'Closed book' life products should be reviewed at least every five years, says FCA

Out-Law News | 14 Dec 2016 | 9:46 am | 2 min. read

Providers should review 'closed book' products at least once every five years, in order to ensure that customers holding products that are closed to new business are still being treated fairly, according to the Financial Conduct Authority (FCA).

The FCA has stressed the importance of "clear and timely", regular communications about policy features for closed book customers as part of its final guidance on the topic. These customers should also have the ability to move from products that are no longer meeting their needs in a "fair and reasonable manner", according to the guidance.

The guidance was published after the FCA's previous work "uncovered poor practices at some firms" with closed book life insurance products according to Megan Butler, the FCA's executive director with responsibility for investment, wholesale and specialist products.

"We are not introducing new rules, but this guidance will help firms know what we expect of them to ensure their customers are treated fairly going forwards," she said.

Although the guidance applies to personal pensions such as SIPPs and annuity contracts, endowments, investment bonds and whole-of-life policies, the FCA said that it expected firms to use it to "[inform] their practices and processes in respect of all products … in which long-standing customers are invested".

Firms have three months to review their business practices and put the necessary changes in place, according to the FCA.

In its guidance, the FCA sets out its expectation that firms treat 'closed book' customers fairly, and do not pay less attention to them than to "customers who have recently taken out a new product". 'Fairness' in this context should include recognition by firms that these customers may find it more difficult to make the right financial decisions than other groups of customers due to the long-term nature of their investments.

Many closed book customers are unengaged with their products, and do not know how their investments are performing, according to the FCA. For this reason, providers should keep these customers well-informed including clear information about the policy's performance and the charges applied. The FCA does not expect them to "disregard or amend" the original terms of the policy or to apply current regulatory requirements retrospectively, but notes that long-term products require "a more holistic consideration of the overall outcome being delivered today rather than rely solely on something that was promised many years ago".

As a general rule, product reviews should take place at least once every five years; although the guidance has been amended from the draft form to suggest that firms conduct an annual check of whether the length of their product review cycle is appropriate. "Higher-risk" products may require more frequent reviews. Firms will also be expected to conduct 'ad hoc' reviews in response to major industry changes, with the pension freedoms given as an example.

Firms should develop clear criteria against which they assess the performance of their closed book products, which should take into account "what a reasonable customer expectation should be, based on what the customer is likely to have understood by the information given to them at point of sale", according to the guidance. Relevant factors could include the impact of charges, contractual obligations, communications to customers and complaints data, although this list is not exhaustive.

When communicating with customers around policy events, firms should highlight any costs and benefits associated with that event in a "sufficiently prominent and specific manner", according to the guidance. Communications should also set out clearly all options available to the customer including their risks, costs and potential benefits, along with any charges that may apply. Customers should be encouraged to seek advice where necessary, and be given alternative options to incurring a paid-up or exit charge where appropriate, according to the guidance.