The latest on Consumer Duty
26 Apr 2023
There has been a huge amount of information coming from the Financial Conduct Authority (FCA) on Consumer Duty over the past few months as the deadline for open products draws closer.
While the main implementation draws nearer, the deadline for manufacturers to complete their reviews for open products and services is now upon us, needing to be completed by the end of April.
The purpose of this earlier deadline is to allow manufacturers to share their reviews and findings with distributors, who will then need to work together to meet their obligations under the Duty.
This leads to the main deadline of 31 July this year for full implementation for open products and services.
While the deadline for closed products is July 2024, the FCA is already issuing clear warnings that work needs to be underway now for companies to meet this deadline.
This article pulls out some of the key messages and themes coming from recent FCA communications for both Life Insurance and General Insurance and considers some examples for each part of the insurance market.
FCA review of implementation plans
The FCA reviewed implementation plans for larger firms and published its findings in January as part of its commitment to feedback what it's seeing in the market.
In this multi-firm review, there was an appreciation of firms’ efforts to respond to the Duty, however, there was a clear warning that some firms had not yet done enough to meet the requirements and were therefore running the risk of being unable to implement the Duty effectively in the given time.
The review highlights three areas where firms are urged to focus their attention during the final stages of the implementation period, ahead of the July deadline.
- Effective prioritisation.
- Embedding the substantive requirements.
- Working with other firms.
These three key areas of focus are the same for both Life Insurance and the General Insurance and Pure Protection Markets.
The FCA’s Dear CEO letters
Matt Brewis, Director of Insurance at the FCA, issued sector-specific Dear CEO letters in February. These set out the FCA’s expectations for implementing the Duty and identified priority areas of focus for each sector, where it believes the most effort will be required to meet implementation deadlines.
For Life Insurance the four areas of focus cover:
- Reliance on Outsourced Service Providers.
- Supporting pensions and retirement consumer decision-making (including increasing consumer engagement and advice/guidance boundary).
- Volume and complexity of closed product business.
- Life manufacturers and distribution, including information sharing.
On outsourcing, it is also worth noting that the PRA have issued Policy Statements and Supervisory Statements on the topic for Financial Market Infrastructures (FMIs) and so this is an area that is gaining general regulatory focus.
For General Insurance and Pure Protection, the areas of focus differed and cover:
- Effectiveness of product governance arrangements.
- Effectiveness of communication with consumers.
- Claims processes and outcomes.
While there are of course overlaps, and indeed lessons to be learned from both industries, the differences in focus illustrate that there are factors that are unique to each industry and require careful consideration, rather than a one-size-fits-all approach.
Examples in relation to the 4 outcomes
The FCA designed the Consumer Duty around the four outcomes that they’re interested in monitoring. These outcomes are set out below along with some specific examples falling under each.
Products and Services
Firms will need to carefully consider the products and services that they are providing with a clear view of the defined target market that they are looking to serve. An example that was provided by the FCA in their ‘Dear CEO’ letters was around lifetime mortgages. This product will have a target market that is likely to include older customers in a particular demographic, which may include customers with characteristics of vulnerability. The FCA expects that if a firm sees younger customers buying lifetime mortgages, then they should consider if alternative products would lead to better outcomes.
Price and value
Insurers are required to show how the value of a product is commensurate with the price charged, but this outcome also delves deeper. For example, a motor insurer might provide comprehensive car insurance cover where upfront discounts and optional add-ons are offered that play on customers’ behavioural biases.
These upfront discounts may skew comparisons of similar products - so to address this, insurers may be required to ensure that consumers have a view of the total cost of a product upfront.
Where optional add-ons are available, insurers may have to do more to show how the value of a product is commensurate with the price charged. For example, protected no-claims discount add-ons will likely need to be more transparent and show how the cost of renewing an existing product that had a claim on it over the past year might differ from the same product that did not have a claim on it.
Finally, insurers may have to ensure that customers have products that provide value to them specifically. This might mean that insurers will be required to design specific products for different consumer groups. For example, the rising cost of living might require insurers to design products that deliver the essentials or that could be built by each customer to suit their needs and specifically add value to them.
With-profits is an example of a product where there is complexity and asymmetry of information. Ensuring customers receive relevant information, at the appropriate time is key to enabling them to make effective decisions.
Life insurers currently monitor certain policyholder behaviours, for example, Guaranteed Annuity Rates (GAR) take-up rates, but less is done in terms of monitoring the impact of communications on policyholder behaviour. For example, if clear communications were issued highlighting the value of GARs in the lead-up to the option date, would that lead to an increase in GAR take-up?
This kind of monitoring, and then using this data to refine future communications is likely to go beyond existing practice. However, this could be necessary to demonstrate that firms are delivering “good” outcomes.
In some instances, pensions-style “wake-up packs” may be appropriate across a much broader range of products, alerting customers a number of times in advance of key dates and adding further prompts to action each time.
Orphaned policies is an area that is gaining focus and can be expected to become more important as insurers prepare closed products and services for the implementation deadline of July 2024. Ensuring that this group of customers receives the same support and servicing as policyholders with active advisers will be crucial in meeting the requirements of the Duty. Firms should also be ensuring that the products and services these policyholders hold remain appropriate and indeed, that the policyholder is aware of the benefits and knows how to claim.
There is a real focus from the FCA on ensuring firms are engaging with the substance of the Duty and acting now to ensure they are ready for the July deadlines this year and next, with a clear acknowledgement that there is a lot of work to be done on heritage business in order to be ready for July 2024.
Just this year there has been feedback from the multi-firm review, different sector letters and the launch of the Consumer Duty firm survey for selected small and medium-sized firms who weren’t included in the multi-firm review. The level of FCA engagement and the amount of detail they are sharing on their findings is a real indication of how new this is.
It should feel different to what’s gone before but actually what’s really important is that in fully engaging with this, the industry will be going beyond a change programme to a mindset shift that will result in better outcomes for our customers.
How Hymans Robertson can support you
For a conversation on how we can support you with implementing the Consumer Duty requirements, or what they mean for your with-profits business, please get in touch with one of our team.