Protecting a minority: closed-book clients
More interesting developments unfold resulting from the FCA’s thematic review. In its latest review of closed-book contracts, the regulator somewhat boldly directs product providers to ensure the best interests of minority customers are protected.
Following an initial review in March, the FCA has declared that existing customers should benefit as much as new customers from a firm’s innovation and evolving policies. In this latest guidance, which is intended to address the ‘poor practice’ in the treatment of customers locked into long term contracts, the FCA has called for reviews of closed-book products every five years as a minimum.
Essentially, the message is that even old contracts with terms superseded by newer varieties should be fit for purpose. The FCA now expects providers of closed-book products to review products periodically ‘to check whether they continue to meet the general needs of the target audience for whom they were designed at the point of sale’.
The FCA says it expects firms to review contract charges post pension freedoms:
‘For pension products, we expect firms to consider whether contracts that incur charges when contributions reduce/cease or the policy exits ahead of a retirement date selected at outset continue to meet the needs of customers, particularly in light of current pension reforms and continuing changes to employment patterns.’
Treating customers fairly is the mantra of the financial services sector. The FCA identifies customers invested in products closed to new business as a vulnerable group. According to the regulator, fairness of charges should be assessed over the lifetime of the contract. The guidance stipulates customers are kept informed about the product in which they are invested and not face unreasonable barriers at exit nor pay unfair charges if they cease paying premiums.
The regulator is already facing accusations for trying to rewrite history and force providers to change the terms written into longstanding contracts, but the FCA has made it clear that it is not asking firms to disregard or amend their original terms and conditions or to apply current regulatory requirements retrospectively.
Rather, it describes actions for consideration to improve outcomes from communications made at the time the customer signed up to the policy. It aims to ensure the customer experience remains positive, but it is not binding on firms. As a minority, closed book customers are easily overlooked. Simply, as I see it, the new guidance brings their rights to the fore and demands that they are fairly considered.