The FCA is on a Government-mandated mission to create a culture of honesty, fairness and professionalism across the UK’s insurance and financial services industry.
As part of this mission, the regulator has recently announced sweeping rule changes to protect customers against unfair practices at every stage in their insurance journey.
The new rules cover a range of behaviours and fall into three categories – a new Consumer Duty, pricing rules, and product governance.
So we thought we’d ask regulation and compliance guru Branko Bjelobaba to explore the industry and policyholder implications with our brokers in our latest Hot Topic webinar. Here’s what he told us…
What is the FCA’s Consumer Duty ruling, and why is it needed?
Consumer Duty is an additional layer of compliance that will demand firms to think holistically about their activities and gives the regulator intrusive and proactive powers to clamp down on poor behaviour.
“Under the current system, most consumer safeguards only kick in after customers experience an issue,” explains Branko. “The new Consumer Duty, which includes all retail customers and most forms of commercial business, enhances this protection and forces insurers and their partners to get things right in the first place.”
Specifically, the Consumer Duty requires providers to:
- Always put good consumer outcomes at the centre of their businesses;
- Focus on the diverse needs of their customers at every stage.
It mandates that insurers and brokers think more carefully about what customers want before selling to them, and take steps to give every customer experience a ‘no regrets’ purchase. Supporting this principle are new rules designed to uphold providers’ commitment to act in good faith, and to ensure they anticipate and avoid any harm caused by products during their lifetime.
“The issue of foreseeable harm is fascinating,” says Branko. “Firstly, insurers must identify possible causes of harm in their product design and policy terms. Secondly, insurers and brokers must identify these causes in their marketing and communications. Everyone involved in selling insurance will be required to reduce or highlight the potential harm that might occur over the lifetime of a product, including any harms identified after a policy has been sold.”
Consumer Duty will be finalised in July, with the implementation period likely to span the remainder of 2022. Once introduced, insurers and brokers will have to carry out regular product reviews and Fair Value Assessments for open and closed products to demonstrate that they’re meeting the new rules.
According to Branko, “Brokers need to think about how they will show that ‘good outcomes’ are being delivered. One thing the FCA would like to see is brokers following up with customers post-purchase to check they understand what they have bought and that expectations have been met.”
In addition, the FCA is set to start analysing pricing practices as part of its annual reviews, bringing the issue of commission into focus. This will ensure that the commission being paid is indeed commensurate with the work being done and services provided by the broker.
“You may need to justify why you’re selling policies from one insurer over another or why you’re continuing to support an insurer that is performing poorly,” adds Branko.
Enforcing the recent pricing rule changes
At the start of 2022, the FCA introduced high-profile changes to its insurance pricing rules to ensure renewing customers are treated the same as new customers.
While it’s not yet clear whether the new rules are working as planned, the FCA is now stepping up its anti-avoidance measures, including making it mandatory for firms to whistle blow in the event that they become aware of peer non-compliance.
The pricing rule changes, which apply to open and closed book motor insurance products (excluding commercial clients) and also include additional products and services sold by brokers such as breakdown, legal expenses and courtesy car covers. The rules require firms to offer a renewal price that is no higher than the equivalent new business price for that customer through the same sales channel. Price-walking has been banned entirely, and the rules apply to the application of monetary and percentage discounts on premiums, including brokers that choose to waive their commission or fees.
“You can give away your commission in respect of new business – that’s not a problem but you have to do it for existing customers too,” says Branko. “And if you’re giving away your commission more than 25% of the time, you’ll have to disclose this to the FCA in your regulatory reporting. It’s about fairness and consistency. You have to have a sound rationale for the policy, rather than cherry picking.”
Enhanced governance will increase the admin burden on brokers
Last year the regulator warned the industry that too many firms were not fully meeting its standards around the design and oversight of products and by 30th September 2022 the initial review of value should have been concluded by manufacturers (insurers). This will be an ongoing requirement requiring insurers to review all products at least every 12 months, as well as carrying out value assessments across the distribution chain. In effect, this means insurers will have to ask for more regular information from their brokers, increasing the admin burden on firms.
“Insurers need to know what brokers are doing with their products, such as bolting-on extra services, bundling products or adding their own fees,” says Branko. “Insurers will have to determine the value of their original product and also take into consideration anything done by the broker to ensure what they’re providing is genuinely needed by the customer.”
Branko suggests that the FCA is increasingly concerned about intermediary remuneration and how it corresponds to the costs or workload involved in distributing a product and whether commission being paid is commensurate. If fees are to be added then these need to be assessed as fair and reasonable in line with the adequacy of the commission being paid.
“Unlike lawyers or accountants, most brokers don’t charge by the hour. Anyone looking to impose admin fees needs to sit down with an accountant and determine how much their time actually costs and whether the fee is then appropriate. The FCA will require reporting of these fees and will be checking to ensure they aren’t just pure bottom-line profit. Remember, they’ll have a wealth of comparative data from other brokers to draw upon, so it’s going to be hard to pull the wool over the regulator’s eyes.”
Helping brokers achieve FCA compliance
Branko’s FCA Compliance webinar covered a wide range of topics relating to the pending rule changes, while he also answered a series of questions about broker pricing practices under the new regime, and how brokers need to be thinking about the issues of ‘fair value’ and ‘good outcomes’.
If you missed the webinar, you can watch the full session recording here.
In addition, to help brokers comply with these changes, we’ve made all of our Product Value information sheets available on ers.com/insurance.
Designed to be read in conjunction with our existing policy wording, these sheets explain the intended value of our products, outline customers for whom our products are unlikely to provide fair value, and help brokers identify how and where they may affect the intended value to policyholders.
