FCA publishes Consumer Duty 'Dear CEO' letters

The FCA has published a series of 'Dear CEO' letters, setting out its expectations ahead of the the Consumer Duty's implementation in respect of closed products and services. The letters are sent ahead of the 31 July 2024 deadline.

The Consumer Duty has been in force for almost a year and so you'd be forgiven for any confusion over further implementation. However, the Consumer Duty has only been in force in respect of open products and services so far. On 31 July 2024 (on a day we refer to as CD Day in this blog), the Consumer Duty will come into force for closed products – these are products where there was a contract with retail customers (entered into before 31 July 2023) and where these products / services have not been marketed or distributed to retail customers on or after 31 July 2023. The FCA is making it clear - firms need to be ready.

The letters have been sent to CEOs of the following firms:

• Asset Management firms;
• Consumer Finance firms;
• Consumer Investment firms;
• Life Insurance firms;
• Retail Banking firms; and
• All other firms

What does the FCA want?

The 'Dear CEO' letters are aimed at supporting firms in their final preparations for CD Day. So, what exactly is covered? 

Priority areas

Aside from reminding firms that the Consumer Duty will now apply to closed products, the letter confirms the five key themes that firms should already be considering. These include:

1. Gaps in firms' customer data
2. Fair value
3. Treatment of consumers with characteristics of vulnerability
4. Gone-away or disengaged customers
5. Vested contractual rights

If you're familiar with the FCA and their current concerns, it'll be of no surprise that they reference gaps in customer data. The FCA has been pushing, particularly in the last 12 months, for improved data gathering and this may be a specific concern with closed products, where client contact may be more infrequent.

In respect of fair value, the FCA has reiterated that there must be a reasonable relationship between the price customers pay and the benefits of the product or service they receive. Suggestions include assessing the total expected price to be paid and considering if this is reasonable for a retail customer.

Firms must also ensure that if a customer does show a characteristic of vulnerability, that they are not negatively impacted by aspects of the product design. It's likely to be an issue that firms will need to grapple with regularly, given a 2022 FCA survey showed that 47% of adults show one or more characteristics of vulnerability.

In terms of gone-away or disengaged customers, the FCA reminds firms that they should consider the actions to be taken and, importantly (particularly for any claims they may face), that they can evidence the steps they have taken to re-engage or discuss the product with the customer.

Finally, the letters confirm that firms are not expected to give up any vested contractual rights, in order to protect customer interests. Having said that, the letters are not particularly helpful in what should happen instead – the FCA simply confirms that if firms do not wish to give up the vested rights, the firm should consider other ways to prevent harm. Examples include allowing greater flexibility on how customers engage with a product, or providing increased customer support to help customers avoid the risk of poor outcomes occurring.

In summary, firms need to ensure – and be able to evidence – that they are acting to deliver good customer outcomes (in line with the overall expectations of the Consumer Duty).

Next steps

If firms are found to be not complying with the Consumer Duty following CD Day, the FCA is unlikely to have much sympathy. It's clear the FCA is keen to offer any support necessary before implementation and indeed, the letters refer to the fact that firms have been given an additional year to ensure closed products are able to comply, in comparison with open products. In theory, firms have had 12 months of living with the Consumer Duty before they are being asked to make changes for closed products – they might even be considered to have their own examples of best practice.

If breaches of the Consumer Duty are found, the FCA says it will take an approach that is proportionate to the harm (or risk of harm) to customers, prioritising the most serious breaches and acting swiftly and assertively.