How will the FCA’s new Consumer Duty regulations impact insurers?

Data is slowly, if erratically, changing the insurance sector for the better. It enables usage-based policies that can be tailored to individual needs and performance. But some old tricks of the trade, such as price walking – the continual price increase of policies on renewal – or arcane charging structures, are still around – and they’re leaving a lot of customers feeling short-changed.

 

There have been previous attempts to persuade insurers and the financial sector at large to break with such bad habits. But the fact that the Financial Conduct Authority (FCA) has recently resolved to become “a tough, assertive, confident, decisive and agile organisation” suggests that the sector and the regulator itself have so far failed to fully deliver when it comes to treating customers fairly.

 

The question is whether Consumer Duty – the latest FCA attempt to get the finance sector to put genuine customer interest at the core of its culture, if necessary, at its own expense – will bear fruit, or be just another entry in a list of failed initiatives.

 

With eight months to go before its implementation on 31 July 2023, Consumer Duty’s prospects to achieve a step-change in the British financial sector’s culture and behaviour are better than you might expect. Unlike its predecessor, the Fair Treatment of Customers referred to as TCF, the new directive has some clout: it mandates outcomes rather than just monitoring whether the right frameworks are in place to deliver them, and expects firms to be proactive in their compliance efforts.

 

The new regulation will entrust FCA with strong enforcement powers. It enables it to not only issue fines but also remove permissions, secure redress for consumers and hold senior managers – whose bonuses may get docked if they fail to perform their duties of reviewing the company’s customer outcomes – to account.

 

One detail seems pertinent, however: the onus will be on insurers to define what a good outcome is. Consumer Duty is not a detailed, prescriptive set of rules, but has the principle of reasonableness at its heart – mandating insurers and other financial institutions to act in line with “the standard that could reasonably be expected of a prudent firm.” This could represent an opportunity for firms to set their standards low then mark their own homework against their own undemanding thresholds. It also raises doubts about how much actual cracking down the FCA will be required to do as a result, and the new regulations have been criticised by the Financial Inclusion Centre, among others.

 

Although reasonableness might mean lower compliance costs and a relative absence of convoluted regulatory frameworks, the obligation to evidence good customer outcomes also puts an enormous burden on companies that it applies to. Being a data-driven sector, insurance already has some of the necessary data sources on hand. Even so, it has a lot on its plate in preparation for next July.

 

Evidencing good customer outcomes

Insurers must translate their findings on the quality of customer outcomes into hard data. When designing their products, setting their prices, wording the product guides for customers or providing customer support services, at every step insurers must ask themselves whether they have acted in good faith and done everything they could to prevent any reasonably foreseeable harm, and whether they have really enabled their consumers to meet their original financial goals.

 

Existing data sources insurers can leverage include complaints data, persistency data (the ratio of timely premiums and net active policies) or the frequency of product switching. A low number of product switches would, for example, imply the persistence of so-called sludge practices that exploit consumers’ behaviour to prevent them from acting in their own best interest.

 

Other factors may make compliance for insurance companies a gargantuan task. If there is a significant change in a customer’s financial circumstances, outcomes regarded as good previously may no longer be up to standard.

Therefore, it won’t be enough for insurers to take data snapshots of their customers. They will have to monitor them continuously with special focus on vulnerable ones (young adults, over 65s, people with disabilities or low income and high debt).

 

The wider net of responsibility

Consumer Duty applies to any stakeholders in the distribution chain: it’s not just companies selling retail insurance that need to comply but “all regulated firms in a distribution chain that can determine or materially influence retail customer outcomes”.

 

But a way through this thorny path could lie in account information service providers (AISPs), which offer insurers access to customers’ financial data through APIs with the data owner’s consent.

 

In the long run these could be the key to Consumer Duty compliance. However, although easy access to a customer’s complete financial data history may look like a panacea for compliance, it also creates a vicious circle.

 

For Open Banking and Finance to take off, the financial sector first needs to build trust with clients – which is exactly what the FCA has set out to do by introducing Consumer Duty upon finding that it’s lacking. (Currently just 36 per cent of customers see financial firms as honest and transparent in their dealings with them.)

 

So, for now, it will fall on insurers to find the resources, expertise and creativity to make Consumer Duty work.