The Financial Conduct Authority (FCA) has published the findings of its thematic review into the treatment of customers with investment-based life insurance now held in closed books (the review was limited to policies bought before 2000): TR16:2: Fair treatment of long-standing customers in the life insurance sector.
The review found that most of the sampled firms demonstrated both good and bad practices, while a small number were delivering poor outcomes to their closed-book customers. The FCA undertook this thematic review to see whether firms were benefitting from customer inertia by leaving some customers with products that were not reviewed to ensure that they delivered fair outcomes. 11 firms were involved in this thematic review.
TR16:2 provides additional detail on the FCA’s expectations of firms in relation to four outcomes. The FCA will consult on these expectations with a view to publishing non-Handbook guidance for firms with long-standing life customers.
Although the review was specific to investment policy customers in closed books, TR16:2 makes it clear that the results should be relevant to any firm with customers of a long-standing nature, whether as provider or intermediary.
FCA expected outcomes and findings from the recent review:
- Outcome 1: The firm’s strategy and governance framework results in the fair treatment of closed-book customers.
The FCA found that firms that recognised the needs of closed-book customers in their strategy were more likely to identify and address poor customer outcomes and were able to demonstrate that they were taking steps to improve outcomes for customers.
The FCA found that some firms placed too much reliance upon contractual terms and conditions, rather than taking non-contractual measures to ensure customers were given fair outcomes; even where clear customer detriment had been identified.
In general the FCA found that boards and senior management did not fully grasp the needs of closed-book customers. Often management information provided to the board and senior management did not present a comprehensive or rounded picture of how products were working. The FCA found that boards relied on complaints data from closed-book customers while failing to take into account that in many instances closed-book customers were disengaged from the product.
In line with product governance requirements, the FCA found that many firms were unable to show that closed-book products had adequate review mechanisms to ensure that products remained fit for purpose. Associated with a failure in governance and oversight, some firms had failed to monitor what outsourced services were doing to ensure that closed-book customers were being treated fairly.
- Outcome 2: The firm’s closed-book customers receive clear and timely communications about policy features at regular intervals and at key points in the product lifecycle that enable them to make informed decisions.
The FCA found that communications with closed-book customers were often of poor quality and failed to help customers to understand how the policy was performing. Most firms in the FCA’s sample failed to give closed-book customers the information they needed at key stages of the policy, for example some firms neither disclosed charges for surrendering or disclosed the loss of benefits. Firms had been found to rely upon the point-of-sale disclosures and the terms and conditions of the policy rather than communicating with customers at regular intervals.
- Outcome 3: The firm gives adequate consideration to and takes proper account of fund performance and policy values in a way that ensure its treats its closed-book customers fairly and proportionately.
Firms are generally identifying and taking action where poorly performing unit-linked funds result in poor returns. A small number of firms in the review had insufficient processes in place to identify poorly performing funds. TR16:2 found that a significant proportion of the worst performing unit-linked funds were performing poorly due to charges. Some customers were unaware of the impact of capital unit charges due to failures in ongoing disclosure.
- Outcome 4: The firm’s closed-book customers are able to move from products that are no longer meeting their needs in a fair and reasonable manner.
Where exit and paid-up charges were made the FCA found that a minority of closed-book customers were incurring relatively high charges for making their policies paid-up or for transfers there was a risk of unfair outcomes for customers.
The FCA will undertake further work with the firms in the thematic review. Those firms that were not in the sample should consider the findings and make changes to align their practices to meet the FCA’s four outcomes. The FCA invites firms to submit their views on the proposed non-Handbook guidance. Responses should be sent by 3 June 2016.