By Padraic Walsh
The 3 February Dear CEO letter sets clear challenges to general insurance and pure protection (GI & PP) firms as the Consumer Duty deadlines loom. Alongside a reminder of existing expectations and setting out expectations for the remaining outcomes, there is a very clear warning. The FCA will act “much faster and more assertively” where firms do not meet the requirements of the Duty.
What does the regulator expect from firms?
This can be broadly split into three focus areas:
- compliance with existing product governance and fair value rules (PROD 4)
- preparing for implementing new rules on consumer understanding and support
- ensuring wider regulatory expectations are embedded in firms’ Consumer Duty implementation.
Fair value assessments need a more rigorous and qualitative assessment
The FCA is concerned about the degree and effectiveness of PROD 4 implementation. No products have been removed due to fair value issues and elsewhere claims ratios suggest concerns for some product types.
Firms should consider whether their products are genuinely offering fair value, and look beyond metrics such as loss ratios to evidence fair value.
Including a qualitative assessment will be more likely to lead to changes to product offerings, and in some cases, firms may consider it is appropriate to withdraw certain products from the market.
Consumer understanding and support should be considered across the whole product lifecycle
Firms will no longer be able to focus effort, resources and quality considerations in the parts of the lifecycle that give the greatest commercial benefit i.e. sales and marketing. Instead, they will need to consider customer journeys at all points of customer contact and ensure that customer outcome expectations are met. Particular focus is on claims handling, which the regulator sees as a key element of the product lifecycle. Implementing these outcomes could involve the development of new processes to manage and test communications and the way customers interact with firms.
A challenge which should not be overlooked by firms is the additional complexity where there are other parties in the distribution chain and where services such as claims are outsourced. Defining responsibilities and gathering and sharing information can present significant challenges for firms in delivering and evidencing compliance.
Connected regulations
The regulator has also overlaid its narrative on the Consumer Duty by making a clear link with the following areas:
vulnerable customers
cost of living
appointed representatives.
Firms should ensure that these areas are considered and factored into their implementation plans. For firms who are not yet fully compliant with the FCA’s vulnerable customer guidance, there is a clear warning they will not be compliant with Consumer Duty; the FCA clearly believes this sector has more work to do in this area.
With the clock ticking and deadlines fast approaching, firms and senior management should consider how they are likely to look in the new Consumer Duty world. The regulator has promised to bite faster and harder where it finds that the customer outcomes are not being met.
