Steven Cameron, Pensions Director, discusses the latest developments of the consumer duty from the FCA – including the next deadline and how it links into other regulatory developments. Steven looks at some of the recent webinars, speeches and supervisory interventions since the 31 July 2023 deadline and the potential impact on your business. 

The following information is based on our understanding of current, and upcoming, government and regulatory proposals as at May 2024.

  • Discuss recent developments concerning the Consumer Duty.
  • Examine the links to other regulatory initiatives.
  • Look at possible future developments if Labour forms the next Government.

(00:01) Hello and welcome to Aegon's latest webinar on the FCA's Consumer Duty. I'm Steven Cameron, Pensions Director at Aegon, and I'll be covering the latest developments from the FCA as well as the kind of head to what might be coming next. This session does qualify for 30 minutes of CPD, so after you've watched the session, simply answer the short quiz that you'll find below the webinar, and we'll send you your CPD certificate. So what am I planning to cover? Well we've got a deadline coming up. If you're watching this ahead of the 31st of July deadline, then I hope you'll find this useful in your final preparations. However, if you're watching it after that deadline, I also hope that there might be some material here, which will help you assess whether or not you've got everything in place that you should have done. So first of all, I'll be looking at what's coming up for that 31st of July deadline for closed books of business.

(00:55) There's also a deadline, the same deadline to have your board's compliance reports available, and the FCA might ask for these. So better get these ready as well. I'm going to look at some of the recent webinars, speeches, Dear CEO letters, and also supervisory interventions, which we've had since the 31 July 2023 deadline. I'll then look at how the consumer duty is linking into other regulatory developments, and we always knew that the FCA would focus on consumer duty elsewhere and its activities, and it certainly has done. And I'm then going to finish with some thoughts from the Labour Party as to what they think of the consumer duty. But first, I'd like to focus on the closed book deadline. I've pulled together here some key considerations for both manufacturers and distributors. You'll probably take from this slide that I think that manufacturers probably have more to consider for closed books than distributors.

(01:54) But when I talk about manufacturers implications, you may find that as a distributor, some of this applies to you as well. So first of all, a reminder of how you define closed books. These are closed products, which were sold before the 31st of July 2023, but haven't been marketed or sold to new customers since. And importantly, the consumer principle, the cross-cutting rules and the four outcomes apply just as much to closed books of business as they do to open books. So let's look at manufacturers. First of all, manufacturers will have to go through the full approach towards complying with the duty as they did for open books of business. There are two exceptions. One is that you don't need to consider target markets or a distribution strategy. And the reason for that is quite clearly because you're not distributing or selling any new products. But other than that, all aspects apply as as they would for open books of business.

(02:56) Now one of the things which the FCA recognises is that for closed books, which are likely to have been with you for some time, you may have data gaps. You may not have collected as much data initially. You may not have kept that as up to date as you would for newer customers. You might not have, for example, insights into customers' positions or into any vulnerabilities which are exhibited. Ideally, the FCA would like us all as firms to close those data gaps. Because it does recognise that that might not always be possible, in which case to expect a more thorough look at outcomes, the outcomes which those customers of closed books are receiving. One example, my suggestion of what an example of this might be, that if you've got a book of business which has a maturity data, maturity age where no market value reduction factor would apply, and you're finding that lots of your customers are asking to surrender just before or just after that date and therefore suffering a market value reduction factor, then that might not, well, that would not be a good outcome, and you might need to look again at how you're communicating with those customers.

(04:10) Moving on to valuable legacy features. Again, we know that many products that were sold in the past included features which simply aren't available today, things like guarantees or guaranteed annuity rates. Now the FCA recognises that these are valuable, but on the other hand, it's not good enough just to say the product has this feature - job done. You do need to consider whether those features are truly of value to different groups of customers that you have on your closed book. You don't want to find that there are certain groups, subgroups, who are paying for a feature which isn't of any benefit to them or in which they might not have any eligibility going forward. And if that's the case, you should look at considering how to advise them of that to explain that to them. We also know that in the past, products often had more complex charging structures than we would see today.

(05:03) Now, complex charging structures are not necessarily unfair. They could be fair, but you do need to check that. And again, check that not just across the whole book, but for cohorts and groups of customers within your closed book. Another test is that not only do they need to be fair, they need to be explainable. So a highly complex charging structure, which customers simply wouldn't understand, will not pass the FCAs test. The next topic is vested rights. These are rights which are written into your policy documents. So you have a right, for example, to deduct a certain charge, but just because you've got the right to do so doesn't mean it is right to do it. And the FCA that if exercising a vested right would lead to poor outcomes, then the firm should consider waiving that right. Or alternatively explaining to the customer how they might transfer to a different product so that they do deliver, they do receive good outcomes.

(06:05) Again, in the past, we may not all have been as rigorous with our testing of communications to make sure that they all met up to today's high standards of communications. So looking at your closed book, you might find that some are less understandable than perhaps your newer communications are, in which case the FCA would expect you to make proportionate improvements to those communications. Proportionality is a theme that runs all the way through consumer duty, and it is one that we should be a reminder from looking at closed books, particularly if there are particularly small groups of customers affected by some of our findings. Similar to communications, we might find that in the past we didn't offer quite as a varied range of customer support approaches. So for example, online or digital servicing may not be available for some of those closed books

(07:00) Again, the FCA isn't expecting every approach to be offered to every legacy customer. However, there is a requirement to make sure that overall the customer support, and the route to customer support that you're offering, are adequate to the needs of your customer base. One very important aspect, and this will come up a number of times in the next 30 minutes, is that the FCA is absolutely adamant that any services which are being paid for must be being delivered. If you're charging a customer for something but you're not delivering on that, then clearly that cannot be good value and the FCA will look very poorly on any examples of that. Moving on to vulnerable customers, I believe that as an industry we've come on leaps and bounds when it comes to vulnerable customers, identifying them and then adapting our approaches to meet their needs. The FCA equally wants us to look at any characteristics of vulnerability that customers in closed books may have.

(08:04) And you may find that some of these are different from the ones that you're surfacing for customers of new products. So again, something to look at in detail. You also may find that because closed books tend to have been written longer ago that some of your customers who've been with you longer may have become less engaged. Some even might have moved away and not passed on a forwarding contact detail. So it's very important that, again, we check that those customers who may not be engaging are still receiving good value and are still entitled to any services that they're preparing for. One final suggestion, and this came from Nisha Arora in a speech which she gave last year, and she said, when you're looking at your closed book, have a think why did you close a particular product line? Was it because you didn't think it was working in the current economic environment? Was it because you had specific value concerns or was it because you were receiving lots of complaints about a certain aspect of it? Because these could give you real pointers as to how to tackle the consumer duty for those closed books of business.

(09:16) So lots to think about for manufacturers, and as I mentioned, some of this will apply equally to distributors, or certain aspects you might find relevant to your business, in particular to clarity of communications and your approach to vulnerable customers. I do want to come back here to this delivery of services charged for because I know that the FCA is looking specifically at this from an adviser perspective. The extreme example of this would be if an adviser firm was, had negotiated an adviser charge with the client and was deducting that or a fee but wasn't delivering the ongoing service that that fee or adviser charge was to cover. That would be an absolute no-go area. However, for closed books, you may find that some of them are continuing to pay renewal or trail commission. I've not seen anything specific from the FCA on this, but I do think I'd be surprised if the FCA wouldn't challenge a firm who was receiving a significant or a substantial and non insignificant amount of trail or renewal commission and was doing nothing in return for that.

(10:29) So I think that's something that you should think about through your own perspectives. For open books, manufacturers were required to share the outcomes of value assessments with distributors. That's not required for closed books because we're no longer selling or marketing them. However, you might take an interest in any changes which manufacturers are making to products that your customers hold, particularly if you've had concerns about certain features within those in the past. I'd like to move on now to some of the webinars and speeches which the FCA has been making recently. And I believe that as an industry we did really well in complying with the consumer duty by the deadline of 31st July 2023. And I hope that the FCA agrees with me on on that. They did go quite quiet. They didn't see an awful lot in the days following that deadline, and I think if they'd had big concerns, they would've said a lot more.

(11:27) So I take that as the FCA having some comfort in the success so far of consumer duty. However, as the year progressed, the FCA increasingly started reminding us that we had other things to do under the consumer duty. I've already mentioned Nisha Arora, and in her speech she mentioned the fact that the consumer duty was 'not a once and done' piece of regulation. It was something that required the ongoing attention of all firms serving retail customers. She also highlighted that the consumer duty is an important piece of the growth puzzle, and what she meant by that was that the FCA sees the consumer duty as driving improved competition, which is good for UK economic growth. So it links up with the government's agenda. So that's one that if you've not already had a look at, I'd recommend that you seek out. The next one I'd like to flag was a very well attended, many thousands of people attended an online webinar, which the FCA gave on the 6th of December last year, which was looking specifically at the 31st July 2024 deadline for closed books and annual compliance reports.

(12:45) This was targeted, this was aimed at all sectors of the retail financial services industry. So a wide range of audiences, but there were nuggets within that which I think are very useful to review and which I've drawn on when preparing for today's webinar. The FCA has been talking about how it plans for its regulation and supervision to be more targeted, more intrusive, assertive and data focused. And I do believe that we're seeing many examples of that being put into practice. The final webinar, which I'd like, sorry, speech, which I'd like to flag, was from Sheldon Mills in February this year, and it was called 'The art of the possible in a year'. And again, it was looking at what else needed to happen as we move towards that 31st of July deadline 2024. So if you've not already done so, I'd recommend that you have a look for that source material.

(13:46) Moving on now to the Dear CEO letters and other interventions, which we've seen over the last few months. Again, this really brings to life this targeted, assertive, intrusive, data focused approach, which the FCA has taken. The first one, and it was a strong one, was to a Dear CEO letter to wealth managers and stockbrokers. It was very critical in a number of regards. This came out in November last year. The FCA said that many of the products offered in the sector were too complex and that the complexity needed to be justified. They pointed to examples of firms obscuring risks or the risks involved being misaligned to their customer needs. We also highlighted that they were very concerned, and this came up again in the webinar, that many firms in this sector, but I think it can apply wider, are classing too few customers as vulnerable, 49% of portfolio managers and 69% of stockbrokers had identified no vulnerable customers. That's allowing for the fact that the FCA reckons that 50% of us will exhibit a characteristic of vulnerability at some time in your life. So the key message here is just because your clients perhaps are wealthier doesn't mean that they can't exhibit characteristics of vulnerability.

(15:11) And again, in this Dear CEO letter, they did also highlight this point about delivering ongoing services that are being paid for. It's really important that that always happens. So that was the first one. We then had our Dear CEO letter to SIPP providers and platforms, and this was about the retention of interest on cash balances. And this led to a ban on double dipping under which a platform or SIPP might be withholding some of the interest they were receiving on cash balances, but also deducting a platform charge. Now to me, dual charging isn't necessarily unfair. It can actually deliver good value if the two charges in totality are less than any single charge that might be levied. However, I do think therefore that this was more about the communication of these charges and perhaps double dipping was seen as too complex for most customers to understand.

(16:07) We've also seen the FCA intervene on one particular firm challenging the clarity and complexity of the charges it was levying, in particular exit charges. Again, you could argue that exit charges are not necessarily offering poor value, but if they're complex and can't be explained, then that will not stack up in consumer duty world. The FCA also issued a survey to 20 of the largest firms around the ongoing services that they are providing in return for the ongoing fees or charges, which they're deducting. And I've not seen the outcome from that particular survey yet, but one suggestion was that if firms are deducting charges but aren't delivering a service, then they might consider refunding that back to the client. I'm not sure how that would work in a pensions context, but that's what we're seeing.

(17:01) We've also had survey findings of a survey of small firms where the FCA drew out good and poor practices around consumer duty. I personally didn't think there was an awful lot new in that particular report, but it does give a different lens through which to understand the FCA's expectations. And just because it was a survey of small firms doesn't mean it's not relevant to firms of all sizes. I wanted to finish this slide by looking at a consultation, which right now I'm in the middle of drafting a response to. And this is around the regulation of pension dashboard service providers.

(17:48) And I wanted to draw specifically that the FCA here is saying that retail customers will be using pension dashboards and therefore the consumer duty applies in totality to the provision of pension dashboard services. The FCA draws out specifically that one aspect of pension dashboards will be having a choice architecture and that will require clear communications and it will expect pension dashboard service providers to carry out rigorous testing to make sure that their communications are understandable to the users of dashboards. The next one I want to cover is the retirement income advice thematic review. There was a survey which fed into this, which looked at practices at the beginning of last year. So before the consumer duty came into to practice. This was a very thorough survey that had 87 questions, and I've always thought that the way those questions were asked, and in particular some of the multiple choice answers which were suggested, gave clear pointers to where the FCA might go next with the consumer duty. Some of the specifics that I had expected to hear more on were around vulnerable customers, around target markets, and again, we keep coming back to this, what's covered in ongoing review services. So we now have the findings of that particular thematic review.

(19:10) Because it was surveying practices ahead of July 2023, I'd always been concerned that the FCA would translate that into consumer duty, but they haven't. So I'm pleased that they didn't. They said that because it was carried out before the consumer duty came into effect, they wouldn't assess the findings specifically against consumer duty. However, they did say that if your firm continues to have weaknesses identified within the review, then it's likely that that points to you having failings against consumer duty requirements. I've mentioned a couple of other Dear CEO letters which are quite hard hitting. This one in my regard was much more of a positive endorsement of the advice market. The determined income advice market included many examples of good practice, which I was very pleased to see, and some of the examples of poor practice were very narrow in focus. So I didn't think pointed to wide ranging failings.

(20:12) However, as you would expect, anytime the FCA does any kind of thematic review, it's always going to find areas for improvement. Some of these relate to practices which they don't approve of. Others relate to lack of evidence to be able to tell for definite that everything is as the FCA would like it to be. And that evidential point has become even stronger now that we have the consumer duty. So what were some of the key findings of areas for improvement? One was around how you determine a sustainable income for your clients or an income withdrawal strategy. Now, whether firms are using a cash flow modelling tool or a withdrawal guide rate to recommend a sustainable income level, the FCA expects the methodology and the assumptions to be adequately tailored to the individual circumstances. So it's not good enough to have a single approach that you apply to every client in terms of risk profiling.

(21:14) Risk profiling covers both attitudes to risk and also capacity for loss. And there are various pointers as to what the FCA would like to see under each of these. One specific is that the FCA believes that for many clients, both of these aspects will change when they move from accumulation into decumulation. So that's something which it expects adviser firms to check. Under advice suitability, the key is to have appropriate and complete fact finding to demonstrate the suitability and advice. The FCA did find some areas of weakness here, including around vulnerable customers. So that's one to look into. The periodic review of suitability is again coming back to if ongoing advice is being paid for, firms must make sure that they're providing it, and going further than that, the FCA is saying that you should make sure that the client understands what's to be delivered in return for that advice charge and also how the customer can cancel it if they no longer feel it's necessary.

(22:24) The control framework, a lot of this is about this evidence that I was talking about. You can't have enough evidence for consumer duty. The other aspect that came out was the FCA expects firms to have a comprehensive advice register, which would include details of the types of services that were offered and the associated charges. I'm not going to cover every aspect of the retirement income advice review here. We have separate material on our website, which you can access to learn more, but some of the other insights were around vulnerable customers, culture, and third party due diligence. On vulnerable customers, one of the very, very positive findings was that 99% of firms have already put in place, or had already put in place, before July 2023, policies to identify characteristics of vulnerability. However, the FCA felt that for almost half firms, it wasn't clear to them how those firms would actually track the outcomes that were being received were good outcomes. So almost full marks for identifying characteristics of vulnerability, more to be done in terms of adapting and making sure that vulnerable customers are receiving as good outcomes as any other customer.

(23:44) If you're active in this market, the FCA does expect you to carry out a thorough review of your practices against those expectations. Next, I'd like to look at the pensions value for money framework. Again, this is something that you'll find more information on elsewhere on the Aegon website. This is a new framework which we hope won't be introduced around 2027, which will be coming across all defined contribution, pensions, accumulation, and over time extended to decumulation. The FCA and government wants to, this is run by the FCA, TPR and the DWP and both government and regulators want to move away from our focus solely on charges and minimising charges, to look at the three mandatory elements of value for money, which are investment performance, costing charges, and other metrics, which used to be called quality of services. What I wanted to bring out today within this webinar is that these three mandatory elements don't neatly fit.

(24:46) There's not a clear link into the four consumer duty outcomes. The FCA is clearly leading on consumer duty and is one of the three parties building this framework. So you'd like to think that the FCA would ensure that there was full consistency, but I'll be watching that very closely because the last thing we can afford is two different value for money tests, particularly in the pension space. Moving on to another topical subject. You'll have seen that in the March budget, the Chancellor introduced proposals to create a new UK ISA. Now we all understand the rationale for this. It's to encourage not just institutional investors, which we've got lots of measures in the DC pension space there, but this is now looking at encouraging retail investors to 'buy British', to invest more in the UK to generate UK economic growth.

(25:43) So the headline here is that the plan is to introduce a new form of ISA and individuals will be given an extra 5,000 pounds on top of the current 20,000 pounds ISA allowance to invest solely in a UK ISA. Right now the consultation is continuing and it is looking at a couple of key questions around how you define what UK investments are and therefore what will be allowed within the UK ISA. And also they're looking at how to avoid abuses. You can't give people an extra 5,000 pounds to put into a UK ISA, and then allow them to simply transfer that into another form of ISA thereafter. So it's likely that there will be bans on transfers out, which unfortunately will further complicate the overall ISA regime. Now it's all very well, the Chancellor is perfectly entitled of course to create his own product, but as regulated firms, of FCA regulated firms, whether you're a manufacturer or a distributor, you're covered by the consumer duty.

(26:45) So we can't offer, manufacture or distribute a product unless it meets consumer duty requirements. So what does that mean? First of all, we've got to consider and we've got to design products with a particular target market in mind. The UK ISA is likely to have a particularly small niche target market because it's likely to be appropriate only for those who've already maxed out their 20,000 ISA allowance in stocks and shares ISAs. So a, a niche target market. We are also required under consumer duty to avoid causing foreseeable harm. Lack of diversification could lead to foreseeable harm, and of course the UK ISA by its very definition will be UK based. So we'll not have the same geographic diversification as some other ISAs. And we also need to make sure that we're offering charges which are value for money. I've said this is a niche market and the cost of implementing this will not be inconsiderable and the maximum contribution per year is £5,000.

(27:51) So adding that all together, there might be challenges in making sure that your charges within your UK ISA do offer value for money. And I will be making these points when Aegon responds to the government on the UK ISA. Another big development is the treasury and FCA's joint look at the advice guidance boundary review. Again, I'm looking here, at solely at those aspects which link into the consumer duty with insights available elsewhere on the Aegon website. So the aim behind the advice guidance boundary review is to have the right support at the right time, at the right cost so that customers can make informed decisions. And as you all know, there are three key proposals. The first is about clarifying the current advice guidance boundary. The third is on a simplified form of advice, looking to see if we can make that work more widely than it does currently. And the one in the middle, the one that I think most people find particularly interesting, is targeted support. And it's targeted support, which I see as most aligned to the direction of travel of the consumer duty.

(29:02) Now, under consumer duty, we are expected to step in if we think that clients might be on track to having foreseeable harm. We're expected to step in if we think they're not likely to receive good outcomes. As a manufacturer not holding advice permissions, we may hold data on clients which may point to certain concerns, but if we use that personal data to then suggest a course of action, that could be construed as advice, we could cross the line into advice. So because of that, manufacturers currently are constrained unless they have advice permissions and how much support they can offer. Targeted support, if you have permission to offer targeted support, that would change all that because you would be allowed to take into account certain data and to proactively go out and explain to customers that for people like them, it might be worthwhile considering a particular course of action.

(30:03) So I see that as very much aligned to the consumer duty's approach to delivering good outcomes and avoiding foreseeable harm. So that was quite a lot on what's currently happening within FCA land and also being led by the current government. Of course, this is our general election year and we all need to start thinking about what the consequences would be if we had a different party in power. So I think it's really interesting to gain some insights into what the Labour Party might do if were elected. And the Labour Party produced a paper called Financing Growth: Labour's plans for financial services at the end of January this year. And again, this is well worth the read. Within the introduction they talked about unashamedly championing the financial services sector. So that sounds quite good, doesn't it? Again I'm gonna focus today solely on what this means for consumer duty.

(31:04) So the Labour Party recognises the value of consumer duty as a form of outcomes-based regulation. However, they think there is an opportunity to streamline, and I quote "duplicative and excessively procedural rules in the FCA's 10,000 page handbook." So they want to see that shortened. They also say that they do respect the FCA's independence and they're not going to try to interfere with that. Direct the FCA, if they're elected, to issue an open call to the industry. And that would be asking the industry, which rules in the current FCA rule book do you think are redundant because we now have the consumer duty. And Labour would also expect the FCA to then follow a transparent process for evaluating these suggestions and responding to them, with the ultimate aim to cut that rulebook back to a less extensive length. So that would be very interesting and you might want to start thinking about what would you like to see taken out of the FCA rulebook as a result of the consumer duty. I think where I would start would be around some of the prescription around disclosures that we still need to make. On the other hand, sometimes having rules isn't a bad thing and that it makes our life a little easier and that we know exactly where we stand. So I do think we'll need to be careful what we wish for here. So I do hope that there's been something that you've found of interest in the last half hour.

(32:39) If you're watching this and still planning for the end of July deadline, then here are some next steps. If you're watching this after that deadline, some of this might still be relevant to assess if you have done everything that you might have done. So first of all, if you don't already have a closed book plan, make sure that you have one. And if you find that you've got just too much to do before the end of July, then the FCA always talks about prioritising those areas with greatest risk of consumer harm. Make sure your first board compliance report has been signed off by your board by the 31st of July 2024. The FCA may ask for these, so make sure that you have those. I've talked about a lot about evidence, check that the MI you're using is truly helping you assess that you are delivering good outcomes, whether it's for customers of open or in future closed books. Vulnerable customers -

(33:40) this is an area that will continue to evolve both with the wider environment and from consumers themselves. So make sure that you keep evolving your approach, not just to identifying vulnerabilities, but adapting your approach accordingly and monitoring the outcomes. And last but not least, well second last actually, but not least, make sure that any services that you are being paid for are being delivered and that they actually have value. And yes now last but not least, read those dear CEO letters, read the speeches, read the updates. A lot of reading, but I think it will pay off if you do so. So in my view, and I think in most people's view, the consumer duty is definitely here to stay and that will apply to whoever is in power. So we all need to make sure that consumer duty truly is business as usual. Thank you very much for joining us today. Please remember to complete the questionnaire to claim your CPD and please do have a look at some of the other material that I've referred to on the way through, which we have on our CPD adviser hub and elsewhere on the Aegon website. Thank you.


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Consumer duty – the latest developments and looking ahead

  • Completed on: 20 July 2023
  • CPD credit: 30 CPD mins

CPD Learning covered

  • Discuss recent developments concerning the Consumer Duty.
  • Examine the links to other regulatory initiatives.
  • Look at possible future developments if Labour forms the next Government.

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