board Reports
July 31, 2024, also marked the deadline for firms to submit their first annual board report under the broader Consumer Duty implementation. These reports are critical in demonstrating how firms evaluate their ability to provide good customer outcomes and identify areas where expectations are not being met, along with the actions taken.
Key Areas of Focus in Board Reports
- Consumer Duty Compliance: The primary expectation is that board reports will provide detailed evidence of Consumer Duty compliance. Firms must demonstrate how they have integrated the Duty into their operations, governance, and culture. Key elements include:
- ● Fair Value Assessments: Detailed analyses of pricing, benefits, and costs of their products and services, particularly for vulnerable consumers.
- ● Consumer Outcomes: Data and case studies evidencing positive consumer results, such as improved financial well-being and satisfaction.
- Data and Evidence: Robust data collection and analysis are critical for demonstrating compliance. This includes both quantitative metrics and qualitative evidence.
- Board-Level Engagement and Governance: The reports must reflect strong board-level engagement with Consumer Duty, including detailed board meeting minutes, governance frameworks and evidence of cultural changes within the organisation to prioritise consumer interests.
- Management of Closed Products: Ensuring that closed products continue to meet consumer needs and provide fair value remains a significant focus.
Broader Implications for the Financial Sector
- Enhanced Accountability: The requirement for detailed board reports will enhance accountability within the financial sector, ensuring that firms remain focused on delivering fair outcomes.
- Improved Consumer Trust: Transparent reporting and positive consumer outcomes will help to bolster consumer trust in the financial sector.
- Operational and Cultural Transformation: The focus on comprehensive reporting will drive operational and cultural changes within firms, cultivating a culture that emphasises consumer interests across all organisations.
Technology as a Catalyst for Better Outcomes
Technology has transformed the financial advisory landscape, making it more efficient and accurate. Integrating tools like cashflow planning, financial goals, risk profiling, investment suitability, and ESG preferences enhances consumer understanding and offers insights into effective communication strategies tailored to different client segments. These systems not only help in delivering good client outcomes but also ensure transparency and compliance with Consumer Duty regulations. A clear audit trail provided by these technologies can further demonstrate compliance with applicable legislation.Conclusion
The extension of the Consumer Duty to include closed products and the requirement for annual FCA board reports underscore the need for financial firms to prioritise transparency, robust data management, and continuous engagement with regulatory requirements. By addressing these areas, firms can meet regulatory expectations and foster a more consumer-centric and trustworthy across the financial sector.Contact
Roxanne Mehdyoun
Senior Client Manager
Iwan Schafthuizen
Managing Director Business Development and PlatformsRelated Insights
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