FCA - Cultural deficit hurts existing customers

Closed Books today, Back Books tomorrow!

The FCA’s thematic review of the life insurance sector assessed the treatment of closed-book customers against four high level customer outcomes:

1. Does the firm’s strategy and governance framework result in the fair treatment of closed-book customers;
2. Do the firm’s closed-book customers receive clear and timely communications about policy features at regular intervals and key points in the product lifecycle that enable them to make informed decisions;
3. Does the firm give adequate consideration to, and take proper account of, fund performance and policy values in a way that ensures it treats its closed-book customers fairly and proportionately; and
4. Are the firm’s closed-book customers able to move from products that are no longer meeting their needs in a fair and reasonable manner?

The review did not assess how individual policies were originally sold but focused on how customers are being treated now.

Tracey McDermott, acting Chief Executive of the FCA said: “Given the long-term nature of closed-book products, it is vital that customers are treated fairly and given the right information on an on-going basis in order to help them make important financial decisions”.

FCA has already commenced investigations to determine:

1. the reasons for the practices within firms and
2. whether customers have suffered detriment
3. how widespread any practices are within these firms

The FCA made it clear in its Business Plan 2015/16 (published March 2015) that cultural change is required to mitigate the risks associated with large back books; “large back-books may lead firms to act against their existing customers’ best interests”. 

The FCA expects firms to act in the best interests of both existing and new customers and to demonstrate a commitment to offering suitable, accessible and good value products to all their customers.

It is particularly concerned about consumer inertia, characterised by a lack of confidence or desire to switch providers or products which it believes can lead firms to offer poor value to existing customers when compared with the offering made to attract new customers.

These concerns are exacerbated by information asymmetries i.e. when one party in a transaction has more or better information than the other coupled with the potential for firms to capitalise on known customer behaviours and traits.

The FCA carries out its own research and is using a variety of sources to gain a deeper insight into the experiences and behaviour of the consumers of financial services. It is clear that where firms or sectors fall below the levels expected, it will take action.

Critically boards need to take note and read through this review to determine what behaviours are evident and how they could apply in other part of the financial services sector?

Just as FX followed LIBOR, back book investigations will follow closed book investigations. But this should not be a surprise, the FCA has already flagged these reviews are coming!

When coupled with the Senior Managers Regime, the fair treatment of existing customers should not be taken lightly.

Boards and senior executives need to act now.

See related BRG white papers:

Mortgage Customers – How to Square a Vicious Circle

The Behavioural Regulators' Agenda