The FCA’s new Consumer Duty principle for closed book products comes into force on 31 July 2024. This means financial institutions will be regulated and will need to evidence of good value for customers.

However, there is a problem. A big problem. According to FCA data, up to 20% of long-term savings belong to ‘gone aways’. In other words, one in five account holders have moved or passed away but the financial services provider hasn’t been notified.

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Failure to act will result in regulatory action

A pension provider who doesn’t pay out because their customer has gone away, or a life insurance provider which redeem a policy to bereaved relatives because they have lost touch with the subject are not fulfilling their raison d’etre. They are not able to provide good value and with the new Consumer Duty Principle, may ultimately face regulatory consequences.

This data pandemic is a particular issue with closed book businesses due to the longevity of customer interaction. Many policies or accounts may have been set up 30-40 years ago. At this time the customer’s information was up to date. However, these days, people move up to eight times during their lifetime and change jobs far more frequently. Consumers now invest in a wider portfolio of products than ever before so lose track of documents and fail to keep in-touch. People also live longer and develop degenerative diseases which may lead to mental incapacity, meaning they are unable to keep records up to date, or they may have moved to a nursing home.

The Covid Pandemic itself has also played its part. The move to non-paper-based banking has introduced efficiencies but it has made it more difficult for executors to find account information. Where statements were previously kept in a drawwe, email trails are now far more difficult to access.

Closed book products are also by their very nature designed to support major life changes such as retirement, or death in the case of life insurance. These changes of circumstances often mean customers can be difficult to trace.

Financial institutions must invest in cleansing their data

The first step financial institutions must take in the face of the new Consumer Duty Principle is an assessment of the scale of the problem. One challenge here is the definition of ‘gone aways’. For some organisations this means simply one piece of re-directed mail. However, what about non-responders? How many account holders are 120 years old and will have passed away? When these subjects are taken into account, the figures may be stark.

Financial institutions will need to get comfortable with the need to invest in cleansing their data. There is no way around this.

The next step is to establish what has been done to date and what can be done to trace customers. This is likely to need prioritisation and looking at increased risk may point to a suitable starting point. For example, gone away or non-responsive pension holders are at a higher AML risk than those with life insurance policies as the premiums are much lower than pension payments. Therefore, it might be sensible to invest in a project to update records for gone away or non-responsive pension holders as a priority.

There are various ways to trace customers all of which require time and resources. The Department of Work and Pensions offers a letter forwarding service to the details they have on file. However, as financial institutions are not given these details, follow-up for non-responders is impossible.

Credit reference agencies are cost effective but generally have a low discovery rate. One reason for this is that credit reference data simply doesn’t go back decades to when the accounts were created.

In house or outsource human investigation and tracing is possible, and delivers superior results, but may require a fresh approach and budgetary allocations from the c-suite. Often the increased cost of investigation negates the cost of erroneous engagements.

High discovery tracing services which take advantage of technology are also an option.

With the Consumer Duty principle for closed book products just about to come into effect, the fact is that Financial Institutions now need to work to re-connect with their lost customers to reduce gone away and deceased customer holdings. However, this time and investment will be well spent to ensure good outcomes for customers.

Andy Davies is FI Relationship Manager at Estatetrace