The FCA believes that ’firms are not consistently and sufficiently prioritising good consumer outcomes’, therefore its Consumer Duty will mark ’a new frontier’ in its supervision approach

The insurance industry has backed the FCA’s latest Consumer Duty consultation paper, which plans to set higher standards for the protection of consumers across the retail financial market.

Today (7 December 2021), the regulator launched its second consultation on the proposed Consumer Duty - this will close on 15 February 2022.

The FCA initially announced its plans for a new Consumer Duty in May 2021. It hopes that this rule change “will drive a shift in culture and behaviour for firms, meaning that consumers always get products and services that are fit for purpose, that represent fair value and are clearly communicated and understandable”.

The Consumer Duty will require firms to review their products and services against a new standard.

Following the publication of today’s consultation, the FCA said: “We see a range of good practice by firms in retail sectors with firms innovating to meet consumer needs. We also want to drive a healthy and successful financial services system in which firms can thrive and consumers can make informed choices about financial products and services.

“But we also see that firms are not consistently and sufficiently prioritising good consumer outcomes. This causes consumer harm and erodes consumer trust.

“We set out our high level proposals in our first consultation - we’ve now revised those in light of feedback and are setting out our proposals in more detail.”

The newest consultation document provides feedback on the earlier industry consultation, details revised proposals and gives a cost benefits analysis. 

New frontier

Speaking on the consultation, Hugh Savill, Sicsic Advisory’s senior advisor, said: “The FCA has now confirmed the essence of its proposals for a new Consumer Duty, marking a new frontier for its involvement in consumer protection.

“The new duty is based around a new consumer principle – that ‘a firm must act to deliver good outcomes for retail customers.’ This effectively replaces the familiar regulatory approach of ‘Treating Customers Fairly’ (TCF) with a higher bar for firms to meet.

“For a start, this principle is supported by new cross-cutting rules on acting in good faith, avoiding foreseeable harm and enabling consumers to pursue their financial objectives. In turn, these cross-cutting rules are underpinned by four outcomes on products and services, price and value, consumer understanding and consumer support.”

Savill explained that although the new Consumer Duty is based on well established regulatory foundations, Sicsic Advisory recommends that companies get to know the details and begin preparations early.

He added: “The FCA has made it clear [that it] will ensure delivery of the Consumer Duty through ‘assertive supervision’ -  and while the [consultation] does not include new reporting requirements, firms must be in a position to evidence to the FCA appropriate data assessing customer outcomes.

“Beyond this, it is clear from the FCA’s explanation that [it] will expect companies to explain their wider approach to consumers through the lens of the new duty, cross-cutting rules and outcomes.

”In effect, all existing consumer policies and materials will need to be reworked using the language of Consumer Duty. The sooner companies learn how to speak it, the better their ongoing relationship with the regulator will be.

“The FCA is determined to advocate for consumers and we’ve seen them go even further in the general insurance space with fair value, starting but not ending with the ban on price walking and essentially the biggest shake up the market has seen for decades.

”Looking at the direction of travel, it is entirely likely [that] fair value will seep out and expand across financial services more widely.”

Crystal clear

For Sian Fisher, the Chartered Insurance Institute’s (CII) chief executive, “the FCA is being crystal clear” with its consultation paper. She explained that the FCA wants the insurance industry to innovate and address what it thinks are the unmet needs of consumers.

She continued: “The regulator’s findings support those of the CII’s Public Trust Index - failure to address this erodes consumer trust in the profession.

“Our Shaping the Future Together consultation shows there is an appetite among professionals to further develop the skills and knowledge required to consider the needs of their customers – including those in vulnerable circumstances – and how they behave at every stage of the product or service lifecycle.

“We are committed to supporting the insurance and personal finance profession with the growing focus on and awareness of what their customers experience and addressing diverse needs.”

Likewise, Heather Alleyne, UK financial services regulation partner at EY, said: “Today’s measures confirm, without any doubt, the FCA’s intention to pursue a new consumer principle. This is set to change the face of the consumer financial services market and puts retail customers and SMEs more firmly in the driving seat of their finances than ever before.”

Potentially ‘contentious’ reform

Anne Fairweather, Hargreaves Lansdown’s head of government affairs and public policy, agreed that the FCA is “right to zero in on the responsibility that the financial [services] sector has in supporting consumers”.

She said: “This new approach, focused on consumer outcomes, is very welcome.

“An ambitious deadline of April 2023 has been set but, paired with the iterative approach [it has] outlined in today’s announcement, there should be time to iron out wrinkles in the framework. As always with wide ranging reform, this will prove contentious in some quarters, especially with headline costs up to £2.4bn being quoted.

“However, there’s a missed opportunity when considering the benefits of greater personalisation in communications. The power of data hasn’t yet been fully harnessed here – more could be done to support consumer understanding. The advice-guidance boundary gets in the way of our ability to engage our clients using targeted messaging and guiding them to better outcomes.

“The Consumer Duty offers the opportunity to look beyond the current, rigid advice boundary and instead judge the value firms provide based on the outcomes they drive for consumers. We’ll continue to make the case for the benefits that more personalised guidance could bring to the millions who are left unadvised in the current system.”

Alleyne added: “The limited range of rules and guidance published today [puts] a significant onus on firms to think now about how they will ensure they have placed consumers at the heart of their individual business models.

”The task before the industry is challenging, but by no means insurmountable. And while the timetable is short for a change of this scale, this is an essential new focus for the industry, which will better protect everyone who uses financial products and services.”