The FCA recently issued a press release confirming it’s written to insurers warning that more actions must be taken to ensure good consumer outcomes.
So what exactly is the FCA’s approach? Let’s take a look at some of its thinking and the work it’s likely to be undertaking. There have been four portfolio letters issued:
Retail insurance
Wholesale Insurance
Life Insurance
Funeral plans
The letters are very similar in content:
- They outline the work the FCA is doing
- They emphasise putting the consumers’ needs first particularly when it comes to:
- Embedding the Consumer Duty
- Price and value
- Consumer support
Key points from the life insurance portfolio letter
The FCA says it has taken supervisory action against firms where it has seen:
- instances of very long waiting times/settlement delays
- weak identification of vulnerable customers
- the continued sale of products not providing fair value
- paying away substantial amounts of commission to third parties where it was not clear how those commission levels had been assessed as being fair value
- failure to implement general insurance pricing practices rules
- discriminatory pricing practices
- undervaluation of motor claims, and
- poor business interruption claims handling.
Embedding the Consumer Duty
The FCA sets out that it has a strong focus on Consumer Duty implementation, especially in the current tough macro-economic environment – for both consumers and firms. It expects firms to assess and address issues with products and services, price and value, consumer understanding and consumer support.
It also expects firms to put the consumer at the centre of their business to ensure that they are delivering good consumer outcomes. This is both for open products and services now, and in readiness for the Duty applying to closed products and services from 31 July 2024.
The FCA says it will consider using its range of regulatory tools to assess the effectiveness of this implementation, which may include mystery shopping exercises across different sectors.
Minimising the impact of operational disruption: operational resilience and the increasing reliance on third parties
The FCA comments that it has recently seen incidences of a lack of operational resilience within firms to the detriment of customers, and that it is particularly concerned with the level of governance, oversight and contingency planning.
Setting and testing higher standards
The FCA says that it will continue to monitor activity in the annuity market and will take action if it considers the actions of firms across the value chain, including the level and transparency of commission on non-advised annuities, could harm the delivery of good outcomes to annuity customers.
For the protection market, through the FCA’s thematic review of PROD 4 rules, it will be testing whether protection products are delivering fair value to customers. The FCA has stated that its concerned that levels of commission may not always be consistent with fair value and may incentivise unnecessary product churn.
Putting consumer’s needs first: price and value
The FCA says that a potential driver of poor outcomes is the commission structures between insurers and brokers. The FCA expects firms to perform thorough assessments of their products and distribution models to ensure that they offer fair value, and insurers should monitor brokers in their distribution channels to identify instances where unsuitable products may be sold, or products that don't offer fair value.
In respect of annuity business, the FCA expects firms to make it clear that consumers may achieve a higher rate by shopping around on the open market, including for impaired / enhanced annuities. This information should be shown prominently, clearly and in an engaging way in the documentation a customer receives.
In conclusion, the FCA wants insurers to prioritise consumers, adhere to the Consumer Duty, and continuously evaluate it products and distribution models to ensure they deliver fair value. We’ll report back on the development.