By Mike Penny, consultant at Simplify Consulting
When the Financial Conduct Authority (FCA) announced 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 indicated open products were their main concern – but the extended deadline highlighted the difficult job firms face in getting closed products to comply.
As we move towards the impending July date for closed products, I believe Consumer Duty to be a real positive for the industry – but I have concerns around the tone of messaging being directed at firms. It indicates a risk of overregulation and has the potential to hinder the growth in the UK financial sector.
It is about getting the balance right. People used to roll their eyes whenever Treating Customers Fairly (TCF) was raised in conversation because of the regulation being so vague. It was often hard to implement consistently and mostly treated as afterthought. The largest problem was consumers couldn’t be treated the same because they are not. The FCA has proven with Consumer Duty 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 insists on products providing fair outcomes, this could cause more harm than good.
One problem when discussing what is now perceived the most challenging outcome of the Duty – fair value – is how does a firm assess a product or service as fair? Most firms have brought themselves in line with what they consider to be the “market standard” by looking at their competitors and charging similar fees or delivering similar features. This is neither what the FCA intended nor the correct solution for the UK market. It doesn’t promote the innovation required. Whereas for closed products, this expectation is not a realistic target, and other options need to be explored.
The role of the FCA has changed with the Financial Services and Markets Act 2023. 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 is looking to remove substandard products to help drive more innovation.
Closed products are more likely to fit the specification of substandard. There are still examples of products being held on legacy systems designed in the 80s, with a limitation on data that can be extracted. The consequence being impacted service levels that deliver poor outcomes with slow transfers and process turnarounds. Accompanied with all of this comes high operational costs.
For example, small pots are constantly highlighted in the pensions industry due to their inefficiency for the market. They are costly to administrate and would benefit from being consolidated across products and/or providers into one overall pot.
This is one example where the FCA will need to be pragmatic, as it may not deliver good outcomes for firms to consolidate pensions. Therefore, the FCA needs to decide and communicate to firms whether they want inefficiencies like this to remain? If consumer outcomes are to be prioritised over market inefficiencies, it may even exacerbate the issue
further, and result in rising costs due to new systems and features being forced to be made available to clients to deliver similar good outcomes as 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 design or no longer meeting the compliance requirements. Firms will therefore need to be proactive.
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 and address these issues.
In the long-term, firms will need to look at the strategic solution. They may need to migrate clients to similar products when good outcomes can’t be achieved or migrate the books of business to consolidators or other providers. Consequently, 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 where the current system is not sufficient and ensure the data infrastructure is of a similar standard to support good outcomes. Consequently, firms should not continue to use the same outdated systems.
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. This is 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 the FCA support outcomes that benefit consumers overall and not just individuals, as well as encourage innovation and support firms to deliver better products to its consumers.
