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FCA’s new Consumer Duty: what does it mean for the insurance sector?

Hugh Savill
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The announcement by the FCA of a new Consumer Duty is a significant moment. It is the first broad policy development since Nikhil Rathi was appointed CEO late last year. As such, participants in the insurance market would well be advised to pay closer than unusual attention to the announcement, and to reflect on their approach to the relationship with their customers, and to conduct matters in general.

The announcement is significant, but not a revolution. It represents a strategy of steady incremental change, suitable for a market where most firms are meeting the FCA’s requirements, building on the existing foundations of the duty to Treat Customers Fairly, and the requirements of the Insurance Distribution Directive.

Principle 6, the fundamental source of the duty to treat customers fairly, is to be re-fashioned. We are offered two options on the obligation:

  • to act to deliver good outcomes for customers;
  • to act in the best interests of retail customers.

The second is the status quo option in terms of thinking – though regulated firms may notice a difference in practice. The elevation of the thinking in the IDD into an FCA Principle will have far-reaching changes in terms of FCA’s approach to supervision and enforcement. The first option would represent a further step by the FCA on their journey away from policing rules about sales practices, and towards ensuring the delivery of good outcomes for customers.

If the first option is chosen, the FCA will set out its expectations on what a good outcome looks like under four headings:

  • communications which put customers in a position to make good decisions
  • products and services designed to meet customers’ needs, and targeted at those customers
  • customer service
  • the price of products and services should represent fair value.

These expectations flow from existing FCA thinking and practice. Clearer communication, which can be understood by most consumers, is a longstanding FCA expectation, still not met in all cases. Product design and governance was the major innovation of the Insurance Distribution Directive, though there remains work to be done before it is fully bedded in. In contrast, the importance of good customer service is a relatively new and welcome addition to the FCA’s expectations. In the past, there had been an assumption at the regulator that good service might be an optional extra to the contract – which should be able to stand on its own two feet. Further thinking is also needed on fair value, as the regulators’ expectations under this heading are likely to have the greatest impact. As we have seen in their report on GI Pricing, our expectation is that the FCA will continue to take a close interest in pricing, as an important component of fairness. Regulated firms need to be ready to explain their pricing strategies.

At Sicsic Advisory, working with both insurers and intermediaries, we have seen that a regulatory focus on pricing creates significant strategic challenges. However, fair value is not just about price. It also captures the FCA’s thinking on value measures, and their work on product value in times of Covid. Responses to the consultation will be important in shaping the FCA’s thinking.

What does the new Consumer Duty mean in practice for insurers?

This will become clearer over time. We will provide a further update after the FCA’s seminar on 10th June. It is significant that both the new principle 6 and the rules underpinning it are written firmly in the active. Firms are to “take all reasonable steps.” In other words, it is not good enough to say that the FCA’s expectations are being met. A regulated firm has to demonstrate that they are being met – and that the firm has taken active steps to ensure this. Invariably, one of Sicsic Advisory’s first pieces of advice to our clients is the need to document your thought processes. Many Heads of Compliance will be muttering beneath their breath at this point that this is all just added paperwork. It is, of course. And it is understandable that writing down how things are done may not seem a priority, particularly for product lines that are going well. And yet, once you start this process, and begin to examine the process from the customer’s perspective, it is surprising how many points have not previously been considered. In addition, firms will need to invest further in data capability to measure customer outcomes, and should expect the FCA to do likewise. Again, this quantitative analysis may produce some surprising insights and challenge conventional thinking.

We at Sicsic Advisory stand ready to assist all participants in the insurance market with this process.