Consumer Duty: what it means for with-profits

With-profits management has an inherent consumer focus, with consideration of policyholders’ reasonable expectations, the impact of discretion on policy values and evidencing customers are being treated fairly as part of the day-to-day focus of With Profits Actuaries (WPAs) and With Profits Committees (WPCs).

The Financial Conduct Authority’s (FCA) new Consumer Duty principle therefore perhaps represents less of a step-change for with-profits businesses than other areas. However, the requirement for firms to “act to deliver good outcomes” arguably goes further than the previous aim of treating customers fairly. In this blog, Rebecca Macdonald, Head of Products, looks at different aspects of the new Duty, and discusses how they might apply specifically to with-profits.

Value for money

Assessing the relative value for money of a with-profits product is difficult, with comparisons between providers blurred by differing historical target investment mixes, investment performances, and patterns of estate distribution, and direct comparisons with non-profit equivalents failing to capture the benefits of smoothing and guarantees. However, there's an onus on providers to assess the overall relationship between the benefits customers are likely to receive and the price they pay. There are a number of considerations specific to with-profits business:

• Excess surplus – this is an area that was considered in the FCA’s 2019 Thematic Review of the fair treatment of with-profits customers (TR 19/3), which highlighted a poor practice example of customers exiting a sub-fund and not getting their fair share of the estate due to inadequate capital monitoring. Ensuring excess surplus is reviewed appropriately should form part of the overall assessment of value, not just for customers in closed funds but in all funds where new business is declining.

• “Goneaway” policies – policies, where policyholders have become uncontactable over time, are becoming an increasingly significant issue for many with-profits funds in run-off, particularly those with industrial branch whole-of-life business. Holding reserves for policies where there are unlikely to be claims risks delaying the distribution of surplus. So, ensuring an appropriate release of unclaimed maturities and gone-away provisions could be part of the evidence that customers leaving the fund are getting their fair share of the estate.

• Surrender value basis – the FCA’s 2018 Final Guidance on the fair treatment of long-standing customers (FG 16/8) set an expectation that “surrender values bases are reviewed whenever bonus rates are reviewed”. While firms commonly monitor pay-out ratios for deaths and maturities, there has perhaps been less focus on surrender pay-out ratios and the Consumer Duty brings renewed focus on value for customers leaving the fund before maturity.

Communications

With-profits is an example of a product group where there is asymmetry of information. Ensuring customers receive relevant information, at the appropriate time, to enable effective decisions will be key to evidencing compliance with the Duty. Many with-profits providers have already adopted a “layering” approach, with key policy information provided directly to customers and additional information on the management of the fund posted online. Developing this further may be helpful as firms look to tailor key communications to ensure they can be easily understood, and importantly, that they cause customers to engage and take action.

Monitoring the impact of communications around key decisions, such as options and guarantees, to understand their effectiveness in prompting action (eg taking up guaranteed annuity options) and then using this data to refine future communications is likely to go beyond existing practice. However, we expect this will be necessary to demonstrate that firms are delivering “good” outcomes and enabling and supporting customers to pursue their financial objectives. In some instances, pensions-style “wake-up packs” may be appropriate, alerting customers a number of times in advance of key dates and adding further detail each time.

Avoiding foreseeable harm

Where there's potential for customer harm, the FCA expects firms to demonstrate action. A number of instances of potential harm for with-profits policyholders were considered in TR19/3, including restructuring closed funds either too early or late, and too much reliance on the continuing application of provisions in court-approved schemes. Evidencing how Boards, taking account of advice from their WPA and WPC, have engaged with these issues will be helpful in demonstrating compliance with the Duty.

Closed books

While the Duty is not retrospective, it will apply to closed books on a forward-looking basis from 31 July 2024. The most likely application to closed with-profits funds will be in respect of new communications to existing policyholders, either to prompt action or to provide updates on the evolving run-off of the fund. For example, changes in the risk profile of investments as the fund runs off may impact customers’ financial objectives, particularly where the investment strategy is changing significantly from the original marketing.

As discussed above, many legacy with-profits books have high proportions of “gone-away” customers. FG 16/8 also sets out expectations for proportionate but robust tracing approaches and evidencing compliance with this guidance will also support compliance with the Duty.

Closed books may also contain some “orphaned” clients, who initially selected their product with the help of an advisor but are no longer in contact with them. Recognising if there are orphan clients, and assessing if these customers require any additional support, will help demonstrate that providers are acting to deliver good outcomes.

In recent years, we have observed significant consolidation of closed with-profits funds in the UK market and this trend is likely to continue. A point of note from the Consumer Duty guidance is that acquisitions, after it comes into force, should include the relevant information required to demonstrate compliance.

A new opportunity

Enabling and supporting customers to pursue their financial objectives is one of the three cross-cutting rules under the Consumer Duty. Many of the key features of with-profits business are genuinely valuable to certain consumers, with smoothed returns and guarantees protecting customers from market volatility and unexpected reductions in pay-outs. A clear assessment of this target market, combined with the increased focus on good customer outcomes, could be an opportunity for innovation and growth of new business which incorporates some of the features of traditional with-profits products.

How Hymans Robertson can support you

For a conversation on how we can support you with implementing the Consumer Duty requirements, or what they mean for your with-profits business, please get in touch with one of our team – Karen Brolly, Rebecca Macdonald or Stephen Makin.

This blog is based upon our understanding of events as at the date of publication. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation. Please read our Terms of Use.