Posted: 26th January 2017
First published on Thomson Reuters Regulatory Intelligence on the 19th of January 2017
This article is linked to our recently published regulatory action paper, which you can download here
The FCA’s eagerly awaited finalised guidance on the fair treatment of long-standing customers contains a number of key messages for life assurance firms.
Many of these centre on the varying needs of customers during different ‘events’ or stages within the product lifecycle. Indeed, firms have been advised to identify the outcomes they wish to provide to their customers and see that these are delivered with consistency across the long-standing customer population.
As well as this, the FCA notes that rigid application of the terms and conditions (T&Cs) of products may not result in the fair treatment of long-standing customers. Essentially, the regulator has identified concerns that T&Cs drafted potentially decades previous may not be conducive to fair outcomes today.
Another key area of focus with regards to long-standing customers is value for money – this is both in terms of customer understanding of charging structures and the true value being delivered by investment products.
The regulator requires firms to review their back books and diagnose any issues. This work must be underway three months after the publication of the final guidance, which landed on the 9th December 2016.
How can firms ensure that – in their assessment of their closed-book business – they pick up everything that might cause potential issues by the deadline?
The origin of the issues
The main drivers for issues in the closed-book were widely considered to be as follows:
- Limited customer understanding of financial services generally – which also tends to diminish with age
- More specifically, many products are complex and contain T&Cs which less savvy customers could find difficult to understand (this is also exacerbated by the amount of time which has typically passed since the customer purchased a product)
- There is significant customer inertia in this space
Previous work from the regulator has revealed that poor post-sale communication reduces customer understanding of product performance and / or other product features. This can impact on their ability to make informed decisions in their financial planning and can ultimately lead to detriment.
Primarily, it’s the absence of clear communications and information which may lead consumers to making poor decisions – or no decisions at all – about their investment products.
A practical and protective solution
To ensure a robust methodology when examining the back book, firms should divide their approach into four stages:
1. Defining fair outcomes and determining risk rating
Firms must recognise the individual circumstances of customers and tailor products and services to these, which means that a single method for managing customers in closed books will be unworkable. Firms must be more granular when looking at the typical customer journey, basing decisions to communicate with their customers on things such as:
- An individual’s retirement age
- The amount of time which has elapsed since a customer took out their product
- Specific ‘events’ in the customer lifecycle, for example, when customers might be considering options ahead of their retirement
In defining fair outcomes for long standing customers, firms should identify circumstances where a rigid application of the original term or condition would result in detriment – this could be deemed an unfair outcome in the future.
As well as this, firms must think about the value for money they are providing to customers. 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.
Some additional questions for firms:
- Have you identified a set of outcomes you believe are fair for your customers with regard to communication, product performance and exit fees or charges?
- Have you risk-rated your products and established which of them pose a high-risk of customer detriment?
- Do you have a robust information in order to determine value for money?
2. Product review
With the desired outcomes established, ensuring they are being delivered is the primary role of the product review. Firms should look to establish the following about their products (while focusing first on those products they see as higher risk):
- The product’s target market, and whether this has this been documented in order to serve as evidence of such considerations
- Whether the product is set up to offer value for money to customers, how effectively customers are kept up-to-date on the value they are receiving, and how charges and expenses impact the real value being delivered
- Whether terms and conditions are fair. Firms must look at this in the context of today’s regulatory landscape, as leaning on the historical terms and conditions of products to justify their approach will not be accepted
- Whether charges and expenses are allocated fairly. Can the firm link all charges and expenses directly to administration and the performance of a fund? Is the market value reduction fairly applied?
- If the investment performance of closed products differ to that of live products, and whether there is a solid rationale for any differences
- How financial promotions and point-of-sale disclosures compared against those of peer firms at the time of the sale. Were these conducive to protecting customers?
3. Review communications and assess customer understanding
Once firms have established how their products are performing, they must discern whether there were any issues around point-of-sale and ongoing communications that may have led to detriment.
Customer understanding of products at point-of-sale is not easy to test, but whether the language and messages used around products was (and is still) conducive to their understanding provides a good indicator of how firms have performed in this area. Firms should therefore:
- Review current communications internally against their definition of fairness
- Conduct customer focus groups (with particular focus on the needs of vulnerable customers) to assess their access to, and understanding of, historic communications
- Use customer feedback and your definition of customer understanding to draft template communications, should it be found that current / historic communications are insufficient
The key areas for customers to understand include the purpose of the investment, the risk profile based on the investment strategy, how ongoing charges, exit penalties and expenses will impact their return and details of any charges applied at key events, such as ‘surrender maturity’, ‘lapse’ or ‘transfer’.
4. Delivery of fair outcomes
Any unfair outcomes should be rectified once detected. From the reviews of products, communications and customer understanding, seek to uncover any unfair outcomes (for example, instances where a rigid application of terms and conditions has led to detriment, or where insufficient information has impeded a customer’s ability to make an informed decision). If and when engaging customers to rectify poor outcomes, communicating the following is key:
- The purpose of the review of the customer’s account
- Any terms and conditions material to the review (if indeed the source of the detriment was the terms and conditions), plus the circumstances which lead your firm to conclude the term or condition lead to an unfair outcome
- The proposed action to address the unfair outcome and how to confirm acceptance of this proposed action
- How to contact your firm for any further information
Robust product review frameworks
As well as reviewing past business to meet customer and regulatory requirements, ensuring your firm is set up correctly to perform product reviews in this way is imperative.
Responsibility for oversight should be apportioned appropriately amongst relevant senior leaders, and those designing products, processes and communications should be clear on what’s expected from them with regards to long-standing customers. A lot of this will lean on firms’ internal culture and attitude to customer-centricity.
Reviews must be regular, proportionate and documented as evidence, and firms’ vulnerability policies should be effectively trained out or further promoted internally to ensure those who are most likely to suffer detriment are adequately protected.
Rising to the regulatory challenge
With the obligation to begin undertaking reviews of their closed books by the 9th March 2017, firms can use the methodology above to ensure they apply a thorough yet business-enabling approach to meeting the requirement.
For firms, getting it right means better engagement with their customers, from which they can draw a wealth of information on how to provide more effective products and design more effective processes (these lessons will certainly be applicable to new products, too).
Firms should think of the review requirement as an opportunity to build trust with their customers – simply seeking to meet minimum regulatory requirements may cause them to miss out on the commercial and advocacy-related benefits on offer.
Quite apart from what the business can gain, for customers in the closed book, improved understanding of their product and the ability to better engage with the provider of that product greatly assists important financial planning decisions. Ultimately, of course, this is the highest priority for the regulator.