Implementing Consumer Duty for Closed Book Products – Are you Prepared?
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2024年2月21日
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After the Financial Conduct Authority’s (“FCA”) July 2023 deadline for implementing the UK’s Consumer Duty for on-sale products, a significant transition phase remains. The immediate focus for banks is now on the upcoming July 2024 deadline for closed-book products and services.1 It’s crucial for financial institutions to maintain momentum, shifting their strategies and resources to adapt to these new regulatory expectations. This ongoing process involves not only meeting but exceeding the standards set for customer-centric operations.
Embedding Consumer Duty Across the Organisation
As the year unfolds, firms are adapting their operations significantly to align with the FCA’s standards. They are restructuring their operational models to prioritise customer outcomes. This operational shift manifests in various ways, including the redesign of product offerings, the enhancement of customer service protocols, and the implementation of more rigorous compliance monitoring systems. These changes are not merely about compliance; they represent a strategic reorientation towards more ethical and customer-focused business practices. The firms are actively reengineering their processes and systems to ensure every aspect of their operation contributes to better customer outcomes, demonstrating a profound change in how they conduct their business.
Approach for Closed-Book Products
The FCA’s emphasis on elevating closed-book products to the same standards as open-book ones poses a complex challenge. The Consumer Duty webinar in December 20232 highlighted key differences in applying these standards to closed products. Nish Arora, FCA’s director of cross-cutting policy and strategy, underscored the importance of adapting, not just replicating, strategies from open-book products. Firms must now navigate these nuances, balancing regulatory compliance with the unique characteristics of off-sale products.
Addressing the complexities associated with closed-book products demands a focused approach, particularly when dealing with data limitations and outdated system infrastructures. These challenges require firms to innovate and adapt their strategies to effectively manage and revitalise these products. The process includes a detailed analysis of product characteristics and performance metrics and their alignment with customer outcomes. It’s crucial for firms not only to adhere to FCA regulations but also to aim for the broader objective of delivering positive customer experiences.
Strategising for Closed-Book Products
A targeted methodology is essential for handling closed-book products, including product modifications, migrations or divestitures. The strategy must be tailor-made to accommodate the diverse nature of closed-book products, reflecting each firm’s scale and complexity.
Initial Review and Assessment: This stage involves collecting detailed data on closed-book products, grouping them by similar characteristics and prioritising based on potential customer harm.
Firms should start by establishing a triage methodology for off-sale products analogous to the one used for on-sale products. This methodology needs to define clear thresholds for triggering remediation actions.
Early engagement with senior managers is crucial to ensure that legacy products are in sync with the overarching business strategy of the firm. This is important in cases where firms are actively working on initiatives that simplify and streamline their product offerings. In these situations, firms should identify which off-sale products might be suitable for transitioning to current, on-sale products. Adopting this forward-thinking strategy can greatly enhance efficiency, eliminating the need for in-depth reviews and complex remediation for certain products, thereby saving both time and resources.
Furthermore, the practice of classifying products within an existing product inventory has been a common approach for many firms when evaluating on-sale products. However, with the FCA defining off-sale products as those not actively marketed or available for renewal, precise classification becomes even more critical. This precision ensures that products which are temporarily withdrawn from the market are not inadvertently missed during the review process that spans both on-sale and closed-book products. Through diligent categorisation and evaluation, firms can prevent potential oversight, guaranteeing a comprehensive and effective review of their product lines.
Design and Implementation of Treatment Strategies: After assessment, firms must decide on appropriate actions, which could include maintaining, repairing, migrating, integrating or closing certain product lines.
Once the assessment phase is completed, firms are faced with the critical task of determining the most suitable treatment strategies for their closed-book products. Unlike open products, where the primary question revolves around how to uplift products to meet the duty, closed products require a broader perspective, including considering whether a product should be uplifted at all.
There are essentially four main strategies for handling closed-book products, each requiring careful consideration of customer impacts:
- Maintenance and Refinement: This approach entails a comprehensive gap analysis. The key here is to apply certain aspects more flexibly or realistically depending on the nature of the closed product. A significant operational benefit of this strategy is the ability to leverage pre-existing structures, such as frameworks, templates and governance models, which can expedite the process.
- Strategic Adjustment: When certain products do not fit into the firm’s future vision or when migration, closure or merging are not feasible in the short term, a strategic adjustment or tactical repair becomes necessary. This could mean simplifying the product and implementing necessary enhancements to ensure it meets customer expectations effectively. Occasionally, this approach might also entail guiding customers towards other, more suitable products, blending this strategy with elements of migration or closure.
- Migration, Consolidation or Integration: This option is considered for products that either lack commercial viability or are unable to demonstrate beneficial outcomes for customers. Proactive steps like migrating, consolidating or integrating these products are explored. The suitability of closing a product often hinges on its natural renewal or expiration timeline. Integration may be a practical solution for scale, but it’s imperative to assess its impact on customer experiences. Migration can be a practical alternative, especially for closed products that are similar to those currently available.
- Divestiture or Transition: This is more of a long-term strategy, encumbered by challenges related to timing and regulatory responsibilities under the Consumer Duty. Therefore, while not an immediate solution, it remains a viable option following the implementation of other strategies.
In determining the most appropriate course of action, firms need to weigh both quantitative and qualitative elements in their analysis. Engaging a broad range of stakeholders is crucial to arrive at a consensus that considers all angles for each product or group of products. Documenting these decisions and the rationale behind them through a comprehensive audit trail is vital for maintaining transparency and ensuring accountability in the decision-making process.
The Importance of Consumer Duty Annual Reports
Annual reports are critical in demonstrating a firm’s compliance with Consumer Duty. These reports, thoroughly reviewed by the board and senior management, serve as essential instruments of internal governance. They are a testament to the firm’s dedication to achieving desirable consumer outcomes, a point stressed by Arora.3 By mid-2024, these reports will become a primary resource for the FCA to evaluate the extent of firms’ compliance with the duty, particularly focusing on consumer benefits and the effectiveness of board-level oversight.
In the first half of 2024, banks should focus on analysing the impact of the fully implemented duty on their business models. This analysis should identify the reliance of bank profitability on products where the benefits to consumers are less obvious. Examples include customers in prolonged overdraft situations or those with older savings accounts that have not kept up with the interest rates of newer accounts. The FCA has indicated its intent to scrutinise such products closely. It is imperative for boards and senior management to ascertain that these products meet the duty’s standards for pricing and value. Where discrepancies are found, adjustments to the product’s pricing or target market may be necessary, alongside evaluating implications for the bank’s long-term viability. This comprehensive analysis will form a crucial component of the board’s report on duty compliance, which banks are required to finalise by July 2024.
Embracing the Consumer Duty as an Opportunity
To fully integrate the Consumer Duty, firms must adopt a comprehensive strategy that goes beyond merely adjusting their product lines. This strategy involves a fundamental shift in organisational culture and practices to prioritise consumer interests. It’s essential for firms to weave ethical considerations into every aspect of their decision-making, ensuring that their actions are not just compliant but also embody the essence of the duty. Implementing the Consumer Duty, especially for closed-book products, extends beyond meeting regulatory obligations; it presents a unique chance for firms to transform how they interact with their customers. Embracing this shift allows firms to foster trust, bolster their reputation and establish a foundation for enduring success in an ever-changing financial environment. Achieving complete compliance with the Consumer Duty demands meticulous planning, decisive action and sustained dedication. However, the benefits of adopting a consumer-focused ethos are vast and deeply impactful.
How FTI Consulting Can Help
With the deadline for the new regulations fast approaching, financial institutions need to quickly adapt. FTI Consulting is well-equipped to offer specialised support in this area, drawing on a team of seasoned consultants, industry experts and former regulators. Having assisted various firms across multiple sectors in designing, executing and ensuring the quality of their open product programmes, we are now extending our services to include closed product programmes. Our capabilities4 encompass regulatory expertise, practical operational insights, and specialised technology and tools designed to facilitate the implementation of the duty.
For firms looking to strengthen and expedite their plans for closed product programme implementation, FTI Consulting is ready to assist. We encourage you to reach out to discuss how we can support your firm’s specific needs.
出版
2024年2月21日
主な連絡先
Senior Managing Director, EMEA Head of Financial Services, Forensic & Litigation Consulting
シニア・マネージング・ディレクター
マネージング・ディレクター
Consultant