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FCA consumer duty changes

The FCA has proposed some additional guidelines for consumer duty – we examine the implications of the new rules and explore what this means from an insurance perspective.

The Financial Conduct Authority (FCA) has long been concerned regarding interactions between financial services companies and consumers. To address these concerns, the FCA proposed additional guidelines on consumer duty — developed with industry and consumer groups — related to some of the behaviours and activities seen as potentially damaging to both customers and the reputation of the financial services sector.

In May and December 2021, the FCA consulted on its proposals to introduce a new set of Consumer Duty rules for financial services firms it said would “ensure a higher and more consistent standard of consumer protection for users of financial services and help to stop harm before it happens”. [1]

The proposals apply to firms in relation to their regulated activities, and relate to products that are sold to ‘retail clients’, meaning all clients other than ‘professional’ clients such as large corporate entities and government bodies. The proposals also extend to firms that form part of the distribution chain, even if there is no direct relationship with the end user of the product or service.

The three key elements of the Consumer Duty are:

  1. An overarching consumer principle: A firm must act to deliver good outcomes for retail clients.
  2. Three cross-cutting rules: Firms must take all reasonable steps to avoid foreseeable harm to customers, enable customers to pursue their financial objectives, and act in good faith towards those customers.
  3. Four outcomes: These represent the key elements of the firm-consumer relationship: consumer understanding, products and services, consumer support, and price and value.

Consultation on the proposals ended in February 2022, and the new rules are planned to be confirmed by the end of July 2022 and implemented by April 2023.

As the rules move closer to implementation, firms should be preparing for the changes in terms of their business models and practices – and take time to understand how best to mitigate the additional risks for organisations, or their directors and officers , when reacting to these changes.

Implications of the new rules

Comprehension and proactivity

At a fundamental level, firms will need to review and understand the requirements of the Consumer Duty and how it applies to their business. For example, what does the change in expectations mean in terms of how they operate? Are any cultural shifts required to help meet the new expectations?  The FCA has previously considered firms too reactive in response to their regulatory requirements. The new regime means the businesses leaders will need to be proactive and ask themselves if the products and services they provide are indeed meeting customers’ needs.

Product design and review

The FCA’s hope is that the new Consumer Duty will create an environment of healthy competition, where firms are encouraged to be innovative and develop products and services that match consumers’ needs, characteristics, and objectives in their target market. Firms must also make sure that the distribution strategy for those products and services is appropriate for the market, and carry out regular reviews to ensure that consumer needs continue to be met. The FCA has specifically raised concerns in relation to financial exclusion, and will be keen to ensure that vulnerable customers are not being disadvantaged. Firms will have to take note and act accordingly.

Understanding and support

While individual communications will still need to be fair, clear, and not misleading, the scope of the consumer understanding outcome extends across the whole consumer journey. Firms will need to consider their overall approach to communicating information throughout that journey to make sure they equip consumers to make effective, timely, and properly informed decisions. Communications must clearly enable consumers to understand the products and services, their features and risks, and the implications of any decisions they make.

The consumer support outcome relates more directly to the support that customers receive when using the product or service. Firms need to make sure there are no barriers to customers using their services, and it should also be at least as easy to exit a product as it is to enter. The channels through which a product or service is provided need to be appropriate to deliver effective support to customers. Again, the FCA makes specific mention of the needs of vulnerable customers.

Resourcing

Firms will also potentially have to consider a range of resourcing needs in order to comply with the new rules. For example, what additional IT will be necessary (if any), and will added tracking, reporting, and testing bring extra costs?  Will extra staff (potentially at a senior level) be required to assess the rules, apply the framework, and make judgements on activities?

What does this mean from an insurance perspective?

For the directors and officers of the regulated firms implementing these changes, there is a heightened propensity for claims to be brought by stakeholders alleging the failure to support the three enhancements of the Consumer Duty Act. Key areas of these claims will centre around claims for misstatement, breach of duty, and failure to act within a managerial capacity. For context Marsh has seen a year-on-year increase in financial lines policy notifications in early 2022, before any further changes in the regulatory environment.

In addition, the uptick in regulatory compliance under the FCA is likely to bring increased investigations and regulatory costs. Such pressures will be in addition to navigating the fallout of COVID-19; environmental, sustainability, and governance (ESG) scrutiny; and macroeconomic disruptions that impact overall business performance and draw attention to a firm’s requirement to better understand their clients and support them in these market environments.

Policyholders should pay careful attention and ensure that adequate limits are purchased where increased labour requirements may dilute existing total D&O limits, as the potential for claims continues to rise. They should also consider whether existing sublimits restrict possible additional cover, or can these be increased where market conditions continue to change? In addition, they should be attentive to whether the roles of management and the services afforded by the company are suitably aligned and affirmed in existing liability insurance arrangements, in line with the Consumer Duty Act?

Conclusion

While many firms are already delivering good outcomes for consumers and will be working towards further improvements, some concerns have been raised, notably from UK Finance, about the proposed timetable for the changes. With the rules expected by the end of summer 2022 and full implementation proposed by early 2023, many firms will require significant focus and resources in order to meet the deadline.

Whatever the timeline, the changes are coming and firms will have to be prepared and ready to respond. The hard work needs to begin sooner rather than later.

For more information about the FCA Consumer Duty, please contact your Marsh representative.

[1] ‘FCA to introduce new Consumer Duty to drive a fundamental shift in industry mindset’, FCA Press Release, 7 Dec 2021

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Will Davis

Vice President, Financial Institutions, FINPRO

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Sharon Kerr

Financial Institutions Practice Leader, UK and Ireland