A design for life (and non-life) - FCA confirms Consumer Duty impact for insurance sector

The Manic Street Preachers' Everything Must Go, which celebrated its 25th anniversary last year, marked a musical and commercial watershed for the band - not least thanks to its anthemic, strings-laden lead single, A Design for Life. 

The Financial Conduct Authority's (FCA) new consumer duty is similarly expected to mark a turning point for customer outcomes across financial services, including the insurance sector. On 27 July, the FCA published its final rules and guidance, providing clarity and certainty for the majority of regulated firms impacted by the changes.  

Duty bound

At the heart of the Consumer Duty is the proposed introduction of a new FCA Principle (what will become Principle 12), under which a firm must act to deliver good outcomes for retail customers. Behind this new Consumer Principle will sit:

• cross-cutting rules setting out how firms should act to deliver such good outcomes – these will require firms to act in good faith, avoid foreseeable harm, and facilitate retail customers pursuing their financial objectives; 
• four outcomes – spanning communications; products and services; customer service; and price and fair value.

The Duty marks a fundamental shift in the regulator’s expectations around the treatment of retail customers. The FCA's final rules reaffirm that insurers and distributors will be subject to the Consumer Duty's more exacting standard, albeit on a phased (and extended) implementation timetable:

• 31 July 2023 for new and existing products and services open to sale or renewal
• 31 July 2024 for closed products and services

(Insurance) lines of duty

Despite a steady stream of initiatives to improve customer outcomes in insurance - from the IDD to tackling the loyalty penalty in home and motor insurance - the UK insurance sector was not immune from criticism in the FCA's Consumer Duty consultation paper.

Generally, the Duty will apply to 'retail customers'. For insurance, this means the scope will typically align with ICOBS (although certain investment products come under COBS); the Duty will not apply to reinsurance, or contracts of large risk (sold to commercial customers or where the risk is outside the UK). The FCA has confirmed that the Duty will also not apply to activities related to the distribution of group insurance policies, or the extension of such policies to new members. 

Many of the elements of the Consumer Duty echo existing requirements. In particular PROD 4 includes requirements for end-to-end product design, approval, marketing and management, which are in many respects akin to the product and services outcome of the Duty. On that basis, the FCA has confirmed that firms can choose to comply with the rules in PROD or those under the products and services outcome. Failure to comply with PROD will be treated as failure to comply with the Duty.

What next

While the FCA has bowed to feedback and extended the implementation timetable, firms should begin assessing the impact of the Consumer Duty and making plans for its implementation now. 

Our Consumer Duty site will provide ongoing updates and guidance between now and implementation. The FCA will also be hosting a series of industry events to help firms prepare - see more information here.