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April 27, 2023
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The UK financial services industry has issues. Over the past few decades, it has repeatedly embroiled itself in regulatory and legal problems by losing sight of customer needs and desires. From pension ‘mis-selling’ through the Equitable Life fiasco to the (ongoing) PPI scandals, the industry seems unable to get out of its own way.
Now, the UK Financial Conduct Authority (‘FCA’) is reaching out a hand, you might say. In July 2022, the financial watchdog unveiled its finalised Consumer Duty (‘the Duty’),* a set of rules that it intends to be the cornerstone of a strategy of higher standards of behaviour in the financial services sector.1
The Duty will require all financial services firms, including banks and insurers, ‘to put their customers’ needs first’ and offer consumers products that represent a ‘fair value.’2,3 It also mandates consumer protections such as clear communications about products and services and robust customer support in provisions found in the Customer Support and Consumer Understanding Outcome. The provisions are intended to increase clarity across the entire customer journey — not just when someone purchases an insurance policy.
Insurers will have their work cut out for them to deliver on the new provisions. That is because, unlike previous, primarily input-based regulations that emphasise insurer internal actions and policies, the Duty is outcome-based and designed to improve measurable results. Insurers will be required to evidence and measure how they proactively prevent customer harm — a process that may necessitate establishing a new testing and monitoring framework.
A proactive approach
When policyholders face customer harm — such as overpaying for a product, buying an unsuitable product or misusing the product so they do not get its expected benefits — it’s often because they do not fully understand what they have purchased or how to access support. This is especially so among vulnerable customers. The provisions in the Duty seek to proactively detect and respond to these kinds of emerging patterns before they lead to customer harm.
Testing and monitoring become front and centre in insurance firms’ compliance efforts under this new approach. They must collect relevant customer data and assess it for potentially adverse outcomes, and steps must be taken in real time to identify and correct those situations. Firms will need to act swiftly to prevent customers from purchasing policies whose terms are too complex to understand, or that are too expensive or not suitable to their needs. Insurers must proactively identify and support customers through potential challenges before they crystallise and complaints arise.
Insurance firms will also be required to use data and technology to test whether customers have the information they need when they need it, and can fully understand product terms and conditions. One area where advanced analytics techniques might be deployed is using cognitive mapping techniques to determine how messages and communications resonate with consumers and whether the information is likely to be understood and suitable for making decisions.
Communication is key
Keeping the customer in mind is vital to the success of compliance with the Duty’s rules. To build an effective framework, insurers should segment their customer bases and tailor communications to respond to each group’s specific needs or preferences. Then, they should test communications directly — and in advance — with these segmented customer types using standard scientific research methodologies such as polls, trials or surveys.
Once deployed, insurers could then measure communications against traditional engagement benchmarks such as response, abandonment and retention rates. And when they identify user experience roadblocks, insurers will be required to support customers so they can buy and use insurance products without facing ‘unreasonable barriers.’4 Imagine a customer exhibiting signs of frustration or confusion when making a claim or purchasing a policy online, for example. In this case, the firm might employ automated real-time, digital behavioural data collection and predictive modelling to enable the use of bespoke pop-up chat boxes.
Insurers might identify points in the sales process and certain groups of customers where positive friction — such as speaking with a customer support representative or viewing an explanatory video or statement — could be introduced to ensure that those customers really assess the product suitability for their needs, without rushing into a sale. The new FCA rules will require firms to monitor customer feedback post-sale to determine if they purchased the right policy, need additional support or require alternative forms of communications in the future.
Emphasising cultural imperatives, board responsibilities
The guiding principle of the Duty is putting customer needs and preferences on equal footing with firm revenue and profitability considerations. The rules stress that senior insurance executives must be apprised of their responsibilities, so that firms can effectively implement the right processes, tools and — perhaps most importantly — changes to firm culture. The Duty will have considerable teeth in this regard: Senior executives may be held legally and personally accountable for failing to implement such changes.
Corporate board members have specific responsibilities under the new rules, including placing consumer outcomes at the heart of all strategy, governance, leadership and people policies. Boards also are required to complete an annual attestation that the firm is delivering good outcomes that are consistent with the Duty and has appointed a board-level ‘Consumer Duty Champion.’ This role is responsible for ensuring that consumer interests remain integral to the board’s agenda, collecting sufficient consumer outcomes information, making that information promptly available to the board, and seeing that it is acted upon.
For all the promise the Duty offers, a recent survey of insurers suggested a persistent lack of industry awareness and preparation. Almost half of all UK insurance brokers, for instance, said they are unaware of the new requirements, according to a January 2023 survey. 5
‘We want to see firms putting themselves in their customers’ shoes,’ the FCA wrote in its guidance.6 Evidence so far indicates that the industry is still some way off from trying on the shoes, let alone walking around in them.
* The FCA specified five milestones to full implementation, with the third and next arriving on April 30, 2023. Full compliance begins on July 31, 2023, for open products and services; July 31, 2024, is the fifth and final compliance date; it covers closed products and services.
Footnotes:
1: ‘Consumer Duty Implementation Plans.’ Financial Conduct Authority. https://www.fca.org.uk/publications/multi-firm-reviews/consumer-duty-implementation-plans
2: ‘Consumer Duty.’ Financial Conduct Authority. https://www.fca.org.uk/firms/consumer-duty
3: ‘The FCA’s Consumer Duty will lead to a major shift in financial services.’ Financial Conduct Authority. August 27, 2022. https://www.fca.org.uk/news/press-releases/fca-consumer-duty-major-shift-financial-services
4: ‘FG22/5 Final non-Handbook Guidance for firms on the Consumer Duty.’ Financial Conduct Authority. July 2022. https://www.fca.org.uk/publication/finalised-guidance/fg22-5.pdf
5: ‘FCA still asking insurers if they have heard of Consumer Duty.’ Insurance Post. March 27, 2023. https://www.postonline.co.uk/regulation/7953072/fca-still-asking-insurers-if-they-have-heard-of-consumer-duty
6: ‘A new Consumer Duty: Consultation Paper, CP21/13.’ Financial Conduct Authority. May 2021. https://www.fca.org.uk/publication/consultation/cp21-13.pdf
© Copyright 2022. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.
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April 27, 2023
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