The new Consumer Duty and the impact on brokers
The FCA’s new Consumer Duty is due to come into force this July, as noted in our report 'Insurance forecast 2023: claims trends and future risks'. The Consumer Duty will have a significant impact on insurers and insurance intermediaries. This article specifically focusses on the impact of the new Consumer Duty on insurance brokers.
The FCA’s Principles for Business originally set out eleven fundamental obligations, the objective of which was to regulate firms in the retail finance market and to protect consumers. Following two consultations in 2021, the FCA announced a twelfth principle, the new Consumer Duty (the Duty), with a view to addressing deficiencies in the existing consumer protection regulations.
The Duty represents, in the FCA’s own words, a “paradigm shift”, requiring firms to go beyond simply acting in a client’s interests, instead delivering a higher standard of customer care, and proactively taking steps to deliver good outcomes for retail customers (see FCA Policy Statement PS22/9 (the Policy Statement)).
On 3 March 2023, the FCA then published a set of portfolio letters addressed to credit brokers, mortgage intermediaries and other retail finance providers. The letters include a reminder of the relevant implementation deadlines and the FCA’s expectation for the implementation of the Duty into working practices.
The majority of brokers are likely to already conduct business in line with the Duty, and so its implementation will be a matter of maintaining the new higher standard and reinforcing well established principles, rather than introducing new policies. That being said, to ensure that current practices do not fall below the new standard, firms should acquaint themselves with the FCA Policy Statement and its guidance as to how to achieve/maintain compliance.
The FCA has introduced a set of cross-cutting rules designed to enhance the standards of conduct and assist with achieving four required outcomes. These cross-cutting rules consist of three expectations for behaviour, to assist firms in understanding and implementing the Duty, namely:
1. Act in good faith
- Firms must have honest, fair and open dealings with consumers. This rule does not prevent firms from advancing their own commercial interests, provided their conduct accords with the provisions of the Duty.
2. Avoid causing foreseeable harm (whether by act or omission)
- This extends to indirect relationships in a distribution chain. However, the FCA states that if a firm reasonably believes a customer to have understood and accepted a risk, failure to prevent that client from proceeding will not breach the Duty.
3. Enable and support consumers to achieve their financial objectives
- The actions required by a firm will depend upon the nature of its products/services, and by what is within the firm’s control, based on its knowledge of the customer.
This rule does not prevent consumers from making decisions which are adverse to their interests. It simply requires firms to establish an environment in which consumers can obtain relevant advice/materials to empower them to make decisions.
Firms must demonstrate that, by adherence to the cross-cutting rules, they have been able to achieve the following four outcomes:
1. Products and services
- Products and services must meet the consumers’ needs and objectives and be fit for purpose.
- To achieve this objective, brokers should consider the consumer’s objectives and pass on relevant information to the product provider/lender (the intermediary) to ensure that the appropriate product/outcome is achieved.
2. Price and value
- There should be a relationship between the cost of a product and the overall benefit the consumer receives from it.
- To ensure compliance with this outcome, brokers should ensure that their fees are not excessive and that they are able to demonstrate value for money. This outcome in particular is likely to be the focus of heavy scrutiny for broker firms.
3. Consumer understanding
- Firms should provide relevant material, in a way that is easy to understand, to ensure that consumers are equipped to make good decisions.
- This outcome is of particular importance to brokers, given that their relationship with consumers is often longstanding. The interests of the consumer are likely to change over time and it is imperative that the information/advice provided evolves to meet the consumer’s needs.
4. Consumer support
- Obtaining ongoing support should not be an unduly burdensome task for the consumer. Firms should be responsive and helpful at every stage of their relationship with the consumer.
- Brokers should evaluate their current channels of communication to consider whether the same lines of communication are (or ought to be) available to consumers for both sales and post-sale enquiries, support and advice.
The FCA has avoided reference to the “average consumer” in its Policy Statement. Instead, firms are required to consider a range of needs in their target market, including “vulnerable” consumers. The spectrum of characteristics of vulnerability could include poor health, cognitive impairment, life events, low resilience and/or capability, such as poor literacy or numeracy skills. Whilst firms are not required to assess the needs of consumers on a case by case basis, the design and sale of products must factor in a range of consumer characteristics in order to satisfy the outcomes.
How can brokers prepare?
The FCA requires firms to demonstrate the steps taken to implement the Duty, if asked. Whilst preparations are likely to be well underway, we would encourage broker firms to consider the following:
- Cross-reference the Duty with current practices and highlight any areas which may require improvement.
- Create a plan for implementing any identified improvements.
- Keep records of steps taken to prove that obligations have been met.
- Arrange staff training at all levels to ensure the Duty and any resulting policy/procedural changes are understood and any issues ironed out.
- Consider investing in software platforms (such as those that automate emails to help brokers keep in regular contact with consumers; to distribute updates/information relevant to the consumer’s sector).
- Orchestrate a review of existing accounts and evaluate whether adequate cover is in place or what information can be provided to enable brokers achieve the best outcome.
- Consider whether current procedures account for a diverse consumer base, particularly those with vulnerabilities. Simple measures (such as a preferred contact method) may provide a more personalised service to those who, for example, would prefer email due to hearing impairment.
30 April 2023
Insurers must have completed a of review of products so that information can be shared with brokers, to allow them to implement procedures to meet their obligations under the Duty.
31 July 2023
Duty must be implemented for new and existing products and services for sale or renewal.
31 July 2024
Duty must be applied to products and services held in closed books.
Whilst the most important deadlines for brokers are 31 July 2023 and 31 July 2024, the FCA expects firms to take advantage of the entire implementation period in order to ensure that procedures/policies are tested and fully compliant by the relevant dates.
Given the short timeframe in which the FCA requires compliance with the Duty, we may see an increase in regulatory action against brokers that have failed to comply with the implementation deadlines, or have otherwise fallen short of the required standard under the Duty. In addition, claimant solicitors will no doubt be alive to the new standards when advising clients on professional negligence actions. As the Duty does not confer a new specific duty of care on firms, we anticipate that such claims will fall into the typical pattern of failing to act with reasonable care and skill (with reference to the Duty) on the basis that, by virtue of the broker’s negligence, a good outcome was not achieved for the consumer.