As firms ramp up their focus on what they need to do with their legacy books of business to align them to the Consumer Duty, they may be tempted to simply replicate their approach to open products1. There is no doubt that much of the thinking and some of the heavy lifting will have been done by firms' activities to date. However, this article explores the additional steps and differing approach closed products may require. There is an increased likelihood that tailored treatment strategies will be required across the closed product suite. A simplistic 'one size fits all' approach is unlikely to be the right answer. For the majority of open products, the decision was straightforward, 'how do we uplift?' to meet the Duty. The closed product approach requires a more open mindset which includes 'should we?'
Closed product approach
Firms will require a process by which they can make the right decisions for each of their products to ultimately deliver an implementation plan (and solution) that is robust and achievable but also commercially sensible and delivers good customer outcomes. The example below is based upon some of the work KPMG in the UK is helping firms with.
Step by Step Considerations
Whilst this stocktaking stage may be straightforward for some, firms that have been acquisitive over the years and/or have a business model with longer term products are likely to have amassed a significant number of legacy products — not all of which may be readily identifiable. Firms will need to include the identification of different product variant/tranches/vintages as well as bespoke solutions designed for specific distributors. The key output from this stage is a robust and complete understanding of all products the firm maintains that may need to be aligned to the Duty.
Firms have exerted considerable effort to reach a definitive position on the scope for open products and much of this will be transferable to the considerations on which closed products are caught by the Duty.
In implementing the Duty for the July 2023 deadline, we have seen a number of firms consciously seek to over-include products and/or customers to ensure the firm's approach is appropriately aligned to the overarching regulatory intentions (extending to customers with retail-like characteristics), practical (so that operationally it will be efficient) and manageable (to over-include to create a buffer between the explicit requirements and a sensible margin for error). With closed products an added challenge will be consistency (such that there is a standard approach adopted across closed and open). Firms should also consider, at this point, the feasibility of grouping the products into cohorts to increase the efficacy of the remainder of the process and associated implementation plan.
This is likely to be a more material undertaking for closed products compared to open. This stage is predominately about the collection of data, MI and intelligence about the key characteristics of the product — likely to be more challenging the older the product. This will include a number of factors designed to help the firm better understand the product, the customer needs it serves, its performance and usage. This will enable an informed decision to be made about the most appropriate way to treat it. Some of these key data and information items will include:
- Closure rationale — what was the driver behind closing the product? This can provide an indication of where key enhancements may be required.
- Materiality — what is the size of the product and/or number of customers to help gauge whether it remains a core solution?
- Ongoing product governance — has it formed part of regular product level reviews, and if so, what were the latest findings?
- Known issues — does it feature disproportionally on the internal complaints and/or conduct risk log, or been subject to historic material remediation activity?
- Customer activity — is the product essentially dormant or are there a number of customers still engaging, transacting and utilising it? Similarly, are there particular features and options that are particularly popular or ignored?
- Complexity — is the product inherently complex in terms of how it is designed, explained or managed?
- Price and Value — are the charges comparatively high and/or complex compared to open or comparable products?
- Commerciality — is the product still a net contributor to the bottom line?
- Maturity and agility of the relevant IT infrastructure — what technology supports the product, how agile, timely, and/or costly is this technology to maintain and change?
- Alignment to open products — to what degree does it serve the same customer need as an open product?
- Read across — has the work undertaken on open products indicated that there may be issues requiring attention?
These are just some of the factors that we have been using with clients in helping them assess the risk and commercial profile of their closed books. As ever, the richer the data, MI and information available, the more accurate and definitive the profiling can be. However, identifying the killer combination of data points through a coherent MI framework can be even more powerful.
All the stages to this point lead to the biggest discernible consideration to open products, making an appropriate determination of how to treat each product/product grouping. For the majority of open products, the decision was straightforward, 'how do we uplift?' to meet the Duty. The closed product process requires a more open mindset which includes 'should we?'
There will inevitably be nuances and variants but there are essentially four options in terms of a treatment strategy. When making the choice, firms must factor in (and evidence) appropriate consideration of customer impacts:
- Keep and repair — undertake a gap analysis assessment similar to the process adopted for open products. There will be aspects that can be disapplied or applied more proportionally or pragmatically. Operationally, the advantage of this treatment strategy is that a significant majority of the thinking, templates, processes, controls and governance will provide a significant jump start to this activity for closed products.
- Tactical repair — recognising that, longer term, the product may not meet the strategic direction of the firm (and/or unable to be migrated, closed or merged in the timescales), a tactical solution to evidence it delivers good customer outcomes may be preferable. To help facilitate the tactical repair, it is likely that some product simplification will be required alongside the tactical uplift solution. Depending on the circumstances, firms may also seek to proactively manage customers, once repaired, to alternate solutions to, effectively, create a combination of option 2 and 3.
- Migrate, Close or Merge — some products may not be viable (commercially or from an evidencing good outcome perspective). Consequently, firms may seek to manage the customers more proactively out of the product. Closure activity will be more effective where the product has a near-term natural renewal/maturity point, rather than being open-ended. Depending on the size and scope of both the firm's open and closed products, merging may provide the economies of scale to make it commercially viable but the impact on customer outcomes will be pivotal. Finally, where a closed product is a near relation to an open product, migration may be a more viable option.
- Sell or Transfer — in reality, likely to prove a challenge from a timescale perspective. Firms will also need to carry out activity to meet Duty-related regulatory obligations associated with selling or transferring products. As such, this may not be used, in any material sense, before the deadline. However, it is a longer-term solution where one of the other treatment strategies is utilised first.
Although closed products would have been factored into the firm's implementation plan agreed by the board in October 2022, it will need to be revisited. Firstly, the plan should now be assessed by the firm's robust and deliverable "day 2” plan (see our article on substantive compliance for more details about what this day 2 plan needs to include). Secondly, the aggregate impact of the more granular analysis will allow the firm to plan with more certainty and revised assumptions. Lessons learned from open product implementation will also assist in developing a plan that is appropriately prioritised to focus on the biggest harms or impact first. In addition to the challenges generated on open products, the closed product programme generates a suite of new ones that firms will need to address — a couple of which are captured below.
Competing priorities — at the same time as trying to invigorate the closed products programme, firms will be addressing residual outstanding actions from the open programme to achieve full compliance with the Duty, as well as other incoming regulations.
Programme fatigue and resourcing — firms will need to find a way to maintain the pace and enthusiasm in place for open products for another 12 months. This risk is exacerbated if the firm hired temporary expertise (or utilised external support) which is due to be wound down after July 2023.
Emerging regulatory thinking — there is a high likelihood that regulatory findings, commentary, action or opinion will evolve post 31 July 2023. This creates an added risk that firms may need to be more agile in their plans and details as the FCA starts to communicate its perspective on how the Duty is operating in practice for open products — and how this can be applied across to closed.
IT limitations — firms have struggled to develop all the data points they wanted in time for open products. The legacy systems that closed products invariably reside in will face an even more significant challenge.
In determining the appropriate treatment strategy, the detailed analysis and the associated decision-making criteria are likely to be a blend of both quantitative and qualitative factors. It will also need a broad set of key stakeholders to be actively engaged to ensure a well-rounded consensus is achieved on each product and/or product grouping. It should also be accompanied by a robust audit trail to capture the discussions and agreed outcome.
Similarly with open products, all the decisions and plans will need to be checked, challenged and ultimately agreed at the relevant forums and committees. Equally, firms should expect the same level of scrutiny and challenge at the board — perhaps even more so given that board members are now fully engaged with the Duty. Firms will need to ensure that the agreed approach to closed products address the cross-cutting rules, and ensures evidential consistency and commonality of approach between open and closed. Ultimately the approach will also need to be aligned to the firm's risk appetite, culture and purpose. Achieving such a significant challenge, once again, against a short deadline will require firms to approach the second Consumer Duty deadline with an open mind, as it is unlikely to mirror the first!
For more of our thoughts and insights, please visit our Consumer Duty hub.
How KPMG in the UK can help
Since supporting a number of differing firms, across all sectors, with their design, approach, execution and/or assurance of their open product programme, we are already helping a number of these firms with their closed products programme. From regulatory expertise, practical operational insight and associated technology and tooling developed specifically to assist firm implement the Duty, KPMG in the UK can help firms solidify and accelerate their plans to successfully implement their closed products programme. If you'd like to discuss further, please do not hesitate to get in touch.
1 For simplicity, this article refers to products throughout — this includes legacy services too.