12/07/2023

FCA’s Consumer Duty and coverage decisions

With the implementation of the FCA’s flagship regulatory reform fast approaching on 31st July 2023, will this mean that insurers must deal with coverage decisions differently?

What is the Consumer Duty?  

To recap, the Consumer Duty introduces a new consumer duty principle, which is “a firm must act to deliver good outcomes for retail customers”.

This principle is elaborated in cross-cutting rules, or obligations, which are:

  • A firm must act in good faith towards retail customers 
  • A firm must avoid foreseeable harm to retail customers 
  • A firm must enable and support retail customers to pursue their financial objectives 

The cross-cutting rules are linked to four outcomes against which firms should judge their impact on customers, which are: 

  1. Products and services 
  2. Price and value 
  3. Consumer understanding 
  4. Consumer support. 

The FCA has explained that the introduction of the Consumer Duty represents a significant cultural shift in the way it expects firms to deal with customers as “it introduces a more outcomes-focused approach to consumer protection and sets higher expectations for the standard of care that firms give customers”[1]. Importantly, it is not prescriptive, and its wide remit is expected to be fully embedded into the culture of firms.

The FCA has also sought to further emphasise the importance of the Consumer Duty, having published feedback on its review of larger firms’ implementation plans on 25th January 2023 and several Dear CEO letters on 3rd February 2023, including to those in the general insurance and consumer protection sectors. In its letter the FCA stated “we expect the Consumer Duty to be a top priority for you personally”.

Who does it apply to? 

As well as the Consumer Duty having a wide remit, its application is wider than what might be considered, given the reference to “consumer”.

The Consumer Duty actually applies to products and services offered to “retail customers”. As it applies to “retail customers” rather than just “consumers”, it is likely to also capture many SMEs and other policyholders who might otherwise have been considered as commercial customers for insurance policy categorisation purposes, if certain exemptions do not apply to them. These exemptions are:

  • reinsurance 
  • contracts of large risk * sold to commercial customers or other contracts of large risk where the risk is located outside of the UK or  
  • group insurance policies 

As a result, we predict that more products will be caught by the Duty than some insurers and insurance intermediaries may initially have anticipated. 

How will the Consumer Duty affect claims handling and policy coverage?  

The Consumer Duty does not just apply to pricing and product development or other ‘pre-bind’ activities and services. It follows that, as it applies to all stages of the customer journey, it will impact claims, too. The importance of claims was highlighted by FCA recently in the Dear CEO letter relating to general insurance in which it was said “for consumers, the experience of making a claim will generally be when the product’s value and service are put to the test”[2].

The Consumer Support Outcome  

One way in which we envisage claims handling coming into focus is under the consumer support outcome. But, what does “consumer support” mean?  

The FCA Final non-handbook Guidance on the Consumer Duty states (paragraph 9.3):

The support firms provide should enable consumers to realise the benefits of the products and services they buy, pursue their financial objectives and ensure that they can act in their own interests. Our consumer support outcome rules set overarching requirements in relation to the support firms provide their customers. They should be read in conjunction with other rules that cover specific elements of the servicing of customers, such as our Dispute resolution: Complaints (DISP) rules…[One of which is to] ensure that customers can use their products as reasonably anticipated.

So, if a claim is denied and the denial is not explained properly, there is a risk of falling foul of this outcome as a policyholder would have anticipated that there was cover to have made a claim in the first place.  

There could be an added focus on how policy coverage decisions are taken and communicated. Clarity is key and technical language, without sufficient explanation for its use, should be avoided.  

The Consumer Duty is underpinned by reasonableness. Clearly this does not mean that all claims must be accepted, or that a claims handler needs to write extensively when providing a decision. However, clear, reasoned decisions will be of paramount importance.  

Insurers should also be aware of the Individual Conduct Rule 6 of the Consumer Duty which requires staff to “act to deliver good outcomes for retail customers”. The FCA has clarified that its application will be reasonable and proportionate – i.e., the more senior the role, the more the FCA will expect from that person in delivering outcomes.

Review of claims data  

Another way in which we consider that claims handling may be impacted by the Consumer Duty is when firms come to assess compliance with the outcomes.  

The FCA expects firms to review relevant sources of data to assess whether the outcomes experienced by their customers match the obligations expected of them under the Consumer Duty. If a high number of claims in relation to a specific product are being rejected, does this demonstrate that there is an issue with the product?  

For example, recent FCA figures have shown that some of the largest home insurers are only paying out on around half of all claims. Some insurers argue, in their defence, that the actual figures are much lower than this because policyholders did not understand what their policies covered. But, under the Consumer Duty, would this show that there is a problem with communication between insurer and policyholder?  

Impact on Financial Ombudsman Service (“FOS”) complaints  

Although the Consumer Duty will not be applied retrospectively, given its importance, there’s likely to be a focus on it in complaints made post 31st July 2023, especially as FOS has publicised that it has been working with the FCA to ensure a “consistent and complementary approach” [3].  The FCA has not implemented a private right of action for breach of the Consumer Duty. However, insurers should take heed of the fact that FOS can make awards for distress or inconvenience, which might come into play if a policyholder can prove that a claim has not been handled in line with the higher standards imposed by the Consumer Duty.  

It should also be remembered that it’s not just individuals who can complain to FOS. SMEs which are not micro-enterprises, have an annual turnover of less than £6.5 million and have a balance sheet total of less than £5 million, or employ fewer than 50 people, can also complain to FOS. 

Summary 

It remains to be seen how the Consumer Duty will impact the claims environment and FOS complaints, but given the FCA’s emphasis on this cultural shift, and fact that it is to be considered at all stages of the policy cycle, we consider it inevitable that some changes will be seen.  

If you have any queries on the new Consumer Duty, please let us know. Read more on our Financial Services team here.


*A contract of large risk applies if a policyholder exceeds limits of at least two of three criteria: (i) balance sheet total €6.2m; (ii) net turnover: €12.8m; (iii) average number of employees during financial year of 250.