This article was originally published by Insurance POST, June 2023.
With only a month to go until the Financial Conduct Authority's Consumer Duty comes into force, Laura Miller explores what steps can be taken to make sure insurers comply with the rules.
The Consumer Duty comes into force in relation to open products on 31 July 2023.
The Financial Conduct Authority expects firms already to have made assessments of the products they manufacture and/or distribute and to be working towards compliance with the Duty in good time for the end of July.
Where firms are lagging behind, they will need to take urgent action to comply. Regulatory and legal experts have weighed in on the points to prioritise in the coming weeks, and the ramifications for those general insurance providers and brokers who fail to act.
Consumer Duty timeline: five milestones to prepare for the new rules to take effect
27 July 2022
Final rules and guidance published.
31 October 2022
Firms agree implementation plans.
30 April 2023
Manufacturers complete reviews to meet the outcome rules.
31 July 2023
Rules start for open products and services.
31 July 2024
Rules start for closed products and services.
Steps already taken
By the end of April 2023, firms that manufacture products should have completed all reviews, for example of products and customer journeys, necessary to meet the requirements of the Duty for open products.
This is so firms could share with distributors the information needed to meet their own obligations in time for July.
Distributors should then be ready to act on the information received in the context of their own implementation plans and activity.
Consumer Duty requirements
The Consumer Duty introduces rules comprising:
- A new Consumer Principle that requires firms to act to deliver good outcomes for retail customers.
- Cross-cutting rules providing greater clarity on our expectations under the new Principle and helping firms interpret the four outcomes.
- Rules relating to the four outcomes we want to see under the Consumer Duty. These represent key elements of the firm-consumer relationship which are instrumental in helping to drive good outcomes for customers.
The outcomes relate to:
- Products and services.
- Price and value.
- Consumer understanding.
- Consumer support.
The rules require firms to consider the needs, characteristics and objectives of their customers – including those with characteristics of vulnerability – and how they behave, at every stage of the customer journey. As well as acting to deliver good customer outcomes, firms will need to understand and evidence whether those outcomes are being met.
Tobin Ashby, partner at law firm Kennedys, says while this information should already have been shared as part of complying with existing product governance and fair value rules, “manufacturing and distributing firms should still consider whether there is any further information on target markets, products and distribution to share that the distributors might need to be able to distribute the products appropriately.”
Manufacturers and distributors, including brokers, in the product chain, “will need to continue to work together and share information relevant to customer outcomes under the new regime”, he adds.
By this point in the process toward being compliant with the Consumer Duty, most firms will have spent time agreeing their own interpretation of “substantive compliance” and “material shift”.
Oliver Sharland, managing principal at technology and management consultancy Capco UK, says what firms should be focussing on now is “whether they can provide a compelling story to their management bodies and regulatory supervisors to demonstrate that they are meeting their obligations under the new Principle 12,” which states a firm must act to deliver good outcomes for retail customers.
Beyond this, firms should ensure the processes they put in place drives continuity and that they have a review process that can allow changes when needed, he says.
Steps to take
Capco has drawn up a number of steps insurance firms lagging behind should urgently focus on ahead of the July deadline.
The first is tackling frameworks, tools, policies and procedures.
Firms should embed the Consumer Duty into their business as usual frameworks.
Given the breadth of the Duty, Sharland says he would expect it to be reflected in a firm’s product governance operating model, conduct framework, pricing and interest rate setting strategy, vulnerability framework, third party risk management framework, senior managers and certification regime, and second and third line policies.
The next issue to address is training, culture and governance.
Firms need to demonstrate tangible changes to their culture. Sharland says: “A first step in achieving this is by developing a deeper understanding of good customer outcomes in their staff, particularly those with direct customer interaction.”
Of equal importance is how customer outcomes are now considered in relevant governance for decision makers.
“Key to this is having active engagement from your board champion,” Sharland says.
Reviews and remediation are other areas Capco recommends looking at, if companies haven’t already, between now and the July deadline.
Most firms have structured their plans to complete reviews of target market and fair value, the associated communications and customer journeys followed by a triage process and remediation.
However, Sharland says “they will need to evidence the thoroughness of the review process, and transformation discipline for any subsequent remediation or uplifts made”.
Critically, firms must be able to demonstrate decisions have been made against an agreed methodology focussed on customer impact.
Kennedys’ Ashby adds: “Firms should engage with the FCA if – as a result of their reviews – they are considering withdrawing or restricting access to products or services which have a significant impact on vulnerable consumers or on overall market supply.”
Enhanced outcome monitoring and use of data, the ability to identify and respond to instances of customer harm, is one of the foremost objectives of the Consumer Duty.
Firms should, Capco advises, make uplifts to their outcomes testing capabilities, as well as enhance their data aggregation and reporting to enable a holistic view of customer outcomes.
A formal report on customer outcomes to the board is not a regulatory requirement until July 2024, “however firms should consider this to demonstrate a shift in how customer outcomes are monitored and governed,” says Capco’s Sharland.
Finally, there is ‘day two’ planning.
“Demonstrating a robust ‘day two’ plan is nearly as important as evidencing what firms have achieved by July,” says Sharland.
Firms should signal to the regulator that while July represents compliance, this is just the start of their journey to greater customer centricity.
Day two plans should, Sharland adds, contain remaining areas of remediation that were not prioritised for July, more ambitious transformation initiatives focussing on digitisation and the further enhancements to outcomes monitoring, and the plan for the review of the closed book products.
Where firms are behind schedule, and already know they will have certain areas needing further work beyond this July deadline, Patricia Celata, principal consultant at consulting firm Sionic, part of the Davies Group, advises they should ensure they “have evidence of what has been done to date, and the remaining work to be completed with the rationale as to why it could not be achieved by the deadline.”
In addition, she encourages firms to have a plan in place to show what they are doing to become compliant with actions and timeframes for delivery.
“The plan should be approved at the appropriate governance level,” Celata says, adding it should also be “owned by a senior manager to drive progress, is monitored to completion, and reported to the Board or equivalent regularly.”
This information should be made available upon request to the FCA.
For those firms which have struggled to get the management information needed by third parties to assess fair value, the regulatory ramifications could be significant.
As the FCA puts it in Policy Statement 22/9: “Authorised firms are responsible and accountable for meeting all their regulatory responsibilities even when they outsource or use third-party arrangements… firms will need to have arrangements in place… to capture any data necessary… to monitor whether they are delivering good outcomes.”
Breaches of the Consumer Duty rules are capable of enforcement just as breaches of other regulatory rules are, points out Jeremy Irving, head of financial services and insurance at law firm Browne Jacobson.
Because of the emphasis on governance for Consumer Duty implementation, Irving adds, “firms which don’t obtain the management information needed to realise their plans – especially if this results in retail customer harm or even the risk of harm – should expect their governance arrangements and individual senior managers to be scrutinised, challenged and, as applicable, changed”.
There is an expectation from the regulator that everyone in the supply chain and through the distribution chain should be communicating openly, particularly if there are any delays in sharing the information.
Where firms are struggling to get the management information needed by third parties to assess fair value the first port of call is to contact the party directly.
“If firms remain unsatisfied with the provision of information and have raised it with the relevant parties, and still have not received a reasonable response as to when the MI will be provided, they should then consider contacting the FCA through their regular supervisory contact or the FCA supervision hub,” Sionic’s Celata notes.
The regulations, Celata points out, require firms to escalate any known areas of non-compliance.
This means firms could escalate any non-compliance resulting in further regulatory scrutiny and possibly strain on the relationship with the third parties.
“Ultimately, the consumer is impacted by this non-compliance as value assessment may not be effectively conducted due to limited information, which is in complete disparity to what the regulations set out to achieve,” Celata adds.
Ultimately, recent Dear CEO sector letters have set out the supervisory timelines and the FCA have signposted that it will be testing enhanced data and dashboards in July and assessing what the dashboards tell firms about customer outcomes in January.
Firms can take some confidence that the quality of their MI will not be tested until later in the year, however the timelines set out a clear intent from the FCA to move towards a data-led supervisory approach.
Capco UK’s Sharland warns: “Firms who are not able to provide a compelling data story will need to rapidly address this as part of day two continuous improvement to avoid regulatory attention or intervention.”
Going forward, each firm will in any case need to report regularly on whether the firm is delivering good outcomes for its customers in a manner consistent with the Duty.
The FCA will use the data and insights it receives to identify outliers and poor practice in delivery good outcomes and expects to intervene quickly and assertively where firms are not meeting the Duty requirements.
Kennedys’ Ashby cautions all insurance firms: “The FCA intends to use its authorisation, supervision and enforcement powers to identify where the implementation of the Duty requires intervention and to act in order to ensure that the Duty leads to a reduction in harm as fast as possible.”
Don’t say you haven’t been warned.