Earlier this month, the FCA published findings from its review into how life insurers are operating their closed-books to determine whether they are treating their closed-book customers fairly (the Review). The products reviewed included personal pensions (including SIPPs and Retirement Annuity Contracts); whole-of-life (individual); endowments and investment bonds (all either as with-profits investments or unit-linked investments). The Review highlights the need for all firms to do more to improve the governance of their closed-books and the importance of the way in which firms communicate with closed-book customers.

The Review also sets out the actions that the FCA believes firms should be taking in order to treat their long-standing customers fairly. This is framed as draft non-Handbook guidance which is not intended to set out new requirements but rather state what firms should already be doing based on its Principles for Business and other existing rules. Based on prior experience of consultations of this nature, the draft guidance is unlikely to change substantially as a result of the consultation process. Whilst the FCA has approached some insurers in connection with the Review and the issues raised by it, all insurers should now be carrying out their own investigations into the way in which closed-book customers are treated in light of the Review, and making any necessary changes to make sure that they are acting in accordance with the FCA’s expectations.

In this newsletter we consider some of the steps that firms should be taking following the Review.

The FCA’s review focused on four high-level outcomes for firms which were considered against the FCA’s Principles and other rules:

  1. the firm’s strategy and governance framework results in the fair treatment of closed-book customers;
  2. the firm’s closed-book customers receive clear and timely communications about policy features at regular intervals and at key points during the product lifecycle that enables them to make informed decisions;
  3. the firm gives adequate consideration to and takes proper account of fund performance and policy values in a way that ensures that it treats its closed-book customers fairly and proportionately; and
  4. the firm’s closed-book customers are able to move from products which are no longer meeting their needs in a fair and reasonable manner.

Strategy and governance framework

The Review focused on investment-based life policies that were sold before 2000, and as the FCA recognises, in an economic environment which was very different to that of today. However, treating customers fairly is a fundamental principle for all regulated businesses and the Review highlights the importance of ensuring that the way in which closed-book customers are treated is central to a firm’s business.

Strategy and governance

Firms should have in place a strategy or customer plan to deal with closed-book customers which recognises their specific needs and the need to ensure that those customers are treated fairly. Treating customers fairly however does not mean that all customers (closed-book or other customers) should be treated the same. The requirement to treat customers fairly recognises that different groups of customers have different needs and characteristics. A firm’s strategy should establish the outcomes that it is trying to achieve for closed-book customers (separate to the outcomes it is trying to achieve for other customers) and should set out the steps the firm is taking in order to measure whether the planned outcomes are being attained. Firms should be able to effectively demonstrate and should clearly record in board and committee minutes that they have properly considered the Principles and other rules and customer outcomes in relevant decisions taken by the board and other key committees. In the proposed draft guidance, the FCA has suggested that the ‘voice of the customer’ is heard on key committees and suggests that a possible way to achieve this would be for firms to appoint a consumer champion. At present, both executive and non-executive directors need to carefully consider customer outcomes against the backdrop of the current regulatory framework. In doing so, they should already be considering the ‘voice of the customer’. Appointing a formal ‘consumer champion’ could add a further layer of protection for consumers to the existing framework, and it will be for firms to consider whether their existing structures are sufficient or need supplementing in light of the FCA’s expectations as set out in the Review. Although, having a formal ‘consumer champion’ within an insurance company is likely to become more commonplace now that the FCA has identified this as a potential solution to some of the FCA’s concerns.

A firm will need to be able to demonstrate that the strategy it adopts is being implemented in practice as well as on paper. The Review emphasises the significance of a firm’s culture and the behaviour of its senior management. Particularly noteworthy is the FCA’s stated view that compliance with contractual obligations and terms and conditions alone does not automatically result in customers receiving a positive outcome and the firm meeting its regulatory obligations. When setting out its strategy, a firm should consider who its customers are, what their specific circumstances and needs are and the associated conduct risks that could impact on the specific outcomes that they receive.

Firms should have in place adequate risk management systems to identify and deal with conduct risks relating to closed-book customers. This includes having in place effective, independent controls in the compliance, risk and internal audit functions. The effectiveness of these risk management systems should be tested in practice – the Review highlights that simply having them in place without demonstrating their effectiveness is not enough to secure a positive customer outcome.

Product review

Many closed-book products are widely accepted to be complex products which may include many different features such as guaranteed annuity rates, MVRs and flexible options. The Review recognises that their complexity coupled with the length of time for which they are held potentially increases the risk of firms delivering poor customer outcomes.

In order to achieve the objectives that a firm sets out in its strategy in respect of closed-book products, firms should be actively measuring whether those objectives and outcomes are being achieved. Firms should have in place a clear and effective product review process to monitor whether the product continues to meet the general needs of those closed-book customers in accordance with the Responsibilities of Providers and Distributors for the Fair Treatment of Customers (RPPD) and Principle 6 of the FCA’s Principles.

Closed-book products should remain fit for purpose and deliver against what they were originally designed for. Firms should ensure they are on track to meet customers’ reasonable expectations as they evolve over time as set out in the RPPD (para 1.21 (2)) and TCF outcome 5 (which states that consumers are provided with products that perform as firms have led them to expect), and the associated service is of an acceptable standard. Although the Review does not extend to considering how individual policies were sold in the past, an assessment of the expectations that customers had at the time the policies were taken is still necessary.

In order to determine whether the product is continuing to meet the needs of the consumer, firms will need to periodically review products whose performance may vary materially to check whether the product is continuing to meet the general needs of the target audience that it was designed for, or whether its performance will differ significantly from original expectations. Firms should:

  1. ensure that products are reviewed frequently, as appropriate for the product. The draft guidance expects firms to review products, save in exceptional circumstances, at least every five years with ‘due regard paid to higher risk products which require a more frequent review’;
  2. review products in light of any relevant changes to legislation or guidance;
  3. not rely solely on complaints data to identify issues with products or the processes that support those products. A customer not complaining is not equivalent to a customer getting a positive outcome. Firms should consider a broad range of material to review products against, not just regulatory publications but also media articles and management information;
  4. consider whether the closed-book products are delivering a fair outcome for customers. This goes beyond merely looking at the application of the terms and conditions. As noted above, strict compliance with the terms and conditions of the product alone does not, according to the Review, automatically result in fair outcomes for consumers. It is not sufficient to rely on or apply the terms and conditions alone where this results in poor outcomes for consumers. The terms and conditions of closed-book products should be reviewed by all firms regularly in light of current FCA principles and practices to reflect the fact that firms are providing an ongoing service today;
  5. take into account all of the relevant factors that could affect the product’s performance e.g. value for money, product performance, impact of charges, contractual obligations, communications to customers and complaints data. Firms need to assess the products themselves to ensure that they continue to meet the general needs of the customers that they were intended for. Firms will need to review the literature that was provided to customers at the time of sale and subsequently to consider whether the product’s performance will significantly differ to what the insurer originally stated it would deliver. To the extent that the product is unlikely to deliver against its original expectations, firms must let customers know to allow them to take timely action in respect of the product;
  6. address any issues identified in the product review within six months of the issue being identified (unless there are exceptional circumstances); and
  7. contact customers and distributors to notify them of any remedial action being taken including details of any changes or modifications to the product.

Sales practices

Firms should pay special attention to the way in which they conduct their reward programmes in respect of staff dealing with customers contemplating surrender or transfer, including identifying whether their approach to retentions could create an increased risk of leading to poor consumer outcomes. Firms should review and ensure that call scripts and other materials provided to customer facing staff are balanced and do not encourage staff to influence the customer to remain with their current provider.

Firms can no longer simply rely on compliance with the original terms and conditions of the product and need to consider subsequent communications with customers on an on-going basis. Firms should carefully consider the documentation customers receive, including the PPFM and annual PPFM compliance reports, and information provided before:

  1. the closed-book product matures;
  2. the customer wishes to surrender;
  3. the customer wishes to transfer;
  4. premiums are altered; and
  5. charges are varied by the firm.

In accordance with Principle 7, firms must pay due regard to the information needs of its customers and communicate in a way that is clear, fair and not misleading. In order to achieve compliance with this Principle, firms should (amongst other things):

  1. have appropriate mechanisms in place to assess these information needs and to ensure that communications meet these needs. This includes providing information regularly with enough information to allow customers to make informed decisions about their policies. A bonus statement alone is not enough to allow customers to make an informed decision and firms should consider providing effective annual statements. Such statements should include information about the performance of the product, its value and the impact of fees and charges;
  2. ensure that closed-book customers are fully informed of the various options, features and guarantees that form part of their policies both on an on-going basis and in the lead up to policy events such as changes in premiums, surrenders, transfers and maturities. Customers should be clearly informed of the impact of their decisions on any benefits available to them under the policy;
  3. highlight where there might be the need for the customer to take advice;
  4. carefully consider the structure, content and presentation of event-driven communications to ensure that the information provided to customers is easily accessible and that key information is clearly prominent; and
  5. demonstrate their commitment to maintain effective communication with closed-book customers to proactively minimise the number of new ‘gone-away’ customers. This includes checking customer details and regularly seeking to obtain change of contact details for customers. Where customers have ‘gone-away’, firms should attempt to re-establish contact. The draft guidance proposes attempting re-contact at the point of ‘gone-away’ and if unsuccessful, within 18 months of the first attempt and if again unsuccessful, at least every three years after that, unless the firm can demonstrate why this will not be effective.

Fund performance and policy values

The proposed draft guidance requires firms to give due regard and appropriate oversight to each type of fund (e.g. closed, open, direct and indirect) and not to give less oversight to a particular fund solely because of its type. Firms should have in place clearly described and effective strategies and processes to identify poorly performing funds. In order to identify poorly performing funds, firms should carry out frequent reviews. The draft guidance suggests that reviewing closed-book funds less frequently than quarterly ‘gives rise to doubts as to whether firms have effective reviews in place’. When assessing fund performance, firms should measure (i) fund performance both over the longer terms and the short term; (ii) volatility over the long and short-term; and (iii) Sharpe ratios.

Where poor fund performance is identified, firms should have in place a defined mitigation process to measure the success of mitigation activities. Firms’ oversight functions such as compliance and risk functions, should be aware of the progress of mitigation actions taken by the firm.

Firms must also monitor all types of expense allocations and charges proactively, noting that expense allocation and / or levels of charges may change. Firms need to consider these charges and expenses in light of having different groups of customers within a fund, for example different generations of policyholders, different policy types and different premium statuses and consider how these different customers can be treated consistently yet fairly.

Exiting closed-book policies

Firms should assess whether customers paying exit or paid-up charges are treated fairly. To the extent that customers choose to exit their policy, they must be told about any exit fees in advance of incurring such fee and its resulting effect on the policy as exit charges may unfairly prevent a customer from moving away from a product that is not performing in line with their expectations.

Firms must also review policy contracts for fairness in line with the Unfair Terms in Consumer Contract Regulations or the Consumer Rights Act 2015 (as applicable). Firms need to be aware of the impact of legislative changes, court decisions and guidance issued by regulators. In the event that a firm has been relying on a contractual term that it now considers to be unfair, it will now need to consider what action it should take to address any potential resulting consumer detriment.


All firms need to consider the Review carefully, including its potential application to products other than closed-book products. Firms should be thinking about present day regulatory obligations and duties that they are subject to, how these apply to historic policies, and whether they need to take any action to ensure that such existing customers are (and, where relevant, have been) treated fairly and otherwise in accordance with the present day regulatory framework (including the draft guidance published in the Review). Importantly, the terms and conditions of a long-term policy are only the starting point of determining whether or not an insurance company has complied with its obligations to its long-term customers. It is the beginning, not the end of the story. The FCA’s Review instead makes clear that a more holistic approach is required to validate customer outcomes. The Review highlights the FCA’s continued shift towards principles and outcomes based regulation. Firms need to ensure that they carefully review their systems and processes to ensure that achieving a positive customer outcome for all new and existing products is central to the firm’s culture.