What will that mean in practice? Perhaps most telling is Mr Woolard’s comment that the “Principle for Business [which] requires firms to communicate in a way which is fair, clear and not misleading, and [pay] due regard to the information needs of its clients … seems like too low a bar”. The Principle focuses on the firm’s processes, rather than the outcome the FCA is looking for – which is consumers understanding their options; and the FCA’s concern is that even if firms comply with the numerous rules regarding disclosure, there is no guarantee that the consumer will understand the information they are given. The FCA is therefore considering “requiring firms to ensure consumer understanding” as part of the Principles Review.
How does one “ensure consumer understanding”? As the old proverb goes, you can take a horse to water, but you cannot make it drink.
2020 may represent a seismic shift in terms of the FCA’s expectations of firms for customer protection. However, this movement would not be unexpected. There were a number of developments in 2019 which set the scene for the year to come.
Fair treatment of vulnerable customers
On 23 July 2019, the FCA published its Guidance Consultation for firms on the fair treatment of vulnerable customers and explicitly stated that protecting vulnerable consumers is a key priority for the FCA. The Guidance connects to the FCA’s Financial Lives Survey, which indicates that 50% of adults in the UK display one or more characteristics of being potentially vulnerable. Vulnerability covers individuals who, due to their personal circumstances, are or may be especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care. There are many different drivers of vulnerability, but the FCA identifies an aging demographic as an important factor – an issue which is examined in detail in CMS’ thought leadership report on Our future financial lives.
Taking the Guidance Consultation and the Financial Lives Survey together shows a clear shift in the FCA’s focus onto improving outcomes for vulnerable customers, with the FCA wanting to see that “doing the right thing for vulnerable consumers [is] deeply embedded in the culture of firms”. It is significant that the FCA wants to see firms focus on ensuring that the outcomes experienced by vulnerable consumers are at least as good as those of other consumers. This echoes part of Christopher Woolard’s speech on “requiring consumer understanding”.
As part of this drive to improve outcomes for vulnerable consumers, we have already seen the FCA introducing a new ‘signposting’ rule, to provide consumers with details of a directory of travel insurance firms that will cover consumers with pre-existing medical conditions to improve access to travel insurance products.
The FCA will consider whether it may need additional policy interventions to enhance compliance with firms’ obligations to treat vulnerable customers fairly and ensure the desired outcomes are achieved. It has indicated that, at this stage, it does not consider this to be necessary. However, it is consulting on potential additional interventions, which could include measures such as proposing new high-level rules that relate specifically to vulnerable consumers.
While firms wait for further clarity, initial steps should be taken to assess whether a practice of “doing the right thing for vulnerable customers” is embedded into their culture – which the FCA suggests should include: (1) understanding the needs of its vulnerable customers; (2) ensuring staff have the relevant skills and capabilities to address those needs; and (3) putting the understanding and skills into practical action.
FCA is also challenging firms to consider how technological change could make financial products work better for everyone through addressing issues such as access, exclusion and vulnerability.
Fair treatment and vulnerability in pricing practices
In presenting its 6-question Framework on how it will assess concerns about the fairness of a given form of price discrimination in the Feedback Statement on Fair Pricing in Financial Services, the FCA was again clear that it is more likely to intervene if pricing practices result in harm to vulnerable customers. It also flagged that it would be devoting time to the question of how firms are price discriminating – and published the interim report on its market study on general insurance pricing practices shortly afterwards.
The study concluded that the home and motor insurance markets are not working well for consumers, finding that 6 million policy holders paid high prices in 2018, at a total estimated cost of £1.2bn – with “price walking” being a particular concern.
This market study is significant because the FCA indicates that it is likely to intervene, targeting a number of areas, including personalised pricing which targets customers with lower awareness of pricing practices, who are more likely to include vulnerable customers. It also raises some interesting points discussed in our articles on the Impact of Insurtech and the future of retail insurance and competition authorities' point of view.
2019 saw the FCA take enforcement action in respect of the fair treatment of existing customers in the sale of non-advised pension annuities where it found failings in explaining to existing customers that they may get a better rate if they shopped around on the open market. This demonstrates the importance the FCA places on price transparency especially where there may be customer inertia amongst existing customers.
Change is afoot and we may see the FCA introduce remedies such as stopping practices that could discourage switching, including a potential ban or restriction on the use of auto-renewal of insurance policies or limiting pricing practices that allow firms to charge higher prices to consumers who do not switch.
Firms should be mindful of growing regulatory scrutiny and the concerns raised; review their governance, control and oversight of pricing practices; their focus on customer outcomes; and take steps to improve transparency and engagement at insurance renewal (bearing in mind that although the Insurance Distribution Directive did introduce a number of rules on just this matter – a move to outcomes based regulation may mean that narrow compliance with those rules is not necessarily enough).
Distribution chains and product value and quality
The FCA flagged product value (including product suitability and product performance) as both an important aspect of product governance for firms when considering whether they are treating customers fairly and an area of an increasing concern for the FCA on more than one occasion last year.
The FCA’s General Insurance distribution chain thematic review, the associated Dear CEO letter and the final guidance identified significant potential harm from the product development and the distribution approaches of some firms - and made it very clear that the FCA expects firms to consider the value their product offers to the end consumer and the impact that the distribution strategy/chain has on that products value. The General Insurance Value Measures Consultation Paper published in January also contained proposals aimed at addressing poor product value and quality, and reducing the risk of unsuitable GI products being bought or sold, requiring firms to report more data about the value and quality of the products they sell. Given a Policy Statement on Value Measures in General Insurance has been in the pipeline for a long time (the Discussion Paper came out in 2015), the timing of the Consultation Paper – coinciding with, and referencing, the FCA’s work on distribution and pricing explored above – seems significant in supporting the FCA’s wider customer focus.
2020 is therefore likely to see a deepening regulatory focus in the insurance sector, with the shift towards outcome focused regulation leading to increased pressure on firms to ensure they understand and meet their customers’ needs and have effective and robust product governance arrangements to help achieve this. We expect “treating customers fairly” will continue to be a theme that cuts across the insurance sector, and one which is especially prevalent when it comes to the treatment of vulnerable customers. The January 2020 Dear CEO letter to PL&CL Insurers certainly points this way, unequivocally stating that the FCA expects a step-change in culture, with firms prioritising their focus on conduct and consumer outcomes throughout the customer journey.