In a recent speech and webinar, the FCA emphasised that two specific areas of focus for firms in the coming months should be their closed products work and the first annual board report under the Duty, both of which are due by 31 July 2024.

In mid-December 2023 the FCA also published the key findings from its review of retail banking firms’ implementation of the Duty, setting out examples of good practice as well as areas for improvement.

Closed books review

Recap of FCA's non-Handbook guidance

Chapter 3 of the FCA's final non-Handbook guidance on the Duty (FG22/5) provides guidance on how the products and services outcome applies to closed products and services. For example – and as the FCA also pointed out in its December 2023 webinar 'Consumer Duty: The next steps' - given there will be no further sales, there are no requirements for firms to have a target market or distribution strategy for the product or service.

Firms' review of closed products and services under the Duty should include:

• Reviewing the product or service during the implementation period, and on an ongoing basis, under the cross-cutting rules. Are there aspects of the design of the product or service which mean they are not meeting these rules? . If any aspect of the design could cause the product or service to breach the cross-cutting rules, firms should take appropriate action to mitigate harm.
• Ensuring products continue to offer fair value under the price value outcome rules.
• Ensuring they meet the consumer understanding and consumer support outcomes in respect of these customers. For some closed products many of the aspects of the post-sale customer journey may be common to current products and services so this may be more straightforward although consideration will need to be given to whether the customer documentation needs to be enhanced through additional material or access to improved information – for example, through FAQs on the firm’s website.

FG22/5 goes on to state that when reviewing closed books, firms could consider:

• Carrying out an initial review first. For example, firms might want to consider what aspects led to the decision to close the product or service, to see if that has a bearing on customer outcomes. If a product was closed because it offered poor value compared to newer products, this is clearly a factor to consider.
• Prioritising review of products or services with higher risk of consumer harm. For example, if a firm has received complaints about a product, such as in relation to price and value, it could focus on that product.
• Incorporating a review of the elements of the Duty into existing and ongoing review cycles, so long as the remaining implementation deadline for compliance with the Duty is met.
• Grouping similar products and services together for review. For example, firms may be able to:
  • analyse cohorts of products or services together, or
  • more quickly conclude, for instance, that more recent closed book products or services (which are similar to those still on sale) provide fair value going forward.

By ‘similar products and services’, the FCA means those products and services that are intended to meet similar customer needs and where the customer base is similar. Firms should consider if it is appropriate to group the products or services in question. They should consider if the customer base, complexity and risk of consumer harm are sufficiently similar. Firms should not group products or services where they are aware of any issue that could impair their ability to assess that product or service adequately.

FG22/5 also states that firms will need to consider how to address any harm to customers in these products and services, and sets out further guidance on assessing fair value and on actions to address potential harm.

What has the FCA said about the closed books review process?

During the December webinar, firms were advised by the FCA to prioritise their closed book work, and to identify and consider the biggest gaps/areas of potential harm. This should include considering why a product was closed, eg was this because there were a number of complaints, or because the product didn't deliver value? It was stressed that the FCA is taking closed product implementation seriously, so firms should do likewise.

Specific examples that were called out during the webinar included:

• The life sector for insurance, where it was stated that closed products is a big issue and where most work still needs to be done regarding the Duty. As some closed products date back to the late 1980s/90s – there will be problematic clauses that need to be brought up to date for fair value. The FCA encourages firms to speak to it if they are having issues with closed books.
• Retail banking, where it was suggested that the closed products deadline will be even more of a challenge for some firms than the on-sale one was (eg in relation to mortgages and savings products of long standing showing significant instances of customer inertia). The FCA wants to see firms scoping products and services and properly resourcing for their closed products review. They should also be using the lessons learned from their on-sale reviews for the first implementation deadline. The FCA expects firms to consider what constitutes fair value and fair outcomes. It will be working closely with the FCA Payments Division and will continue to engage through various channels including portfolio letters, speeches, industry events and roundtables.

First annual board report

Recap of FCA Handbook rules and non-Handbook guidance

PRIN 2A.8.4R requires a firm's board, or equivalent governing body, to review and approve an assessment of whether the firm is delivering good outcomes for its customers which are consistent with the Duty. This should be done at least annually.

According to FG22/5 (paragraph 10.12), the assessment should include:

• The results of the monitoring that the firm has undertaken to assess whether products and services are delivering expected outcomes in line with the Duty, any evidence of poor outcomes, including whether any group of customers is receiving worse outcomes compared to another group, and an evaluation of the impact and the root cause.
• An overview of the actions taken to address any risks or issues.
• How the firm's future business strategy is consistent with acting to deliver good outcomes under the Duty.

Under PRIN 2A.8.5R, before signing off the assessment the board (or equivalent governing body) should agree the action required to address any identified risks, or any action required to address poor outcomes experienced by customers and agree whether any changes to the firm's future business strategy are required.

What has the FCA said about the first annual board report process?

In its December 2023 webinar, the FCA stated that firms need to reflect on actions coming from their implementation plans, looking at data points that have been enriched in the last few months and at the commitments that they intended to deliver on, as well as looking at what MI assessments are telling them and using that to assess where they are and what else they need to do next to improve and continue delivering. For very small firms, the FCA advised bringing in an independent ‘critical friend’ to ensure objectivity around the assessments that the firm is undertaking.

The FCA also made it clear in the webinar that the board report should be seen as a very important internal governance matter. It was stressed that boards have a 'critical role' in ensuring that their firms deliver outcomes, and should challenge executives to deliver the Duty. In addition, ongoing outcomes monitoring will be a very important aspect of the board report, which should not be viewed as a tick box exercise.

Firms should take particular note that the FCA mentioned it will check that boards have the right data and MI, and is planning to ask a sample of firms to provide their board reports to it. The FCA will then feed back on what it sees in that sample, in order to drive good practice across the industry.

The key message from an FCA speech on 1 November 2023 (reiterated during the December webinar) was that the Consumer Duty is not a ‘once and done’ compliance exercise, but should instead create an enduring cultural shift throughout firms. This means that firms need to make sure they’re assessing, testing, understanding and evidencing the outcomes their customers are receiving on an ongoing basis.

The FCA stated that where this process is done well, firms have focused on the outcomes they are aiming to deliver and have identified the data they need to measure and monitor that these outcomes are delivered.

The FCA emphasised that firms who haven’t considered how they will monitor outcomes for different groups of consumers, including those in vulnerable circumstances, will need to do more to meet its expectations. Firms should be using this whole process to learn and improve continuously and must be able to evidence this in their annual board report.

FCA key findings from retail banking Consumer Duty multi-firm work

Summary of key findings

Some of the FCA's key findings included:

• Frameworks and methodologies: Frameworks with clear expectations and/or user guides allowed for application across different products and services and so for use across the business, eg frameworks directly mapped to sections of FG22/5, which highlighted the metrics and reasoning for each section. Firms using a range of data points, rather than relying on a single source in their review, were better able to consider different types of customers, and outcomes for customers in different scenarios, and therefore were able to clearly identify areas requiring improvement or remediation in line with the Duty.
• Results and outputs: While many firms had clear plans in place including suitable remediation, ownership, timelines for completion, budget and mitigation plans until the gap was resolved, not all firms provided the FCA with the complete outputs of their analysis. The FCA reminded firms that they need to monitor their customer outcomes, and to be able to provide evidence of their monitoring and assessment of these outcomes and any resulting action, on request.
• Distribution strategy and target market: The better frameworks had clearly identified the target market, including who the product was and was not suitable for (with specific identification of customer cohorts).
• Product design and features: The FCA reminded firms that they should ensure they have adequate monitoring in place when reviewing product design and features or when introducing new products.
• Considering vulnerable customers: This was lacking in some firms’ documentation, so the FCA reminded firms that the Duty raises the standard of care to all consumers and referred them to its guidance on the fair treatment of vulnerable customers.
• Consumer understanding: Firms demonstrating better practice had identified the area responsible for the communication, identified key communications or prompts customers used in decision-making and used a range of testing (controlled trials, experiments, surveys, interviews and focus groups) when reviewing consumer understanding. These firms then put clear actions in place to identify gaps and improvements needed to increase consumer understanding.
• Improvements to specific journeys: The findings covered customers in financial difficulty (CiFD), reporting fraud, and reporting bereaved/deceased customers. On this last area, the FCA was pleased to see that many firms had been able to identify ‘sludge practices’ which caused delays to resolving issues.
• Improvements to specific products: This covered business current accounts (BCA) and mortgages used for debt consolidation. On BCAs, the FCA expressed its disappointment that reviews of BCAs varied between firms. It reminded firms that the Duty also applies to SME customers in line with the approach in its existing rulebook. In addition, the FCA found that very few firms were able to identify vulnerable customers within their BCA reviews. The FCA expects firms to be able to identify BCA customers in vulnerable circumstances to the same standard as they would for personal customers. The FCA was also disappointed that several firms did not consider that consumers were using mortgages for debt consolidation purposes. This is necessary even where firms may not have specifically designated the products as debt consolidation products.

What should firms be focusing on?

In terms of next steps for firms, the FCA states that all firms should evaluate their products, services and processes against the Duty rules and guidance on an ongoing basis. The FCA also emphasises that firms need to ensure they have the appropriate MI and can evidence the outcomes their customers are receiving.

The review findings may also be helpful for firms as they consider what changes they need to make to closed book products ahead of the July implementation deadline to ensure the FCA's expectations are met.

FCA will be asking to see closed book implementation plans and board reports

The FCA will engage with firms on their implementation plans for closed book products. As the FCA mentioned in its recent webinar (see above 'What has the FCA said about the first annual board report process?'), firms should also expect it to ask for the results of their monitoring and their board reports. The FCA will use this information, as well as the information that it already gathers from firms and other sources of data, to assess them against the Duty and identify and address harmful practices. 

More cross-sector work ahead

In addition to sector-focused work, the FCA will also explore how firms are meeting its expectations under the Duty for themes and issues across multiple sectors. The findings from this review will feed into this cross-sector work. The FCA states that there is real scope for learning from different industry areas, and it wants to drive forward good practice across financial services.

Next steps

The FCA’s Consumer Duty already applies to new and existing products or services open to sale or renewal. It will apply to products or services held in closed books from 31 July 2024. Those firms with closed products and services should check that they are on track to meet this implementation deadline.

Firms' first annual assessments on complying with the Duty are also due by 31 July 2024. ​

Other areas of potential concern in current implementation of the Duty that were identified by the FCA during its December 2023 webinar included firms' approaches to fair value, vulnerability, and information sharing in the distribution chain. A number of examples of good and poor practice across the retail banking, consumer investments, insurance and consumer finance sectors were provided. You can watch a recording of the webinar on the FCA website here (registration required). For retail banking, see also 'FCA key findings from retail banking Consumer Duty multi-firm work' above.

Our Consumer Duty hub provides a number of useful resources to help firms as the second major implementation milestone approaches.

If you would like to discuss any aspect of the Consumer Duty, including the upcoming closed books review and annual board report deadlines, please get in touch with one of the people listed above or your usual Hogan Lovells contact.

Authored by Julie Patient and Virginia Montgomery.