Thinking big picture about the FCA’s recent Consumer Duty interventions in the Insurance market

Introduction

Seven months into the Financial Conduct Authority’s (“FCA”) Consumer Duty (“Duty”) regime and the regulator has already made significant interventions in the General Insurance (“GI”) market related to customer outcomes.

These interventions include:

• A large number of firm-specific interventions that cover the Duty, Product Governance and Fair Value Assessments (“FVA”), Delegated Authority (“DA”) and Distributor oversight, the role of Senior Managers and control functions in relation to the Duty, Board MI and oversight, and many other topics related to the Duty; and
• Broader industry focus on topics such as GAP insurance, premium finance, pricing, motor claims, Appointed Representative (“AR”) oversight and Multi-Occupancy Buildings Insurance (“MOBI”). As well as the upcoming release of the FCA’s Product Governance thematic review paper, which is expected shortly, and the FCA's recent publication of Duty good practice and areas of improvement.

It’s clear the FCA is being proactive where it sees the potential for customer harm and firms who have not taken appropriate action to address the Duty.

Some of these interventions relate to products and distribution that have been on the FCA’s radar for some time, for example, the FCA introduced new rules for GAP insurance in 2015 and undertook a thematic review on AR oversight with findings published in 2017, to name just two. However, the FCA is now intervening further under the Duty, given its perception of a lack of change made to products and distribution by insurers and brokers.

While these topics aren’t new to many firms in the GI market, two points of emphasis are:

1. These topics should not be addressed in isolation; and
2. The findings and themes still apply to firms that don’t underwrite or distribute these specific products.

The FCA interventions have findings and themes that apply across the GI market to a wide range of products and distribution types, and action should be taken by firms using a risk-based and proportionate approach. This doesn’t mean taking a blanket approach across all business, but firms should identify and assess where there is impact and take proportionate action. Many of these findings and themes also apply across other financial services sectors.

How these interventions are linked

To bring this to life, here’s five practical considerations for your firm:

1. MOBI isn’t just property owners insurance: The FCA’s new MOBI rules have also introduced the regulatory concept of “policy stakeholders” which applies much wider than just property owners type insurance. It requires firms to consider the value they are providing to other potential personal lines customers that sit underneath other types of commercial insurance products, which can be prevalent in master policies, AR business etc.

2. GAP insurance themes aren’t just related to GAP: The FCA’s recent intervention in the GAP insurance market is related to topics such as distribution, commission, claims data, loss ratios etc. It also relates to firms having product governance frameworks and distribution oversight that enabled the products and distribution to continue without being changed or withdrawn, prior to the FCA intervention. There is an expectation that firms apply the themes from this GAP insurance intervention across other product lines. This is likely to significantly raise the bar in terms of the depth of analysis and data required by firms to undertake Product Governance/FVAs, vs current market practice. Falling short of this expectation can result in breaching PROD/Consumer Duty and potentially result in having to withdraw products.

3. Themes also apply to commercial customers in a risk-based and proportionate way: What is a vulnerable commercial customer? These themes also apply to a wide range of commercial and SME customers, which also fall into the scope of the Duty. How are underwriters and brokers identifying potential vulnerabilities in their commercial customer base and taking action when identified? Also, the oversight requirements insurers have over Coverholders/Schemes/DAs are raising the bar on the extent of onboarding and oversight required over other types of non-delegated distribution, such as open market brokers.

4. Cost of living factors apply across products: There are factors relating to the cost of living situation in the UK that are relevant across a number of these themes and products, including premium finance, motor total loss claims, GAP insurance etc. These factors can apply across a wide range of products and customer types. They also apply outside of GI, for example, the ongoing FCA interventions in the motor finance space.

5. Operational resilience and customer harm: As the next operational resilience deadline approaches in 2025, it’s important for firms to be putting their frameworks into practice and enhancing their resilience. A number of firms have experienced resilience issues, for example relating to third parties, which can also impact customers depending on the nature of the business service. Drawing the link between operational resilience, customer harm and customer remediation is important.

Actions firms should be taking

Many firms continue implementing and embedding the Duty through their “Day 2” programmes. It’s important for firms to incorporate the lessons learned from the ongoing FCA interventions into their “Day 2” programmes, in a risk-based and proportionate way.

Some example steps to take include:

• Identify and assess: It’s important to show you have identified the themes across the FCA interventions and assessed your business for exposure in a transparent and structured way;
• Take action on products and distribution as applicable: Take appropriate steps in relation to specific products and distribution types. There are many levers to enhance value to customers. Keep track of what you’ve changed or withdrawn, as a key indicator of effectiveness and culture;
• Enhance associated processes Including FVAs: The enhancements required to product governance/FVAs, distributor/DA oversight, Board MI (etc) can be embedded in your Day 2 plan. It is likely that the depth of analysis undertaken during FVAs including the use of data needs to significantly improve across the market to be in compliance with PROD and the Duty;
• Governance and SMCR: Board, Committee and Senior Manager awareness and engagement in how the Duty is working in practice is critical including challenging the extent of change following implementation of the Duty;
• Upcoming annual Board approval: Incorporate your consideration of these topics within your upcoming Board approval of your Duty compliance. This should include findings of assurance you’ve undertaken, which is a topic discussed further in our previous blog ; and
• Use of technology: Consider the use of technology to automate product governance and distributor oversight processes to surface the right customer issues in a quicker and more consistent way, compared with manual processes. Two examples of this technology that clients are using are Deloitte’s OneView solution for Product Governance and Distribution Oversight .

The approach firms take to addressing these topics is a key indicator of culture. It’s important for firms to take a risk-based and proportionate approach to how these themes apply across their business. The lessons learned from these FCA interventions can be maximised if addressed holistically and can result in a more sustainable and streamlined solution. If you would like to discuss any of these topics, or other regulatory and risk topics, then please get in touch.