In May 2021, the Financial Conduct Authority (FCA) announced its plans to introduce a new Consumer Duty for financial services firms servicing retail clients, with the aim of ensuring that firms are consistently prioritising the best interests of consumers and delivering them products and services that are fit for purpose. The Consumer Duty is intended to replace two existing FCA principles for regulated businesses – Principle 6, which stipulates that firms must act in the interests of their customers and treat them fairly, and Principle 7, which says that firms must communicate information to their customers in a way that is clear, fair, and not misleading.
On 7 December last year, the FCA published its second consultation on this new Duty, with the final rules and guidance expected to be released by the end of July 2022 and potentially implemented by April 2023. In this blog, we explore the new responsibilities insurance professionals will have with respect to the Consumer Duty and how they can prepare for its introduction.
Why is the Consumer Duty needed?
In the introduction to its consultation, the FCA explained:
“We see a range of good practice by firms in retail sectors with firms innovating to meet the needs of consumers. However, we also see that firms are not consistently and sufficiently prioritising consumer outcomes. This causes consumer harm and erodes consumer trust.”
The proposals, therefore, are intended to drive a “significant shift” in the culture and behaviour of firms and incentivise financial services firms to compete in the interests of consumers. The FCA is looking to create an environment that rewards high standards of conduct and penalises those firms failing to prioritise their customers’ best interests.
The proposals
Among the proposals consulted on were:
- A new ‘Consumer Principle’ that sets the overall standard of behaviour the FCA expects from financial services firms. It stipulates that ‘a firm must act to deliver good outcomes for the retail consumers of its products’.
- The implementation of four ‘outcomes’ that firms should deliver to comply with the Consumer Principle across the various areas of their business, these being:
- Products and services should be fit for purpose, designed for consumers’ needs, and targeted at consumers who meet those needs
- Products and services should be fairly valued
- Firms’ communications with consumers should enable them to understand the products and services they are buying and to make informed decisions. They should be given the information they need, at the right time, and presented in a way they can understand
- Firms should provide an appropriate level of support to ensure consumers’ needs are met throughout the relationship.
- The ‘cross-cutting’ rules that outline how the FCA expects financial services firms to behave in order to deliver the above good outcomes, namely:
- act in good faith
- avoid causing foreseeable harm to customers
- enable customers to pursue their financial objectives.
What does this mean for the insurance industry?
The Consumer Duty will have an impact for all insurance firms providing products and services to ‘retail clients’, whom the FCA has defined as “individuals who are acting for purposes which are outside their trade, business or profession”. This means that insurance professionals working, for example, in the general, home and protection insurance markets, should be preparing for the introduction of the new rules.
Positively, the Association of British Insurers (ABI) says that insurers are a couple of steps ahead of other sectors in their preparations. For example, 2018 already saw the introduction of client’s best interest and formal product governance rules, while in 2016 the FCA’s thematic review of the life insurance sector against four high-level customer outcomes has already resulted in significant improvements. Finally, the general insurance sector recently introduced stricter product governance requirements and new pricing requirements to ensure products deliver fair value to customers. Even so, the ABI has urged insurers not to become complacent and recommended that they perform a gap analysis as soon as possible, in order to identify the gaps between their current level of service provision and what the new Consumer Duty will require of them.
For more information on how the insurance industry can best approach the upcoming changes, please visit the ABI website.