Background and introduction
In July this year the FCA published its Policy Statement (PS 22/9) A New Consumer Duty (the Consumer Duty). The FCA is clear that the Consumer Duty will have a significant impact on how firms interact with what it describes as retail customers and that it will set higher expectations for the standard of care firms give to them over the lifecycle of their products. PS 22/9 follows two earlier consultation papers and a discussion paper. As well as PS 22/9 the FCA has published substantial non-Handbook Guidance (FG 22/5).
The Consumer Duty is consistent with the FCA’s continuing focus on outcomes for consumers (e.g. that they are sold products which provide valuable benefits at an appropriate price, that they receive the service and support promised or to be reasonably expected, and that there are no barriers to them cancelling or deciding not to renew). Firms will need to be able to demonstrate how their business models, the actions they take and their culture are focussed on delivering good customer outcomes. The FCA believes that an outcome focussed approach will also have benefits for firms as it will give them ‘greater flexibility to adapt and innovate’. The FCA considers that ‘outcomes based regulation can be applied more easily to technological change and market developments than detailed and prescriptive rules’.
The Consumer Duty applies to both insurers and insurance intermediaries. However, there are some significant differences in the way in which it applies in relation to insurance products when compared with other products like mortgages. First, the duty extends to all policyholders (including prospective policyholders and beneficiaries) covered by the ICOBS rules. This will include significant numbers of commercial customers who are not consumers. The duty will however apply to commercial customers in a proportionate (and objectively reasonable) way. Secondly, the duty will not reduce any obligation to comply with existing rules on insurance product governance (including fair value and testing requirements) or where applicable, price walking (see Scope of the Consumer Duty below).
The duty applies to firms conducting regulated activities in the UK in relation to customers located in the UK. It will not apply where a person could benefit from an exemption in relation to an activity that would be a regulated activity (either in the FCA Handbook or legislation). It will however also apply to firms in Gibraltar or which are in the TPR, in relation to their UK customers.
Although, firms will be required to take appropriate action to mitigate or rectify identified harm to customers, the FCA is not attaching a private right of action to any aspect of the Consumer Duty.
From 31 July 2023, firms will need to apply the Consumer Duty to new and existing products and services that are open to sale (or renewal). Firms will have until 31 July 2024 to apply the Consumer Duty to products and services held in closed books.
The FCA expects firms’ boards (or equivalent management body for overseas firm or branches) to have agreed implementation plans by the end of October 2022 and to maintain oversight of their delivery in order to ensure that the implementation work is sufficient to meet the duty standards.
The FCA also expects manufacturers to have shared key information with distributors three months ahead of the implementation deadline to enable all firms to comply with the 31 July 2023 deadline.
In a summary - the Consumer Duty
A new Principle for Business
The Consumer Duty sees the introduction of a new Principle for Business, Principle 12, which will require firms to act to deliver good outcomes for retail customers (i.e. for insurance holders of policies which are not contracts of large risk or reinsurance). Principles 6 and 7 will not apply where Principle 12 applies.
The Consumer Duty is supported by cross cutting rules which are designed to provide greater clarity on what is required under the new Principle. The cross-cutting rules require firms to:
- act in good faith;
- avoid causing foreseeable harm; and
- enable and support retail customers to pursue their financial objectives.
The Consumer Duty also introduces rules relating to four outcomes (the Outcomes). The FCA considers that the Outcomes relate to:
- products and services;
- price and value;
- consumer understanding; and
- consumer support.
Impact of the Consumer Duty
For insurers as manufacturers of insurance products (and to a certain extent, insurance intermediaries either as co-manufacturers or distributors), work in recent years on product governance and, in particular, the need to specify the target market, to assess whether products provide value for money (including where applicable, by reference to insurance value measures) and to carry out product testing should hopefully reduce the impact of the introduction of the Consumer Duty. In some respects, the duty does not go as far as requirements applicable to certain general insurance contracts (e.g. price walking requirements applicable to home and motor policies and add-ons sold to consumers). The product and services outcome and the price and value outcome requirements are not applied to insurers and insurance intermediaries in relation to insurance products covered by those rules (and which remain subject to the requirements set out in PROD 4).
The consumer understanding and consumer outcomes as well as the Principle and Cross-cutting rules do however apply. Firms should not therefore underestimate the impact of the Consumer Duty. They will need to undertake an end-to-end review of their businesses (including the services and support provided to customers), how they get feedback from other firms in the distribution chain and to confirm, or establish, the required governance.
Governance and accountability
A firm must ensure that Principle 12 (and the obligations in PRIN 2A which sets out the Cross-cutting rules and the Outcomes) are reflected in its strategies, governance, leadership and people policies - including incentives at all levels. The FCA makes it clear that it considers that the firm’s board or equivalent governing body is responsible for ensuring that the Consumer Duty is properly embedded within a firm. The FCA says it expects the board of a firm to ensure that the Consumer Duty is ‘considered in all relevant contexts’. Firms should have a Duty Champion at Board level who is an independent Non-Executive Director, and who, along with the Chair and the CEO, ensures that the Consumer Duty is discussed regularly and is properly considered in all relevant discussions. The guidance in FG22/5 suggests questions that the Duty Champion (together with the Chair and CEO) could use to guide discussions. The Duty Champion would be in addition to any other consumer champions that a firm may have within the business (e.g. as part of product governance or communication approval arrangements).
At least every 12 months a firm’s board should review and approve an assessment (annual report) of whether the firm is delivering good outcomes for its customers which are consistent with the Consumer Duty. This is likely to require an understanding of what poor outcomes look like and how the firm is protecting customers from them. However, there is no prescribed format for the annual report.
In addition, and consistent with the need to embed compliance with the Customer Duty into the culture of the firm, the FCA has introduced a new individual conduct rule, applicable to all staff involved in the insurance or insurance distribution business. This new rule requires staff to act to deliver good outcomes for retail customers. The action staff have to take will depend on their roles and seniority. Separately, the FCA has been clear that it will hold senior managers accountable for a firm’s approach to the Consumer Duty through the Senior Managers & Certification Regime.
Firms will not only need to act to deliver good customer outcomes, but they will need to be able to demonstrate that they understand how the outcomes are being met. The FCA will carry out its own assessment of the impact of the regime adopting a data led approach. It will assess success against a number of factors:
Fair value: customers pay a price for products and services that represents fair value and poor value products and services are removed from markets leading to fewer upheld complaints about poor value and unexpected fees or charges.
Suitable products and services: customers are sold and receive products and services that have been designed to meet their needs, characteristics and objectives leading to a reduction in the number of upheld complaints about products and services not working as expected.
Suitable treatment: customers receive good customer service leading to a reduction in upheld complaints about switching, cancellation and service levels and customers having higher levels of satisfaction with the service they receive.
Confidence: customers increase their confidence in financial services markets and are equipped with the right information to make effective, timely and properly informed decisions about their products and services.
Scope of the Consumer Duty
The FCA will apply the Consumer Duty in line with the approach in existing sourcebooks. FG 22/5 confirms that for general insurance and pure protection policies (non-investment insurance), the scope will follow ICOBS. The Consumer Duty will not therefore apply to reinsurance, contracts of large risk sold to commercial customers or other contracts of large risk where the risk is located outside the UK. Nor does it apply to activities connected to the distribution of group insurance policies (as defined by the FCA) or the extension of these policies to new members. This does however mean that it will apply to customers who are not consumers. For investment insurance contracts (qualifying contracts of insurance) the Consumer Duty will apply to retail customers as defined in COBS (i.e. who are not professional customers).
Who the duty applies to
The FCA states that it is important that all firms that can control retail customer outcomes should take responsibility for their actions, regardless of the relationship with the customer including customers with whom a firm does not have a direct relationship. To assist firms guidance in FG 22/5 seeks to clarify its expectations of different parties in the distribution chain. In summary, the Consumer Duty applies to firms that can determine or materially influence retail customer outcomes, from the design of a retail product throughout the product lifecycle and customer journey to those providing post sales services and customer support.
Generally, firms should only be responsible for their own actions and omissions. However, the FCA has introduced a rule requiring firms to notify them if they become aware that another firm in the distribution chain is not complying with the Consumer Duty. A separate new rule will require a firm to notify other firms in the distribution chain if it thinks they have caused, or contributed to, harm to retail customers.
Those firms active in insurance distribution chains will need to review their contractual arrangements and assess whether their systems and controls will enable them to pick up and notify material failings by other firms. For new relationships, firms will need to ensure that they carry out sufficient due diligence ahead of partnering with a new firm.
Contracts will need to ensure that there is sufficient clarity as to the duties and obligations of each party in a distribution chain. Existing agreements may need to be reopened to ensure that they are consistent with the new regime. During the life of an arrangement each party in a distribution chain will need to monitor and review the performance of other firms in the chain. Firms will need to plan carefully for the circumstances in which either of the new notification rules is triggered. Failure to notify where the obligation is triggered could have material consequences for a firm.
The FCA has added further clarity on its expectations regarding situations where the distribution chain includes non UK distribution firms . Where risks remain for UK retail customers distributors in the UK of non-UK insurance products and services ‘must take all reasonable steps to understand the product or service, to ensure it will be distributed appropriately’.
Unless an FCA authorised outsource provider can determine or has a material influence over retail customer outcomes, it would not be subject to the Consumer Duty. Instead, in accordance with the existing outsourcing regime, the outsourcing firm will remain responsible for meeting the relevant aspects of the Consumer Duty.
Interaction with existing requirements
The Consumer Duty will generally apply in addition to existing requirements (other than Principles 6 and 7 which will no longer apply to customers covered by the duty). Two of the Outcomes (products and services and price and value) will not apply in addition to PROD 4 (and the requirements of the UK IDD POG Regulation) in relation to the products covered by those rules. Those rules already impose obligations on product manufacturers to maintain product governance arrangements to assess, monitor and review insurance products (other than contracts of reinsurance or large risks) and to prevent or mitigate customer detriment. The existing regime includes requirements to test products (including using scenario analyses) and to identify the customers for whom the product would not be suitable. Under PROD, a firm must have such processes for both new and existing products that are still being sold or remain in force and for significant adaptations of products. This does not extend to closed books where no policies are in force. However, previous requirements (e.g. legacy business reviews and the Responsibilities of Providers and Distributors (RPPD) guidance) have already been applied in this area. The review required by PROD is an end to end process for the insurer (and potentially, any co-manufacturers). The FCA has already made clear (in the rules) that the requirement for fair value applicable to non-investment insurance contracts cannot be ascertained without understanding all the distribution fees, commissions and charges. It is also necessary to identify if there are groups of customers for whom the product or package would not provide the intended level of value. A firm should stop selling or take other appropriate action where it cannot satisfy itself that the product is providing fair value. In addition, for certain general insurance contracts there is a requirement for the assessment of value to be made by reference to the insurance value measures reported to and published by the FCA. Further, for home and motor policies (and add-ons) sold to consumers, there are additional pricing rules (i.e. requiring the price for new business to be the same as for renewals and imposing further reporting requirements).
PROD 4 also already imposes obligations on manufacturers and distributors in relation to the provision of information about the products, the target market and the approval process. This should include the manufacturer providing information to the distributor in relation to any type of customer for whom a non-investment insurance product is ‘unlikely to provide fair value’ and, for other types of insurance contracts, to enable distributors being able to identify customers for whom the product is not suitable. Manufacturers should also communicate information or reminders about contractual breakpoints (e.g. in longer term contracts).
Application to existing products and services
The FCA regime applies most elements of the Consumer Duty on a forward looking basis (i.e. from implementation) to both existing products or services which are still being sold to customers (including on renewal) and to closed products or services (which are not available for sale or renewal). As noted above, existing product governance and the fair value requirements in PROD 4 apply to insurance products which are still being sold/renewed or are ‘in force’ (legacy non investment insurance products). This may mean that some of the products which would be categorised as closed book for the purposes of the Consumer Duty will already be covered by the PROD 4.6 requirements for legacy non investment insurance products.This will not however be the case for qualifying investment contracts where in practice there are significant amounts of closed book business.
Whilst there was some push-back at consultation stage, the FCA is clear in PS 22/9 that it does not think that it would be appropriate to dis-apply the Consumer Duty rules for closed book customers. In the FCA’s view, it is sometimes older products ‘which no longer represent fair value for customers compared to newer products or compared to contemporary market rates.’ The obligation in relation to closed products is for the manufacturer (e.g. the person managing, operating or carrying out activities in relation to the book) to maintain, operate and review a process to assess and regularly review whether any aspect of the product results in the firm not complying with the Cross-cutting obligations.
The FCA has acknowledged the significance of the task for reviewing closed books and has put back the implementation date for this element of the Consumer Duty to July 2024.The FCA accepts that there may be particular challenges for firms in trying to apply the rules under the price and value outcome to existing contracts made before the Consumer Duty comes into force. The FCA notes that these rules may be linked to the original contractual terms of products and services and could be vested rights. These are rights between the parties or under contracts with third parties, arising prior to implementation. This could include under reinsurance or other risk mitigation contracts and the FCA accepts that these should not be infringed by the Consumer Duty. However, the FCA is clear that firms still need to consider their ‘overarching expectations under the price and value outcome for their existing and closed products or services’.
Purchased product or service books
Some firms which have bought product or service books questioned whether it is proportionate to require them to review those products or services. By and large they were not involved in developing the purchased products or services and may not have relevant information to carry out the required reviews. They may also lack the resources and expertise to assess whether products or services continue to meet the needs of customers or offer fair value going forward. While acknowledging the potential difficulties for some firms, the FCA declined to exclude purchased books from the new regime (which covers those managing, operating or carrying out activities in relation to the book), but instead will require firms to use ‘best endeavours’ to meet the relevant requirements in the Consumer Duty. To mitigate against the risk that these obligations impact negatively on the sale of product and services books, the FCA is introducing rules that will require most firms selling a product or service book to provide relevant information to the buyer.
The Consumer Duty will not apply to group policies. The term group policy is used very widely and can include master policies and contracts which are actually contracts for insurance rather than contracts of insurance. For the purposes of the Consumer Duty, the term has the limited meaning set out in the FCA Handbook. The group policyholder has to be someone who enters into the policy on its own behalf and for other insureds/beneficiaries. Those additional insureds/beneficiaries need to be linked by virtue of a common employment, occupation or activity which has arisen independently of the contract of insurance. Further, the common employment, occupation or activity cannot be brought about, in relation to the contract of insurance, by the insurer or any activity which if carried on by a firm would be an insurance distribution activity. Finally, the risks insured under the policy must relate to the common employment, occupation or activity of the insureds or beneficiaries. The most common example is policies taken out by employers for their employees to cover employee benefits.
The Consumer Principle
The FCA has confirmed that Principle 12 will provide that ‘a firm must act to deliver good outcomes for retail customers.’ The FCA is clear that Principle 12 sets a higher standard than both Principle 6 (a firm must pay due regard to the interests of its customers and treat them fairly) and Principle 7 (a firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading). Principles 6 and 7 are dis-applied where the Consumer Principle applies. Principles 6 and 7 will continue to apply to conduct outside the scope of the Consumer Duty.
Chapter 4 of FG 22/5 provides guidance on the meaning and application of Principle 12. The FCA is clear that in its view the Consumer Principle also does not change the fundamental nature of a firm’s relationship with its customers. For example, it does not create a fiduciary relationship where one would not otherwise exist.
FG 22/5 guidance notes that the Consumer Duty ‘is underpinned by the concept of reasonableness which is an objective test. The obligations on firms will be interpreted in accordance with the standard that could reasonably be expected of a prudent firm carrying on the same activity in relation to the same product and services, taking appropriate account of the needs and characteristics of customers in the relevant target market’.
The cross-cutting rules
The cross cutting rules require firms to:
• act in good faith towards retail customers;
• avoid causing foreseeable harm; and
• enable and support retail customers to pursue their financial objectives.
Guidance in FG 22/5 is clear that ‘cross-cutting rules articulate the standards of conduct that we expect under Principle 12. They set out how firms should act (proactively and reactively) to deliver good outcomes for customers. As with the rest of the Duty, they apply both at a target market level and at an individual customer level, depending on the situation’.
The FCA sees the cross-cutting rules typically operating as a package rather than individually. It seems that it is the FCA’s view that if you breach one cross-cutting rule there is a high chance that you will be in breach of one of the others.
The obligation to act in ‘good faith’ has been the cause of much comment with many industry respondents arguing that the concept lacked clarity. The FCA did not accept these objections maintaining that acting in good faith should be seen as a ‘standard of conduct characterised by honesty, fair and open dealing and acting consistently with the reasonable expectations of retail customers’. It can be seen that this is similar to the customers’ best interest rule applicable under ICOBS (a firm must act honestly, fairly and professionally in accordance with the best interests of its customer). The FCA also believes that the guidance in FG 22/5 provides sufficient examples as to the meaning of good faith for firms to be able to form a view as to its meaning and how it should be applied to their businesses. These include not designing products, features, sales processes or services in a way that exploits behavioural biases or which are difficult for a customer to understand or compare with other products.
In the FCA’s view the good faith requirement does not create a fiduciary relationship between a firm and its customer.
The second cross cutting rule requires firms to avoid causing foreseeable harm. The FCA is clear that a firm could cause foreseeable harm through its actions or by failing to act either in its direct relationship with a customer or through its role in the distribution chain. While the FCA confirms that this does not mean that a firm is responsible for the activities of other firms, or require them to oversee the actions of others in a distribution chain, the FCA does envisage that where a firm can reasonably foresee harm to a retail customer, it should act where it can and raise any issues with other relevant parties. This may, for example, mean a firm needing to notify the FCA or another firm if it considers that that firm is causing harm.
Conversely, the FCA is clear that firms do not have a responsibility to protect customers from all foreseeable harm. Many financial products involve risks that are understood by customers. Where this is the case (and provided the risk does not negate the purpose of the product), firms would typically not be required to protect consumers. However, the FCA warns firms against inadequate disclosure of risk. Ensuring customers understand risks is seen by the FCA as an important element of the Consumer Duty. The FCA is also clear that its rules and guidance require firms to consider consumers’ limited experience and behavioural biases at all stages of the product lifecycle.
Firms are also reminded that harm is dynamic, so firms need to stay abreast of new and changing risks through using intelligence such as press articles, management information and customer complaints. A harm may become foreseeable even if it started out being unforeseeable, and firms will need to be alive to this type of risk and consider the implications for customer relationships.
Following feedback from commentators and those active in the market the FCA has clarified that the ability for a firm to reach a conclusion as to customers’ financial objectives will depend on the nature of the relevant products or service. A firm’s ability to support or enable a customer to reach a financial objective will be determined by what is within a firm’s control, based on the service or product they are providing, and the knowledge that they have of the customer. A firm in an advisory role will necessarily understand a lot more about its client than a firm providing a mass market insurance product.
The rule may require a firm to consider whether it is appropriate to take pro-active action to assist customers where it has declined to provide a service or product to a customer. For example, guidance in FG 22/5 provides that ‘travel insurance firms are required to signpost customers with pre-existing medical conditions to a directory of specialist insurers in certain circumstances’. The FCA states that such an approach is consistent with its expectations under the Consumer Duty, ‘as firms signpost declined customers to a reliable source of information that can help them to achieve their financial objectives’. Such situations may not always be as straight forward as this FCA example suggests, but firms will need to consider how they deal with this type of situation in case they are challenged by the regulator.
The products and services outcome
This outcome will not apply to insurance products covered by PROD (i.e. all open or existing products in force). However, the aim of all products and services to be fit for purpose, being designed to meet the needs, characteristics and objectives of a target group of customers and distributed appropriately is the same as the rules applicable to insurance products. The FCA guidance is therefore consistent with and of use in understanding the PROD requirements.
Guidance in FG 22/5 observes that the products and services outcome rules are central to firms acting to deliver good outcomes. The FCA comments that the rules ‘set out a range of requirements, including the need for relevant firms to:
- ‘ensure that the design of the product or service meets the needs, characteristics and objectives of customers in the identified target market;
- ensure that the intended distribution strategy for the product or service is appropriate for the target market; and
- carry out regular reviews to ensure that the product or service continues to meet the needs, characteristics and objectives of the target market.’
The FCA also sets out a number of key questions for firms in relation to this outcome and which should in practice apply equally in the application of the PROD rules:
- Has the firm specified the target market of its products and services to the level of granularity necessary?
- How has the firm satisfied itself that its products and services are well designed to meet the needs of customers in the target market, and perform as expected?
- What testing has been conducted?
- How has the firm identified if the product or service has features that could risk harm for groups of customers with characteristics of vulnerability?
- What changes to the design of its products and services is it making as a result?
- Is the firm sharing all necessary information with other firms in the distribution chain, and receiving all necessary information itself?
- How is the firm monitoring that distribution strategies are being followed and that products and services are being correctly distributed to the target market?
- What data and management information is the firm using to monitor whether products and services continue to meet the needs of customers and contribute to good consumer outcomes?
- How regularly is it reviewing this data and what action is being taken as a result?
- Where the firm is planning to withdraw a product or service from the market, has the firm considered whether this could lead to foreseeable harm?
- What action is it taking to mitigate this risk?
The price and value outcome
As with the products and services outcome the price and value outcome is not applicable to existing or open insurance products. The PROD requirements for non-investment insurance contracts require a similar assessment of value and provide additional rules for insurance value measure products. The value measures concept was introduced following the FCA’s thematic work on insurance contracts such as add-ons and extended warranty. It applies to a defined range of products which also include home and motor insurance. The value measures data, which firms have to report and which are then published by the FCA, should be considered as part of the value assessment for these products. In addition, ICOBS provides requirements in relation to the pricing of a smaller subset of policies (e.g. home, motor and add-ons to such policies). These rules prevent new customers being offered a better price for the same product than that a firm offers on renewal and are designed to avoid ‘price walking’. Interestingly, in relation to the Customer Duty generally, the regulator has declined to apply these rules more widely as was suggested by some consumer organisations.
Insurers and insurance intermediaries are also already under obligations to ensure that they and their staff are not remunerated in a way which conflicts with their duty to comply with the customer’s best interests rule. This means that they must not use sales targets or incentives in a way which would conflict with their duty to the customer. In addition, the product governance requirements in PROD and in particular the fair value requirement, mean that remuneration offered to distributors needs to reflect their role and the benefit to the customer. This affects the ability of a distributor in a chain to receive remuneration which is not proportionate to their role.
Despite the outcome not necessarily applying and, in some cases, the PROD rules being more prescriptive about the assessment of value (e.g. for insurance value measure products), the FCA guidance is useful to understand the concept of value. The FCA says that its intention is not to set prices, but it wants customers to receive fair value. The regulator notes that value ‘is about more than just price’, and wants firms ‘to assess their products and services in the round to ensure there is a reasonable relationship between the price paid for a product or service and the overall benefit’ the customer receives from it. The regulator’s view is that ‘retail customers experience harm where they don’t get value for their money’. The absence of fair value ‘is unlikely to be consistent with customers realising their financial objectives and firms cannot act in good faith if they are knowingly manufacturing or distributing poor value products or services’.
The guidance in FG 22/5 and commentary in PS 22/9 provides a significant amount of information and merits reading by insurers and insurance intermediaries. Some of the issues raised deal with practices which can be considered to be ancillary to a firm’s main business. For example, the FCA comments on the monetisation by firms of customer data. It notes that some firms have been unable to articulate how customers have been receiving fair value for the provision and use of their data.
The FCA expects firms to monitor and review value throughout the life of a product or service and this may require firms to collect information from other firms in the distribution chain. The rules therefore provide that distributors must on request provide relevant information to the manufacturer- including in relation to their own review of the distribution arrangements. Firms’ assessments will need to be reasoned and supported by credible management information. The FCA has provided a list of the type of data and monitoring that a firm might use. It also sets out some examples of the type of question a firm might be asked by the FCA in relation to this outcome.
The FCA has researched fair pricing in financial services and while in principle, it accepts that practices such as differential pricing may be justifiable, firms should be aware that the regulator is likely to challenge pricing models depending on how they are used and in what context.
The consumer understanding outcome
The consumer understanding outcome will apply in relation to insurance products. The FCA states that it wants firms’ communications ‘to support and enable consumers to make informed decisions about financial products and services.’ Consumers should be ‘given the information they need, at the right time, and presented in a way they can understand’.
Financial promotions are a key lever in delivering customer understanding of products to enable them to pursue their financial objectives. Proposed changes to the Financial Services and Markets Act 2000 would impose a requirement on firms to have permission to approve financial promotions. Firms must therefore give thought to the financial promotions process and how they can communicate in a way which will enable the customer to get the information they need to make a decision and which is likely to be understood by the customer. Many firms already have consumer champions as part of their approval process for financial promotions and the customer journey.
The FCA notes that the consumer understanding outcome builds on existing requirements that a firm must ‘communicate information in a way which is clear, fair and not misleading’. In summary, the additional obligations under this outcome require firms to:
- support their customers’ understanding by ensuring that their communications meet the information needs of customers, are likely to be understood by customers intended to receive the communication, and equip them to make decisions that are effective, timely and properly informed;
- tailor communications taking into account the characteristics of the customers intended to receive the communication – including any characteristics of vulnerability, the complexity of products, the communication channel used, and the role of the firm;
- when interacting directly with a customer on a one-to-one basis, where appropriate, tailor communications to meet the information needs of the customer, and ask them if they understand the information and have any further questions; and
- test, monitor and adapt communications to support understanding and good outcomes for customers.
The consumer support outcome
The consumer support outcome will apply in relation to insurance products. The FCA believes that consumers can only pursue their financial objectives when firms support them in using the products and services they have bought. The support provided by a firm should enable its customers to realise the benefits of the products and services they have bought.
The FCA’s consumer support outcome rules establish overarching requirements regarding the support that firms should provide to their customers.
- design and deliver support that meets the needs of customers, including those with characteristics of vulnerability;
- ensure that customers can use their products as reasonably anticipated;
- ensure they include appropriate friction (e.g. options to get more information should the customer wish to do so) in a customer journey to mitigate the risk of harm and give customers sufficient opportunity to understand and assess their options, including any risks;
- ensure that customers do not face unreasonable barriers (including unreasonable additional costs) during the lifecycle of a product or service;
- monitor the quality of the support they are offering, looking for evidence that may indicate areas where they fall short of the outcome, and act promptly to address these; and
- ensure they do not disadvantage particular groups of customers, including those with characteristics of vulnerability.
Although the FCA has stressed in the past that firms should not only rely on customer complaints as evidence of harm, the consumer support outcome should be considered in conjunction with other rules that deal with the servicing of customers, such as complaints (DISP) rules. The FCA also notes that there is a close relationship between the consumer support outcome and the consumer understanding outcome.
Some Frequently Asked Questions
Are policies with commercial customers covered by the Consumer Duty?
Yes unless they are contracts of large risk or reinsurance
What is a consumer champion?
FCA guidance is for an independent non-executive director to act as a Duty Champion. This person, together with the Chair and the CEO should ensure that the duty is discussed appropriately and regularly at board level. The FCA guidance includes examples of questions the Duty Champion, the Chair and the CEO could ask as follows:
- Has the firm specified the target market of its products and services to the level of granularity necessary?
- How has the firm satisfied itself that its products and services are well designed to meet the needs of consumers in the target market, and perform as expected? What testing has been conducted?
- How has the firm identified if the product or service has features that could risk harm for groups of customers with characteristics of vulnerability? What changes to the design of its products and services is it making as a result?
- Is the firm sharing all necessary information with other firms in the distribution chain, and receiving all necessary information itself?
- How is the firm monitoring that distribution strategies are being followed and that products and services are being correctly distributed to the target market?
- What data and management information is the firm using to monitor whether products and services continue to meet the needs of customers and contribute to good consumer outcomes? How regularly is it reviewing this data and what action is being taken as a result?
- Where the firm is planning to withdraw a product or service from the market, has the firm considered whether this could lead to foreseeable harm? What action is it taking to mitigate this risk?
In addition, firms may have people working in the product governance process or in producing or approving financial promotions who act as consumer champions to consider the customer’s perspective independently from the firms.
What are the Board obligations?
The Board has to approve and oversee delivery of the implementation plan for changes required to comply with the Consumer Duty. On an ongoing basis the board should be ensuring that compliance with the duty is considered when making relevant decisions and should approve an annual report (following an appropriate review) of whether the firm is complying with the duty.
Does this affect the way I price my contracts?
It may not as pricing and remuneration are already part of the value assessment in the product governance requirements for existing non-investment insurance contracts. It may have more impact for other types of insurance contract. Whilst in principle the FCA accepts that practices such as differential pricing may be justifiable, firms should be aware that the regulator is likely to challenge pricing models depending on how they are used and in what context.
Do I have to streamline my product offerings?
The combination of the requirements to ensure customer understanding and to provide the required level of customer support may, particularly for consumer contracts, lead some firms to reduce the number of products they offer.
Do I have to change my remuneration to staff or intermediaries?
Whilst this needs to be reviewed, it may be that existing requirements (e.g. from the Insurance Distribution Directive/IDD) mean that this has already been considered.
Can I still offer digital only channels?
Yes the FCA guidance makes it clear that this is possible. However, it is still necessary to comply with legal requirements relating to equality of access to services and to provide a means of dealing with non-standard enquiries. Consistency should also be required (e.g. if communication is generally by email then it may not be possible to offer only a telephone option for cancellation or non-renewal).
Can my products still be sold without advice?
This will need to be assessed based on the complexity and risk. Products where the risk is well understood and presented in a way that the customer can understand and make an informed decision about will be easier to sell without advice.
Does a distributor have to provide relevant sales and other information requested?
Yes PRIN 2A.3.18 requires to provide relevant information if this is requested by the manufacturer (or as appropriate, operator) of the product.
What additional training is required?
This will need to be considered as part of implementation (e.g.. any changes to product governance or approval of financial promotions) but given that all staff will be subject to a new individual conduct rule, training on that should be provided to all affected staff.