Consumer Duty: Closed Products Shouldn’t Have to Compete

When the FCA initially announced that closed products would be given an extra year to comply, firms could have been mistaken in thinking the impact of Consumer Duty was less. Given the FCAs consistent messaging to prioritise products most likely to cause consumers harm, it would have indicated that open products were their main concern. However, the extended deadline was an acknowledgment from the FCA of the monumentally difficult job firms would face in getting closed products to comply.

Now, as we move towards the impending July date, I am becoming increasingly apprehensive. I should clarify, overall, I do believe Consumer Duty to be a real positive for the industry. My concern comes from the tone of messaging being directed at firms when it comes to the regulation. To me this indicates a risk of overregulation and has the potential to hinder the growth in the UK financial sector, which the industry, regulator, and government so desperately hope to achieve.

To clarify, it is all about getting the balance right. I used to watch people roll their eyes whenever Treating Customers Fairly (TCF) was raised in conversation. This wasn’t necessarily because they didn’t care but rather due to the regulation being so vague. It was often hard to implement consistently and mostly treated as afterthought. The largest problem though was that consumers couldn’t be treated the same because simply they are not. There is no ‘fair for all’. With Consumer Duty the FCA has proven it can build meaningful regulation around the less intangible factors. However, the danger comes where outcomes are compared across different products. For Consumer Duty to work outcomes should only be assessed against each individual product. If the FCA insist on products providing fair outcomes this could cause more harm overall than good.

The problem comes when we start discussing what is now widely recognised as the most challenging outcome of the Duty – fair value. But what does this mean? How does a firm assess a product or service as fair? Well, most firms have taken the approach to bring themselves in line with what they consider to be the “market standard”. Looking at their competitors and charging similar fees or delivering similar features. This is instinctively a problem and neither what the FCA intended from Consumer Duty nor the correct solution for the UK market. Simply it does not promote the innovation required. Whereas for closed products, this expectation is not a realistic target, nor should it be. Therefore, other options need to be explored.

As per the Financial Services and Markets Act that came in to force in 2023, the role of the FCA has changed. On top of protecting consumers and markets the FCA’s secondary objective is to facilitate international competitiveness and growth of the UK economy. For this to happen the FCA are looking for the removal of substandard products to help drive more innovation within the sector.

The consequence being that service levels generally deliver poor outcomes with slow transfers and process turnarounds. Accompanied with all of this comes high operational costs. This is one example where the FCA will need to be pragmatic, as it may not deliver good outcomes for firms to consolidate pensions. Resulting in rising costs due to new systems and features being forced to be made available to clients to deliver similar good outcomes seen for open products.

In December, the FCA implored firms to consider the reasons as to why products were closed in the first place. Products will have been taken off sale for a reason, whether it due to a high volume of complaints, inefficient tech, poor product or no longer meeting the compliance requirements. Simply they were no longer commercially viable to be rolled out to new customers or couldn’t be. Firms will therefore need to be proactive. If these issues can’t be resolved in the short-term then they will need a clear roadmap for how they can deliver good outcomes for consumers in the long term.

In the short-term firms should consider how they can comply with the duty to deliver good outcomes for consumers whilst mitigating the foreseeable harm they know the products may cause. Firstly, they should update any vested rights if possible, allowing customers to easily exit where necessary.  Additionally, firms can assess their processes to identify where the turnaround times do not deliver good outcomes due to system limitations. Where they cannot optimise their processes further, they will need to ensure they allocate enough resource instead to ensure good outcomes are delivered. This will not be sustainable but will be necessary to comply with Consumer Duty once it comes in to effect.

In the long-term firms will need to look at the strategic solution. Whether they need to migrate clients to similar products when good outcomes can’t be achieved, migrate the books of business to consolidators or other providers. Consequently, though the expectation will be to meet the same standards as expected of open products if clients are to remain. If this option is chosen then clients will need to be moved to a new system, if the current system is not sufficient and ensure the data infrastructure is of a similar standard to support good outcomes. Firms should not continue to use the same outdated systems. Otherwise it will continue to impede the necessary innovation required to stimulate growth whilst continuing to deliver worse outcomes for consumers overall.

There will of course be exceptions to the rule where the options will be more limited. An example would be private Defined Benefit Schemes, given that the returns will outweigh that of other pension schemes, firms will have to ensure that the necessary IT infrastructure and appropriate operating model is in place to support good outcomes. For most legacy products however, a hybrid approach should be explored, as no one option will deliver good outcomes for the whole client base.

The question remains as to whether the FCA will take a pragmatic view to closed products and where possible allow firms to reduce closed books of business in the best interest of the industry and consumers. The aim should not be to enforce firms to meet the standards of similar open products by just updating their current system to comply. For the prospects of UK Financial industry, I hope that the FCA support outcomes that benefit consumers overall and not just individuals. I hope the FCA encourage innovation and support firms to deliver better products to its consumers. This is a pivotal transition that is long overdue, so I do truly hope the FCA support the industry in achieving the right objectives.