Rules-based or principles-based regulation? Is it really that simple? Yiannis Kotoulas finds out

By Acting Editor Yiannis Kotoulas

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The FCA’s Consumer Duty regulation, which came into force earlier this year (31 July 2023), has placed a slew of new requirements on firms operating in the UK insurance market.

One of these – and perhaps the most significant – requires companies in the sector to ensure that their products provide fair value to customers.

And while many, if not all, within the sector would argue that their products of course provide fair value, crucially, the new regulations require that firms must also now demonstrate this.

But what does fair value mean? 

According to the FCA, the definition is simple. On its website, it explains that consumers have received fair value ”if the price a consumer pays for a product or service is reasonable, compared to the overall benefits they can expect to receive”. 

Understandably, the industry isn’t entirely satisfied with this definition. In response, the FCA has also committed to laying out its thinking in more detail and providing examples of what it means, although many brokers and insurers feel that this has not yet gone far enough. 

In the case of property insurance for multioccupancy buildings, for example, the FCA has said that many consumers were not being provided fair value by their insurers because of large commissions paid to other actors within the distribution chain, among other issues. 

But as Insurance Times columnist Stuart Reid pointed out, many within the sector were well aware of the goings on in this business line – even if the FCA said it was surprised at what its investigation found. 

Figuring it all out

What brokers and insurers tell Insurance Times when asked about the regulatory regime, is that they would like more help in navigating it.

It is easy to see how financial businesses with large regulatory departments can be concerned about their processes, but the regulator has explained that it is focusing primarily on outcomes.

Speaking to the exclusive audience at last week’s Insurance Times Broker CEO Forum (16 November 2023), the regulator’s director for insurance Matt Brewis said: ”There’s not a magic equation that we’re hiding from you in terms of how we view fair value – it’s outcomes focused and we also need to find out what the answer is ourselves.

“We’re looking at what the fair value assessments are showing and using that to help us determine what fair value looks like.” 

Brewis added that the implementation of Consumer Duty would be iterative, with the FCA looking to work with the sector to explain its positions in much more detail. 

But at least for the moment, it seems that how we see fair value as an industry really must be simplified down to outcomes – with so many disparate products across the insurance industry and wider financial services, Consumer Duty was always going to be principle-based rather than rules-based. 

What remains to be seen is exactly how the FCA marries up its somewhat laissez faire attitude to intepretation with a desire to come down hard on insurance outliers

Watch this space…