ILC ARTICLE

Consumer Duty is coming – are you ready?

18th October 2022

No one will be exempt from the Financial Conduct Authority’s new Consumer Duty regulations, and for the insurance sector the road to compliance can be complicated.

Although not exactly a new set of rules, Consumer Duty will mean a change in culture and behaviour to ensure businesses are consistently delivering good outcomes and ‘fair value’ for their customers. It means not just saying they are doing this, but having the processes in place at every stage of the customer journey to be able to prove they are.

Lifting the lid on what this means on a practical level, Suneeta Padda, Managing Director of Padda Consulting, held a forensic Risk and Compliance Surgery at last month’s MGA Claims Conference, which was delivered by ILC in association with the MGAA.

She provided an overview of what Consumer Duty will mean within claims, and considered the various aspects that need to be factored in when striving to deliver ‘fair value’ – such as the cost-of-living, fraud, and vulnerable customers.

Suneeta said, “The new Consumer Duty is not a new set of regulations. It just wraps up everything that has come before it, such as pricing practices, value distribution and product assessment. Essentially, it means that everything you do and everything you say within your organisation should be focused around the customer, whether that’s behaviour, product or services. Everything needs to be customer-centric.”

Although the regulations will not be introduced until next July, the implementation deadline is the end of this month. That means that by the end of October companies must be able to prove to the FCA that they have developed a strategy that will deliver compliance by next summer.

Sunneeta said, “For insurers, that means mapping an entire claims journey and ensuring that each step of the journey delivers a good outcome.”

Cost-of-living

This is even more challenging in the midst of a cost-of-living crisis, which is constantly moving the goalposts; as the price of service, claims and products continues to increase, so the definition of ‘fair value’ changes.

For example, Suneeta explained that a car may have been insured for £8,000 but its value had risen to £10,000 by the time of claim. If an insurer does not honour that higher valuation then it will not be delivering fair value and could be held accountable under the new Consumer Duty regulations.

She says it is not the policyholder’s responsibility to ensure their insurance coverage keeps pace with rising values, so insurers will have to build that sort of flexibility into their pricing strategies.

However, she believes that operating practices within many insurers could make that difficult.

She explained, “I go into a lot of companies where people just aren’t talking to each other. The pricing people do their bit, the actuaries do their bit, the underwriting people do their bit and the claims department does its bit. They might think they are delivering, but they are delivering in silo and it if you don’t join the dots you’re not going get the bigger picture.

“Talking to each other to understand what is really happening and then feeding all of that into your product assessment is absolutely critical or you’re going to cause problems further down the chain. Remember, the principle of insurance is to put people back into the same position they were prior to an incident. If a customer is underinsured then you’re doing that.”

Fraud

Alongside escalating prices, another result of the cost-of-living crisis is a surge in fraudulent claims. This too can have an impact on the customer, and insurers will be expected to prove that they have taken reasonable measures to protect their policyholders – both from being a victim of fraud themselves and also the implications of rampant fraud within the industry.

Of course, fraud is inevitable and while no company is expected to eliminate it completely, part of meeting the new Consumer Duty regulations is proving that they are at least trying. That means investing in suitable anti-fraud technologies and ensuring that the systems and monitors are in place within the organisation and its extended supply chain to mitigate the risks as best possible.

Suneeta said, “Fighting fraud is part of Consumer Duty because fraudulent activity can drive up the cost of the product, and is that really fair on the customer? Is that achieving good customer outcomes?

“We all know fraud will still happen, and companies won’t face regulatory enforcement if they are victims of fraud. But they might do if they do not have the correct controls in place. I know some people will say they can’t afford to invest at the moment, but you can either spend money up front on detection to mitigate the risks, or let it go until you get a complaint, and when you do a systemic review you realise you have 300 similar cases and then not only do you need to invest in the technology and investigators, you’ve also got a regulatory piece too.”

Vulnerable customers

Another area where companies might be exposed under new Consumer Duty regulations is the service they deliver to vulnerable customers. The first challenge is knowing what a vulnerable customer is.

In many cases people think vulnerable means elderly, but actually the term applies in many more circumstances and businesses will need to ensure they are delivering the additional support whenever it is required.

Suneeta said, “Vulnerable customers are not just the elderly. Research found that about 50% of people are illiterate so if you are selling something to somebody and they don’t understand what they’re buying that makes them a vulnerable customer. A vulnerable customer may also be someone with medical issues who is undergoing treatment, or someone who has just lost their job.

“There are many things that can make a customer vulnerable, and your service needs to reflect that.”

Recognising a vulnerable customer is one thing, acknowledging that their status may change during the lifespan of their policy is another challenge. A company may have systems in place to flag up a vulnerable customer at the point of claim, but that information might be outdated. Circumstances change and a policyholder may not have been vulnerable when they took out the policy but has since become so. Claims handlers need to be able to identify vulnerable customers and adjust the service they offer accordingly.

MGAs

As discussed earlier, Consumer Duty will affect everyone in the supply chain. For MGAs, who are not insurers but nor are they intermediaries, it can be confusing to understand where their responsibility starts and ends.

This is even more true if the service they are delivering is tied in with an insurance partner and in some way determined by that partner.

Suneeta said, “MGAs are left in no-man’s land with little guidance. They’re a bit like an insurer but they’re not an insurer; they have to act like an intermediary but they’re not an intermediary.

“It gets even more complicated if their customer service is disrupted by an unresponsive insurer. Perhaps an MGA requested data about a product months ago, but that information has not been received and now they are being hit with a volume of queries which is distracting them from their day job. Where does the responsibility rest in that cast? On the other side, they may not have made that request to the insurer until the last minute.”

She added, “Ultimately it is about delivering good customer outcomes so for MGAs that means mapping out the customer journey from end to end, clarifying their roles and then taking the steps necessary to achieve fair value – whether that’s with the actual product or the service.”

Conclusion

It can seem convoluted, but Suneeta insisted that Consumer Duty is more about intent than outcome. She likened it to a maths exam, where more marks are attributed for the working out process than the end result, and said that as long as company can prove that it is doing its best to deliver fair outcomes for the customer, then it should have no regulatory issues.

She concluded, “Compliance may seem complicated but it’s actually not, you just have to think about good customer outcomes and remember that what’s important is being able to prove your processes and methodology. But this is not a tick-box exercise. Regulators are going to keep a close eye on this and a company must have the data to back up whatever attestations is makes.”

The MGA Claims Conference held in association with MGAA was supported by gold sponsors Claims Consortium Group, Clearspeed, Davies Group, DWF360 and EDAM Group, along with silver sponsors Robertson & Co, Vitesse PSP and Wiser Academy.