What will the FCA's new Consumer Duty mean?
The FCA published its long awaited second Consumer Duty paper today, confirming that it will push ahead with the plans it first mooted back in May.
The Consumer Duty is a new layer of principles-based regulation which is underpinned by the principle that all firms "must act to deliver good outcomes for retail clients".
At first glance, it may not seem much more than a tweak to Principles 6 and 7 of the FCA handbook:
But in reality, the Consumer Duty sets a much higher burden on firms - not just to treat its customers fairly, but to evidence that it is doing so.
What is fair value?
Today's paper confirms that all firms will need to evidence that their products offer fair value - when they are created, but also on an ongoing basis. This extends the line of regulation which has been evolving in multiple sectors over the last few years - and will now be extended to almost all financial services firms.
This year's General Insurance Pricing Practices paper had already laid down the requirement for insurers to carry out annual assessments to prove they are offering fair value. And in asset management, the annual Assessment of Value reports have been around for a couple of years.
But banks, building societies, lenders and all other regulated firms that serve retail clients will now be bound by similar requirements.
For many firms, the challenge of determining whether they offer fair value is a headache - another abstract compliance challenge with no right answer. But today's paper did provide a few extra clues around what the FCA expects.
The paper states clearly that fair value is not simply all about price: "Value needs to be considered in the round and low prices do not always mean fair value."
It goes onto say that while it won't be drawn on defining exactly what should be included in a fair value assessment, it should as a minimum include the following:
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This may be a shock to some in the insurance industry who have already completed their initial attempt at assessing fair value. Over the last few months, we've spoken to dozens of insurers about the fair value challenge, and many seem content to produce a dashboard of numbers to prove they are meeting the requirements. But as today's paper makes clear, a true assessment needs to be holistic and consider the whole proposition - not just the price and profitability.
Our fair value framework
Earlier this year, we created a framework for assessing fair value, and have now begun working with a first wave of lenders and insurers to help them meet these new requirements. Thankfully, today's paper very much echoes the approach we've been taking.
Our framework looks at five elements:
Next year, once we have completed our first assessments, we'll be turning this into an accreditation - allowing firms that perform above our stretching bar to prove they offer fair, or even excellent, value to their customers.
We still see a lot of firms deciding to manage this challenge internally - but it's clear that it is much harder to credibly mark your own homework, with no external input.
Clear communications matter
One other important strand of the consumer duty paper is the requirement to communicate clearly. The paper makes it clear that this expectation goes beyond Principle 7's requirement for all communications to be "clear, fair and not misleading". Instead, the FCA wants firms to evidence that customers understand their communications.
I sincerely hope that this leads to many more firms taking the time to rewrite their technical policy documents and terms and conditions. We score hundreds of Ts&Cs every six months, and the vast majority are still incomprehensible to the average customer. Only around 20-30 documents in the industry yet meet the requirements of our Clear & Simple Mark accreditation.
Today's paper will raise the bar of conduct for financial services firms. But for those that take it in the spirit it is meant, it provides a clear path to marrying the long-term interests of shareholders and customers. By delivering good outcomes on a consistent basis, firms will deliver better returns for their shareholders over the longer run - and we can break free from the cycle of boom, fines, reparations and rebuild.
The new standards are not due to come into force until April 2023. But today's paper will mean work needs to begin today for many insurers - sharpening the work on fair value that they've already started.
If you want to talk about the Consumer Duty, do get in touch. We'll be running a webinar early next month.
CEO, Insurtech UK | Candidate for Common Councillor, Billingsgate Ward
3 年Insightful article James Daley we should team up on accreditation!
Price and profit optimization. Protection gap filling.
3 年Nice summary James Daley Thinking about my little sector - individual protection - I think the FCA will struggle to get anything price-related against insurers in the IFA and aggregator channels. Arguably this is reasonable. Outside these channels there are some large distributors badging products with loaded (vs IFA) premiums. They (and the insurers) might struggle more. I agree with the tone of what (I think) you're trying to say on quality of documentation. Anything that places a 20th-century-like reliance on the customer reading 10+ pages of conditions seems unfair to me. Perhaps the most interesting area is underwriting. Questions that effectively rely on the applicant remembering dates for doctor visits going years back feel somewhat unfair - of course the test is the claim, if any. I also wonder the extent to which underwriting outcomes are fair. But again, good luck to the FCA on catching insurers on that (and perhaps they shouldn't in any case).
Consumer Duty Champion | R-Day ?? = Better Outcomes for 92% of Workers | Helping CEOs & Workers become Net Zero Heroes
3 年Ian Simons see my note to James, happy to share.
Consumer Duty Champion | R-Day ?? = Better Outcomes for 92% of Workers | Helping CEOs & Workers become Net Zero Heroes
3 年James Daley we should compare notes as you pen your approach, there are a few things that need to be stamped out and called out, which I have written to the FCA Executive about privately. It says it won't be drawn on the issue of what it expects but they know full well what delivers the best financial outcome on a risk/reward adjusted basis because they know I have the customers and outcomes to reflect upon and have already served a formal complaint from sample customers who represent the vast majority of those who have been failed for 20 years since the introduction of Stakeholder. 2022 represents an extremely challenging time for the Industry and the FCA's announcement is long over due, but hasn't gone far enough to prevent another £33bn in excess costs being suffered by 1 in 3 UK workers in 2022. What I have in my possession is proof of the biggest ever financial harm scandal that has been allowed to manifest because of the hidden agendas and vested interests of those with too much power and influence. The FCA knows that the advancements in tech and AI will expose #CultureFailure and the systemic failures which in my opinion proves the Regulator itself has repeatedly failed under its own six pillars.
Independent Non-Executive Director and Chair of Investment Policy Committee at BlackRock Life Ltd
3 年Great article, James. The interview Darshini David conducted with Nisha Arora on the Today Programme this morning was interesting, if you haven’t heard it already.