Closed Products – Firms must be ready for increased scrutiny

The next three months are pivotal in Financial Services. 

Consumer Duty’s Closed Products deadline passes on 31^st July, marking the regulation’s final milestone, and a significant increase in scrutiny from the FCA.

Firms are already wearing many regulatory hats. Duty implementation has been closely examined since the Open Products deadline, whilst vulnerability has gained renewed importance – particularly in collections, as warned by the UKRN. Throw in the motor finance scandal, and it’s clear to see how compliance teams might be feeling stretched.

Providing evidence has been crucial throughout Consumer Duty, but we’re expecting the pressure to ramp up significantly in Q3-24. Knowing which levers to pull in the build-up, across product governance and data management, will be key to minimising risk, as we’ve outlined below.

Bridging the governance gap for Closed Products

Firms should be conducting closed product governance alongside that of open products, until they’re confident that all conditions of Consumer Duty have been satisfied. We’ve already seen the FCA highlight this area as a major concern, on the assumption that product governance deteriorates when they’re no longer open to customers.

Clear ownership of closed products, including consideration of firms SMCR responsibilities, needs to be considered to ensure governance structures pay these products appropriate attention.

Good governance processes should have clear outputs and risk/decision logs, which can serve as great best practice to evidence, if requested by the FCA.

Equally, it’s important to consider whether closed product customers would receive better value from an equivalent open product. If so, migration of customers, or justification for not doing so, should be thought through.

Upholding data standards for Open and Closed customers

Data is another critical watchpoint as we approach July’s deadline. Firms must strive for contact processes that are equally tailored to both closed and open customers. Overlooking this risks being unable to maintain customer data to the same standard across both, increasing the risk of customer disengagement.

Often where data is of poor quality for these products, it’s a result of being held in legacy systems, or outside of core systems which have modernised since the inception of the closed product. Firms should consider reviewing the accessibility and usability of closed product data and/or the migration of data to new systems, although this will of course be resource intensive.

From the FCA’s perspective, process documentation and data cannot demonstrate a preference to open product customers over closed product. Examples like affordability solutions and variety in contact channels must be equally accessible to both, with any requested evidence being able to prove this. Fair value assessments, process reviews, and remediating actions should be front of mind.

A potential minefield for Fair Value

As the FCA looks for more evidence of compliance, we’re expecting Fair Value to be fundamental to investigations, which creates a potential minefield for closed products.

The FCA have repeatedly stated this part of the duty is not about fixing or monitoring prices, but encouraging firms to assess prices from a customer value perspective – e.g., the FCA have encouraged firms not to take advantage of less engaged customers, or those with a lower propensity to switch provider when setting savings rates..

Evidencing compliance is particularly challenging where there’s less differentiation between products to justify different prices and customer value. Closed products become a minefield from this angle, with customers on different pricing structures to the newer, equivalent open products, meaning these segments must be identified and their prices justified by value.

If prices can’t be justified, they should be updated (where T&Cs allow) to align with equivalent open products.

While this will help to relieve pressure in the short-term, best practice is needed upstream in the process to minimise long-term risk. This means customer value propositions should be considered and documented from creation/design, all the way through the product lifecycle.

Building this into product creation processes helps to boost customer centricity, and avoids the delivery of products with prices that aren’t justified by value.

From a strategic angle, firms may also consider deploying a value-based pricing mechanism over one that’s cost-based.

What’s next?

With only three months remaining until the Closed Products deadline, firms must be actively preparing to provide evidence of effective governance and data management.

Ensuring customer value propositions are considered and documented, from product creation and design, all the way through the product lifecycle, is crucial to avoid non-compliant products – or those where fair value is hard to demonstrate.

Data for closed products should be maintained via appropriate customer contact, and good data management practices, but time is running out for firms to review this and react effectively.

If you’d like to know more about how we can help, contact John Scott.