Insurance brokers and the Financial Conduct Authority: is the new Consumer Duty the ‘thin end of the wedge’?October 2023
After years of consultation, consideration, and speculation, the Financial Conduct Authority’s (“FCA”) new Consumer Duty has finally arrived, coming into force in July earlier this year. The reform has been in the works for some time and has been both hotly anticipated and dreaded in equal measure. In essence, the new duty is an attempt by the regulator to reorient financial services toward a greater focus on the customer and their specific needs. The consumer duty is broken down into three strands that intertwine and are designed for integration across all market activities.
The Duty Explained
The first strand to the reform is its namesake, the overarching Consumer Duty. The Duty raises the standard of care owed to customers in retail financial markets and requires businesses to proactively deliver good outcomes for retail customers. Firms must act in good faith, enabling consumers to achieve their financial objectives without coming to foreseeable harm. If they weren’t already, firms must also now monitor and consider the diverse needs of their clients, including and especially those who are vulnerable.
The second strand identifies three, “cross-cutting” Behaviours that firms must now implement across all their activities to achieve compliance with the Duty. Firms must now:
- Take all reasonable steps to avoid causing foreseeable harm to customers.
- Take all reasonable steps to support and enable customers to pursue their financial objectives.
- Take care to act in good faith.
The third strand introduces four so-called Outcomes to navigate the key features of the business/consumer relationship. The Outcomes are designed to inform the Behaviours and offer guidance on those actions that comply with (and are required by) the Duty. The Outcomes will be discussed in more detail below, but are broadly differentiated by the following themes:
- Consumer understanding
- Consumer support
- Price and fair value
- Products and services
Importantly, the Duty applies not only to products and services offered to retail customers, but to all firms who determine or have a “material influence” over consumer outcomes – not just those with a direct customer relationship. The Duty does not apply retrospectively nor to reinsurance, contracts of large risk sold to commercial customers or other contracts of large risk where that risk is located outside the UK.
The reform comes as part of the FCA’s three-year strategy to “prevent serious harm, set higher standards and promote competition”. The Duty itself has been on the horizon for some time. Five years ago, in 2018, the FCA released a discussion paper requesting feedback on proposals to implement a new duty of care. Then, in April 2021, the newly enacted Financial Services Act implemented a provision requiring the FCA to “carry out a public consultation about whether it should make general rules providing that authorised persons owe a duty of care to consumers.” A consultation duly took place in May 2021, with further feedback sought in the December. The FCA confirmed its plan to introduce a new consumer duty in the summer of 2022; please see our previous article for more.
A new consumer duty, in some form, has therefore been anticipated by the market for several years. A direct letter to credit brokers circulated on 3 March 2023 offered particular clarity on the Duty and what its arrival would mean for the sector. But with the Duty barely two months on the books, many questions still remain as to how the Duty will impact firms in the future.
As we say above, the new Duty represents the culmination of a years-long project to bring about greater customer-centricity in financial services. It is clear that the Duty is designed, not to address a specific issue or concern, but to initiate a holistic shift in the FCA’s expectations of firms across all their activities. Speaking in June 2023, the FCA’s COO, Emily Shepperd, stated that the Duty represents a “higher standard” and “will require a significant change in many firms’ cultures”. That being said, there are certainly a handful of specific concerns prompting the FCA’s direction of reform.
As outlined above, the FCA’s three-year strategy focuses explicitly on reducing and preventing harm, setting higher standards, and promoting positive change. It is clear that these three ‘pillars’ are informed by the steady erosion of consumer trust in UK financial services. To demonstrate and support the Duty’s introduction, the FCA conducted a survey on the matter earlier this year. That survey found that less than half of UK adults had confidence in the industry and just 36% agreed that most financial firms are honest and transparent in the way they treat them. These findings (and the FCA’s subsequent concerns) are no doubt fuelled by the ongoing cost of living crisis.
The FCA has also expressed concerns over the effectiveness of the product manufacture and governance (“PROD”) rules, releasing a ‘Dear CEO’ letter on the matter as far back as October 2018., In 2021, the FCA warned that firms were still not doing enough to ensure customers received fair value. The FCA stated that firms were “insufficiently focused on customers, outcomes and product value”, and that there was still “significant work to do urgently” to achieve compliance.” The Duty, particularly its Price and Value Outcome, represents a further tool available to the regulator to encourage greater compliance in this area.
As onerous as the Duty may first appear, most brokers will already be compliant with its requirements (and are likely to have been for some time). For the majority, the objective will be to maintain current, quality levels of service. However, the FCA has specifically warned against complacency, stating that it is most concerned about those firms that assume compliance. The message is clear – all brokers must be fully appraised of and ready to demonstrate compliance with the Duty.
One aspect of the Duty that may strike the reader is the potential difficulty with measuring compliance consistently and fairly. Firms are equipped with more and more data technology tools, which will and do help, but challenges still persist with measuring more subjective concepts such as “culture” and even “good outcomes”. The Outcomes are presumably designed to assist firms with this complexity and brokers are encouraged to pay particular attention to this feature for practical guidance, as we explore in more detail below.
The Outcomes Explained
a) Consumer understanding
The Consumer Understanding Outcome centres on clear communication with customers. It requires firms to “tailor communications to ensure customers get the information they need, at the right time, and presented in a way they can understand.” In order to do this competently, firms are expected to take the characteristics of a consumer into account, particularly if that customer has “any characteristics of vulnerability”. Consumer Understanding could be thought of as the destination of the Behaviour requiring firms to enable customers to pursue their financial objectives (see above).
Consumer Understanding will be particularly crucial to brokers given the critical importance of client relationships across the industry. The key challenge here is the dynamic nature of customer needs – the typical broker/consumer relationship is likely to last several years. Brokers must take care to both monitor and respond to changes in a customer’s ‘characteristics’ (whilst also balancing privacy considerations).
Intrinsic within this is the FCA’s specific focus on a customer’s vulnerabilities. Firms are directed to and must comply with the FCA’s guidance on the fair treatment of vulnerable customers to meet this aspect of the Duty. In short, the FCA expects customers with ‘vulnerable characteristics’ to experience the same level of care as other customers. The Duty also reminds firms of their existing obligations under the Equality Act. The FCA has explicitly warned that firms that are not fully compliant with the vulnerable customer guidance will not be compliant with the Consumer Understanding Outcome.
To prepare for the Consumer Understanding Outcome, insurance brokers have been busy reviewing, improving, and implementing additional systems to ensure compliance. Specific actions include the following:
- Reviewing and improving any communication explaining key policy terms to customers. This includes terms relating to coverage, the function and cancellation of a policy (including any fees), and all potential administrative charges. Those communications are to be as clear as those selling the policy.
- Ensuring that key information is available to customers in one, centralised, and accessible place, as opposed to spread across various webpages.
- Ensuring the complaints process is clearly explained and accessible to customers at all stages of their engagement with the firm.
- Testing customer understanding of the firm’s communications, as described above, especially if the firm tests customer understanding of sales materials. As the FCA will expect firms to demonstrate their engagement with the Outcomes, this may be a particularly useful exercise for firms that can invest in such services.
b) Customer support
The Consumer Support Outcome focuses on timely and effective customer assistance. It requires firms to offer support that “enable[s] 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 interest”. The FCA has identified that customers are requiring more support from firms due to the cost-of-living crisis, alongside rising numbers of customers falling into vulnerable circumstances. It’s likely the FCA will pay particular attention to a firm’s customer support capacity across all aspects of their engagement with a customer. This will include consistent levels of customer support across the entire consumer pipeline – from approach and sales to offboarding.
Much like Customer Understanding, getting Consumer Support right will be critical to a broker’s compliance with the Duty. As the FCA has noted, “for consumers, the experience of making a claim will generally be when the product’s value and service are put to the test.” In practice, this means investing more time and money across other areas of the business, i.e., beyond (or even away from) sales and revenue generation.
Most brokers will already be adept at delivering high-quality, consistent support to their clients. In preparation for the Duty however, brokers have been taking the following actions:
- Reviewing, improving, and implementing policies that require and offer guidance for staff on the importance of consistent customer support.
- Ensuring that staff have sufficient and regular training on delivering compliant customer support.
- Reviewing and improving internal systems that monitor, identify, and flag delays in response times.
- Widening the scope of any quality assurance reviews to capture the entire customer experience, rather than primarily focusing on financial outcomes.
- Reviewing and/or updating processes for identifying vulnerable customers and addressing any inconsistencies across those processes.
c) Products and services
The Products and Services Outcome centres on ensuring that the products and services offered by firms are appropriate to a customer’s needs. The FCA defines this as ensuring that “the design of the product or service meets the needs, characteristics and objectives of customers in the identified target market”. The key goal here is to protect customers from purchasing products that do not fit their circumstances.
Of course, brokers make these kinds of decisions every single day for their clients. Understanding the needs of a customer and translating that into an appropriate product is a core and well-practiced competency for most. The challenge here will be the monitoring of a client’s specific needs over time and ensuring that any recommended products are demonstrably fair value. The key word here is ‘demonstrably’. The FCA will expect firms to readily supply evidence of those actions that work towards achievement of the Product and Services Outcome.
Brokers will be doing the following to manage risk in respect of Products and Services:
- Ensuring systems are in place to monitor consumer characteristics.
- Ensuring distribution systems target appropriate customers. This is opposed to basing distribution strategies on factors deemed to be attractive, rather than seeking to meet identified needs, characteristics, and objectives.
- Reviewing and/or improving product testing for all market conditions.
- Ensuring that products are well designed. For example, removing unreasonable exit charges or unnecessarily convoluted cancellation processes.
- Ensure the Customer Support Outcome is fully satisfied, particularly across claims handling pipelines.
d) Price and value
The Price and Value Outcome is designed to ensure fair value to the consumer. Value is to be considered “in the round” and means that the price paid by a customer “is reasonable compared to the overall benefits”. Presumably anticipating some industry apprehension, the FCA has repeatedly stated that the Price and Value Outcome “does not mean that firms are expected only to offer products and services at a low price.” This is almost certainly how Price and Value will play out in reality, but insurance brokers (and the wider market) are right to be cautious over the implications of this particular Outcome.
Perhaps encouragingly, the FCA has indicated that firms that fully comply with the PROD rules will also be compliant with the Price and Value Outcome. However, brokers should be mindful that Price and Value is introduced, in part, to address perceived deficiencies with PROD compliance across the sector.
Price and Value will see many brokers investing across several processes to be able to demonstrate compliance. This includes:
- Implementing or improving value assessments of products and addressing areas of concern.
- Reviewing product governance arrangements, including how the business demonstrates fair value to customers.
- Ensuring full and demonstrable compliance with the PROD rules.
- Implementing regular reviews of commission structures, to ensure the commissions charged to customers are not excessive.
- Ensuring that an annual assessment of the firm’s delivery of good outcomes to customers is a key part of the continued role of the Board. The FCA adds that the contents of those reports should be made available to the regulator at any time.
There is no doubt that the Duty is designed to disrupt the current regulatory environment, placing firms already subject to close oversight under even more scrutiny. Those concerned about meeting the new standard of care will therefore be reassured by the Duty’s reasonableness qualifier. In other words, whilst firms are expected to ‘do more’ for their customers, this is only within reasonable limits. What will be considered ‘reasonable’ is an objective test; the Duty must be interpreted “in line with the standard reasonably expected of a prudent firm carrying on the same activity” and in light of “all the circumstances.” The FCA has also acknowledged the differing capacity across firms, indicating that what will be expected of a large, international firm will look different to that of a much smaller sole trader.
The new Duty is ambitious and reflects just how seriously the FCA intends to improve the empowerment and protection of UK customers. Other regulators are also potentially taking note, with the European Securities and Markets Authority consulting earlier this year on embedding a similar duty of care in MiFid II. The move towards systemic regulation, intended to shift the industry as a whole, is also indicative of what is to come.
When announcing the three-year strategy underpinning the new Duty, the FCA stated that its “remit is broad and growing”. For those paying attention, this statement will come as no surprise. In fact, the Duty promises to be a precipitator of further change, rather than a regulatory ‘final destination’. For example, the FCA is currently consulting on the implementation of a new diversity framework. Any future framework is to encourage inclusion and healthy work cultures, but it also aims to “improve understanding of diverse consumer needs” – a clear cousin to the Duty. The FCA has also published a guidance consultation on financial promotions and social media, indicating an interest beyond ‘traditional’ regulatory oversight. The guidance echoes and advances the Consumer Understanding Outcome, hoping “to ensure that consumers can access high quality marketing information across all channels, enabling them to make informed decisions”. It is clear we can expect further regulatory ‘off-shoots’ of the Duty, embedding and entrenching customer-centricity across the sector. Firms should expect any and all future oversight to be guided primarily by the Duty’s key principles.
Any regulation that seeks greater protection for consumers is undoubtedly welcome, especially for customers struggling in the current cost-of-living crisis. As highlighted above, the vast majority of firms already place their customers front-and-centre and consistently deliver good, if not great, outcomes for clients. What can often get lost however, particularly in the cost-of-living debate, is the impact the economic downturn has had on business, especially smaller firms. The reality is that, no matter how urgently required, all new regulation comes with an inevitable increase in compliance costs for industry. This may be dismissed by some as merely the ‘cost of doing business’. However, all stakeholders (including retail customers) have a common interest in keeping regulation both strong and cost-effective for business to maintain a competitive and healthy market: this is most acutely true for the insurance market.
The key criticism levelled against the Duty is therefore its inherent, and potentially significant, squeezing effect on the profitability of business. Firms may find that the Duty both increases costs (across all Outcomes) whilst reducing profit margins (see specifically the Price and Value Outcome) – a tricky position for any business. Outgoings are bound to be greater in the coming years as insurance brokers invest more and more heavily into new (or improved) data technologies, training for staff, and improvements across all stages of the customer lifecycle. Incomings will also be impacted by greater regulatory scrutiny into pricing, more robust quality assessments, and potentially even a climate of pricing overcaution generally. The FCA has repeatedly stated that its “intention is not to set prices and our rules do not have this effect”, but insurance brokers will be forgiven for not being entirely reassured. It is worth noting too that the Consumer Support Outcome will also force more resources into other areas of the customer pipeline, taking time and money away from sales and business generation.
The Duty no doubt represents one of more significant changes to the regulation of financial services in the UK. Crucially, the FCA has consistently signalled that all supervisory and enforcement actions taken against authorised persons will be informed by the Duty. This demonstrates how seriously the FCA intends to take the reform. It is therefore clear that the Duty’s tentacles will reach far, and as with all regulatory sea-changes, the exact ripples of its implementation are not yet fully felt.
As the industry grapples with what compliance means, more pessimistic commentators may start to wonder whether the cost of compliance outweighs the ‘acceptable’ cost of doing business
 The Consumer Duty came into force on 31 July 2023 for new and existing products or services that are open to sale or renewal. The Consumer Duty comes into force for closed products or services on 31 July 2024.
 FCA (July 2018) DP185, Discussion Paper on a duty of care and potential alternative approaches, https://www.fca.org.uk/publication/discussion/dp-18-05.pdf
 s.29(1) Financial Services Act , https://www.legislation.gov.uk/ukpga/2021/22/section/29/enacted
 CA (May 2021) CP21/13, Consultation Paper: A New Consumer Duty, https://www.fca.org.uk/publication/consultation/cp21-13.pdf
 FCA (December 2021) CP21/36 A new Consumer Duty Feedback to CP21/13 and further consultation, https://www.fca.org.uk/publication/consultation/cp21-36.pdf
 FCA (03 March 2023) Letter: Implementing the Consumer Duty in credit brokers, https://www.fca.org.uk/publication/correspondence/consumer-duty-letter-credit-brokers.pdf
 The FT (27 June 2023) Consumer duty requires shift in culture, says FCA, https://www.ftadviser.com/fca/2023/06/27/consumer-duty-requires-shift-in-culture-says-fca/
 FCA (2022) Our Strategy, https://www.fca.org.uk/publication/corporate/our-strategy-2022-25.pdf
 FCA (26 July 2023) Financial Lives survey highlights importance of the FCA’s Consumer Duty, https://www.fca.org.uk/news/press-releases/financial-lives-survey-highlights-importance-consumer-duty
 FCA (31 October 2018) Letter: FCA expectations of general insurance firms undertaking pricing activities, https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-fca-expectations-general-insurance-firms-undertaking-pricing-activities.pdf
 See also FCA (25 August 2021) FCA warns insurance firms over product governance rules deadline https://www.fca.org.uk/news/press-releases/fca-warns-insurance-firms-over-product-governance-rules-deadline
 FCA, FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty, para 8.3., p71
 FCA, FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty, para 8.4., p71
 FCA, FG21/1: FG21/1 Guidance for firms on the fair treatment of vulnerable customers, https://www.fca.org.uk/publication/finalised-guidance/fg21-1.pdf
 The FCA notes that vulnerable customer “systematically” receive poorer outcomes than other customers. See FCA, FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty, para 1.27., p7
 FCA, FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty, para 9.3., p92
 FC (26 July 2023) Financial Lives: Key findings from the FCA’s Financial Lives May 2022 survey, https://www.fca.org.uk/publication/financial-lives/financial-lives-survey-2022-key-findings.pdf
 FCA, FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty, para 6.3., p38 https://www.fca.org.uk/publication/finalised-guidance/fg22-5.pdf
 FCA, FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty, para 7.3., p56
 FCA, FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty, para 7.4., p56
 FCA, FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty, para 1.4., p3
 FCA, FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty, para 1.6., p3-4
 ESMA (27 March 2023) ESMA35-43-3448 Final report: Guidelines on MiFID II product governance requirements, https://www.esma.europa.eu/sites/default/files/2023-03/ESMA35-43-3448_Final_report_on_MiFID_II_guidelines_on_product_governance.pdf
 FCA (25 September 2023) The FCA and PRA propose measures to boost diversity and inclusion in financial services, https://www.fca.org.uk/news/press-releases/fca-and-pra-propose-measures-boost-diversity-and-inclusion-financial-servicesDownload PDF