Posted: 21st October 2016

Closed-book firms are falling short in the management of their long-standing customers’ needs.

This was the opinion of the regulator in March following the FCA’s Thematic Review (TR16 / 2). With the final outcome of the regulator’s review due to be published shortly, it is critical for firms to think through their approach to long-standing customers – but what’s involved in building a robust approach that delivers good customer outcomes? 

The FCA’s review sought to assess the treatment of closed-book customers in the life insurance sector against four desired outcomes:

  • Strategy and governance frameworks result in the fair treatment of closed-book customers
  • Closed-book customers receive clear communications at appropriate intervals that enable them to make informed decisions over their policy
  • Fund performance and policy values are taken into consideration in a way that ensures closed-book customers are treated fairly and proportionately
  • Closed-book customers are able to move from products that are no longer meeting their needs in a fair and reasonable manner

The thematic review sampled 11 firms who hold £153bn of savings in closed-book products across 9.4 million customers. This – plus continuing FCA investigations of specific firms in this area – certainly served to illustrate the scale of the issue and the regulator’s keenness to address it.

Six months on from the release of TR16 / 2 and with the industry still awaiting an FCA response to the industry consultation which ended in June, is your firm ready for the final findings and their implications? What factors should firms be considering in order to protect long-standing customers from detriment and themselves from regulatory scrutiny?

Ensuring good outcomes                                                           

When it comes to making sure your firm is treating its long-standing customers fairly, it makes sense to view the experience you are providing through the lens of the desired outcomes above. By ‘benchmarking’ customer experience against these outcomes, firms can get a clear view of how they are performing.

Strategy and governance frameworks

The key challenge for firms in this area is the development of customer strategies supported by the right governance arrangements that enable them to consider the needs of long-standing and current customers in equal light. Different treatment of customers based on how long they have been with a firm risks delivering different outcomes. The challenge from the regulator will be whether such different treatment is justified.

Some questions for firms to ask themselves in this area include:

  • Is your strategy holistic and derived from both your commercial goals and the needs of your customers? How can you demonstrate value for money and good outcomes for long-standing customers?
  • How robust is your product governance framework? Does it regularly review historic products to ensure the outcomes being delivered are fair? When was the last time the firm reviewed the historic products?
  • Do you tend to over-rely on contractual terms and conditions when dealing with customer complaints, claims or general queries? Is this view overly legalistic and not customer-centric? In taking this approach, firms could be exacerbating the creation of different classes of customers; those long standing customers on terms that may no longer be considered ‘fair’ seen through today’s lens, and new customers on more favourable terms because the market and customer treatment has moved on
  • Does your firm outsource any product or fund administration? Do you have a clear view of the performance of your partners and whether this contributes to long-standing customers suffering detriment? Are the firms buying closed-book business able to service that business effectively and do they understand what they are administrating?

Clear communications

The regulator believes that firms are not doing enough to remain in contact with closed-book customers during the lifetime of their policy, resulting in customers losing track or being unable to monitor how their policy is performing. As well as this, some firms are failing to disclose important information to closed-book customers at key events. These customers are left to rely on point-of-sale disclosure and terms and conditions, which will be outdated and which the customer may not have retained.

Again, success in this area is about strategy – a robust communications strategy can ensure that you are sending the right messages at the right times throughout the product lifecycle. As well as this, being able to demonstrate the reasons why you send certain communications at certain times will be of benefit if the regulator wishes to examine your firm’s approach to engaging with these customers.

Some questions for firms to ask themselves in this area include:

  • Are communications pertaining to the ongoing performance of a product and a fund clear?
  • Is the current frequency of communications sufficient to keep customers engaged with their product and your firm? As well as providing potentially key information, communications about a product that might not always be ‘front-of-mind’ can prompt a customer to engage

Value for money

The FCA has specifically noted that some firms are struggling to determine where investments are not delivering expected returns for consumers. In addition to this, firms are not always effectively monitoring the extent to which unit-linked business generates profit/loss, and how this compares to their original assumption. Experiences where customers are incurring charges (including expenses) are not always assessed to ensure this is fair and this is one area of concern for the regulator. When a customer actively decides that their policy is no longer delivering on their needs, they can be caught unawares by exit fees – a lack of customer awareness and lack of historical engagement from a firm can combine to result in what is often seen by consumers themselves as a poor outcome. Similarly, paid-up charges at the end of a policy can result in customers receiving significantly diminished returns on their investment.

Some questions for firms to ask themselves in this area include:

  • Do you have a clear policy or approach to what constitutes value for money for customers?
  • How often do you communicate with your customers on the topic of on-going value for money?
  • Have you reviewed your historic approach to fees and charges to ensure that these are justified and that they are in line with regulatory expectations?
  • What have your customers told you about performance and costs – by way of feedback such as complaints – and should this be used as a reason for change?
  • Do you communicate clearly with customers the consequences of exiting or surrendering policies, i.e. charges and exit fees, but also the financial impact in relation to investment returns?

Bringing long-standing customers into focus

Firms can expect the regulatory burden to increase in this space, and in an already challenging market they will have to be focused and proportionate in their approach. Some of the considerations above should help firms prepare for the final outcome of the FCA’s review – and, ultimately, achieve a sustainable approach to long-standing customers that achieves both commercial and regulatory goals. 

This will have implications for the open-book, too, as the impact of firms designing products with this more long term view may mean that certain policies and product terms are no longer appropriate.

Given the findings of the thematic review and the likely contents of the upcoming policy statement, it will no longer be acceptable to sell a product without maintaining a clear view of how that product delivers for customers over the long-term.

regulatory action paper

We've published a new regulatory action paper 'Delivering Fair Outcomes to Long-standing Customers', which is intended to help firms as they plan their activity up to the end of March and beyond.


Matt drage

Matthew Drage

Director of Advisory Services