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Sicsic Advisory’s comment on Citizens’ Advice report

Michael Sicsic


PRESS COMMENT: The Citizens Advice Report (see Citizens Advice findings ) make disturbing reading for insurers. It is a serious matter that will heavily impact the industry for years to come.
Trust is extremely important in financial services. Insurers will need to work hard to rebuild this with multiple stakeholders, including their own staff, customers and regulators. Public companies must also satisfy investors’ ESG commitments.

The FCA’s expectations are clear. Firms should not wait for them to check up on them. They should carry out a thorough review of their pricing models and risk factors straight away.

The FCA has previously voiced concerns about how the use of data in insurers’ pricing models could lead to consumer harm. Its new flagship regulation to introduce a Consumer Duty builds on this – and will require firms to justify when different groups of customers get different outcomes in terms of products, price and value.

The FCA has already moved into the realm of pricing regulation with their intervention to fix the “loyalty penalty” – it will be difficult for them not to act to investigate this matter and more broadly we anticipate they may have to step in to regulate pricing models.

The issue raises the deeper question of model risk in financial services including the use of machine learning and other artificial intelligence techniques. Advanced uses of data have been a fundamental driver of innovation in insurance. However, it is essential that firms retain oversight of how that data is sourced, how models work and how the output is aligned to desired customer outcomes. Independent audits of their pricing models and external data sources assurance should be an important next step.

Citizens Advice report draws no definitive conclusion on how we got here – but this doesn’t affect the severity of their findings. Businesses have a duty to avoid discrimination whether direct or indirect and to ensure appropriate controls throughout their business. It is outcomes and oversight that matter.


Regulatory context:
Citizens Advice have called for an FCA investigation after its research found evidence of an ‘ethnicity penalty’ in the insurance market. Its research, based on over 649 mystery shops, found that customers in postcodes with a high Black or Asian population are quoted at least £280 more for their insurance than those in areas where the population is largely White, and that these differences could not be attributed to other factors.
The FCA may launch an investigation, but its rules here have been consistent and it has a statutory requirement under the Public Sector Equality Duty to look for ways to eliminate discrimination and advance equality of opportunity.
Long before today, the FCA has been clear about firm’s obligations under the Equality Act. In 2018, following the review of pricing practices that eventually led to the dual pricing ban, CEO Andrew Bailey identified “the risk of discriminating against consumers through using rating factors in pricing based (directly or indirectly) on data (including third party data) relating to or derived from protected characteristics” as an issue that could cause significant harm and poor outcome for consumers.
Its 2021 guidance on the fair treatment of vulnerable customers reminded firms that a likely breach of the Equality Act “will also be a breach of the FCA’s rules”. Last year the FCA and Equality and Human Rights Commission signed a commitment to share information and take action to help protect people in financial service markets.
Its current proposals to introduce a Consumer Duty principle also enforce the point, stating: “Where distinct groups of customers experience different outcomes from a firm’s products or services, we would expect firms to investigate the causes of this. This is particularly important where groups sharing protected characteristics under the Equality Act 2010 may be disadvantaged. Firms would need to satisfy themselves, and be able to evidence to us, that these different outcomes are compatible with the firm fully meeting the standards required by the Consumer Duty for all its customers.