OneAdvent’s Head of Compliance & Risk, Richard Palmer, lays out the core principles of the new Consumer Duty directive and incorporates insight from Matt Brewis, Director of Insurance and Conduct Specialists at the FCA, who provided an update at the recent MGAA conference.

For some years the FCA has talked about firms putting customers “at the heart of the business”.  The regulator is now going a step further by introducing an obligation for all regulated firms to comply with a new Consumer Duty.

At the recent MGAA conference, Matt Brewis, Director of Insurance and Conduct Specialists at the FCA provided insight into what this means for businesses and how they can incorporate it. He emphasised that the new directive was not designed to be a huge set of rules but rather overarching principles to guide firms in focusing on customer outcomes.

In his speech, Brewis discussed how the regulation was also not intended to be a curb on innovation and that, in fact, “we want you to make money” and “be successful” to enable the development of new ideas.

The duty is divided into 3 core elements, the first of which is the inclusion in the FCA Handbook of a new Principle for Business, Principle 12, which will state:

“A firm must act to deliver good outcomes for retail customers.”

In addition, the structure of the Consumer Duty also contains three ‘Cross-Cutting Rules’ and ‘Four Outcomes’, which provide further guidance as to how Principle 12 should be developed in practice.

The Cross-Cutting Rules state that regulated firms must act in good faith and avoid harm toward retail customers, and enable and support retail customers to pursue their financial objectives. The Four Outcomes set out the key elements of the firm-consumer relationship:

Governance of products and services

This outcome is focussing on making sure companies understand what it is that their customers need. The FCA recommends that firms should appoint a ‘Consumer Duty Champion’ to oversee an assessment of the firms’ strategies, leadership and policies. Brewis discussed that MGAs are in prime position to create the right products and services, particularly as they can set up quickly.

Price and Value

Brewis emphasised that this outcome is “about people getting value from the products they need. We aren’t really talking about price.” He indicated that value assessments have been introduced to ensure that customers are getting the best value and he made it clear this is not about getting products for the cheapest price. He asked the audience to consider whether some products need all the current participants in the value chain e.g. insurer à MGA à broker à customers. “Each part needs to show value and be renumerated appropriately. Putting £20k on an invoice for ‘services rendered’ is not sufficient to demonstrate the role they have played.”

Customer Support

Brewis was frank in his assessment that currently some customer support “is not at a level customers expect”. He went on to say that this outcome is all about supporting customers in getting what they think have bought. He highlighted that this can be done by introducing simple initiatives across the customer journey e.g. if a policy is bought online, it should be able to be cancelled online.

Customer Understanding

This outcome is about confirming that all communications to customers include ‘plain and intelligible language’ so that they can make informed decisions. This includes reviewing policy wordings. Brewis explained that “making the customer journey too quick is not acceptable”. He gave the example of a consumer buying a concert ticket with an add-on insurance product that has a 50-page terms and conditions attached to it but only a 5-minute time window to buy.

Firms of all sizes will be expected to have conducted a review of existing products and services in line with the Cross-Cutting Rules and Four Outcomes ahead of the July 2023 implementation date, and this review process must remain in place on an ongoing basis.

The Duty will apply to all firms in the distribution chain that have a ‘material influence’ over the outcomes for the customer. This means that all firms involved in the manufacture, provision, sale, ongoing administration and management of the product or service to the end retail customer will be expected to demonstrate that they have complied with the rules.

In assessing whether it has a ‘material influence’, a firm will need to assess to what extent it has a discretion over the customer outcome. In any given distribution chain, some firms are likely to have greater influence than others, but a firm must assess its own contribution (and that of others in the chain) toward the outcomes for the end customer, even if there is no direct relationship.

Whilst all UK regulated firms are subject to the Duty, a firm may use a test of reasonableness when dealing with non-UK firms in the distribution chain in assessing the level of due diligence required. During Brewis’ speech he explained that the FCA are aware of the impact on SMEs due to the potentially onerous implementation process but emphasised that they are trying to be proportionate in their expectations and want to “focus on where the harm is the greatest”.

Brewis spoke candidly about MGAs and revealed that his biggest concern is the disappearance of MGAs where there is “flighty capital” because that reduces customer certainty that they can claim for the life of the policy. He says that the FCA is focused on ensuring that operational resilience is a priority, and that MGAs have a clear plan on how to wind down (if needs be).

The Consumer Duty comes into force on 31 July 2023 and will apply immediately to all new products and services (including those remaining open for sale or renewal).  Implementation in respect of closed products and services will be deferred for a year until 31 July 2024.

If you want more information on Consumer Duty and its implementation, please get in touch!

About OneAdvent
Focused on getting innovative insurance businesses to market – and fast – OneAdvent provides a springboard for growth across the industry. Operating as an MGA platform, Lloyd’s broker and niche product distribution business, OneAdvent brings its sector expertise and technical know-how to bear for established industry players and entrepreneurial start-ups around the world.