Regulator’s ‘culture shift’ forces firms to place greater emphasis on vulnerable customers

The FCA’s “culture shift” to focus on good customer outcomes has had a domino effect within the insurance sector, placing greater emphasis on vulnerable customers and how insurance products work when making a claim rather than the regulator concentrating solely on pricing.

Speaking at a Managing General Agents’ Association (MGAA) webinar last Thursday (17 September), Mathew Rutter, a financial services partner at law firm DAC Beachcroft, told 141 online attendees that the FCA’s perspective and stance on “value” drastically changed between 2013 and 2019, demonstrating “a culture shift on the part of the regulator, which in turn is requiring a culture shift on the part of the firms that it regulates”.

The regulator’s approach back in 2013, according to Rutter, was “that if you gave customers all the information they needed, then they would be able to make the right decisions, at least enough of them would so that poor products were eliminated and poor service was punished and therefore the good would drive out the bad. I think there have been enough examples in the financial services industry in the last 30 years or more to demonstrate the fallacy of that and in some ways, it’s surprising the regulator took so long to catch up, even after the financial crisis”.

However, in 2019 the FCA took a U-turn with its July pricing statement. It said: “Ensuring fairness in pricing is an important part of our role as a regulator”. Rutter believes this mission statement grew after the FCA became a competition regulator in 2015.

He said: “It’s really looking at the efficiency of the particular markets that it regulates, not just the behaviour of the firms. So, it’s trying to generate better outcomes rather than merely prevent bad outcomes. And that’s really quite a big culture shift in the approach that the regulator is taking.”

This includes “an emphasis not just on the product and the way it’s presented in the abstract, but how it actually works in practice when people come to claim”.

There is also “the possible introduction of a duty of care, Rutter said. “I know there’s quite a lot of push back, many people, myself included, would think that that seems to be rather duplicative of the principles that are already in place, but nevertheless that is still bouncing around. There’s a move away from the traditional regulatory approach of the blanket disclosure to more focused, targeted measures, such as using behavioural economics and nudge theory to influence the approach.”

Vulnerable customers

A key element of this revitalised focus is around vulnerable customers. Again, in July 2019, the FCA changed its perspective on how to determine vulnerability.

“There’s a number of characteristics of vulnerable customers, so low resilience, low financial capability, suffering a negative life event or having an ongoing health condition that affects their day-to-day activities. All of those mean that they may be at risk of being vulnerable customers, but it doesn’t automatically follow that they will be,” Rutter explained.

“The FCA has moved away from its approach of categorising customers as either vulnerable or potentially vulnerably and not vulnerable, but what it now talks about is a spectrum of risk, so it draws a funnel diagram of customers who, particularly if they have more than one characteristic, are more likely to be vulnerable.”

Rutter added that this “is one of the hardest things for firms to try and grapple with because there aren’t simple answers. It’s a whole series of little steps that you can take to try and address the issue rather than a big band approach”.

He continued: “[It’s an area] where firms are always going to be looking to improve and make small, incremental changes. But it’s something where as a firm you need to be able to respond if the FCA comes knocking, or indeed your local MP or whoever it might be, out raising the issue on behalf of constituents, saying ‘what is your policy on vulnerable customers?’ You need to be able to give a coherent answer.”

For him, one solution could be having an internal champion that highlights the potential problems vulnerable customers may come up against, such as the loyalty penalty. Aside from this, Rutter recommended training and empowering staff to deal with vulnerable customers, in particular ensuring that customer-facing employees demonstrate empathy. Practical action, such as improving communications to accommodate a range of vulnerabilities is also a good idea.

Rutter added that it is also important not to make assumptions, for example not all elderly customers will be vulnerable.

Distribution chain

Looking to the insurance distribution chain is another way to ensure value for customers, said Rutter. For example, being wary of excessive prices, fees or charges where parties within the distribution chain may be receiving remuneration that exceeds the costs incurred when distributing the product. This could have the knock-on effect of customers purchasing unsuitable insurance products and achieving poor outcomes, perhaps when seeking to make a claim or a complaint.

Other potential “harms” within the distribution chain could relate to an organisation’s culture not being sufficiently centred around customer outcomes, poor governance or oversight of an insurance product’s design, manufacture and distribution, or the lack of due diligence conducted on distribution partners.

Rutter added that it is vital that appointed representative agreements are in place too, as firms have a regulatory responsibility to oversee third parties they work with and ensure they are acting in a suitable way.

Concentrating on customer outcomes “is something that needs to be owned by the business because it’s an ongoing process with review and assessment and so on. It’s not just something that you can step in, do and then forget about” Rutter emphasised.