The FCA’s Consumer Duty proposals in CP 21/13: what do insurers & insurance intermediaries need to think about?

Click here to read more - CP21/13: A new Consumer Duty

What is the consultation about?

In CP21/13, the FCA has proposed the creation of a new Consumer Principle, supported by a set of “cross-cutting” Rules and four Outcomes.  Together, these are intended to set higher expectations for the standard of care that financial services firms (including insurers and insurance intermediaries) provide to consumers.

See here for our summary of the Consultation Paper and details on the proposed:

• Consumer Principle;
• ‘Cross-cutting’ Rules; and
• Four Outcomes (suite of rules and guidance).

You can also find our companion article on the key issues that we see arising out of the FCA’s proposals here.

Who does the consultation affect?

The scope of this consultation covers the entire financial services sector, including insurers and insurance intermediaries, applying to regulated firms in relation to their regulated activities. 

The proposals apply to products and services sold to ‘retail clients’.  This is wider than the traditional definition of ‘consumer’ and includes financial services offered to SMEs. 

The proposals also extend to firms that are involved in the manufacture or supply of products and services to retail clients, even if they do not have a direct relationship with the end customer.  This will mean that some firms that operate exclusively in wholesale markets will be impacted.

What is the purpose?

Although the FCA recognises that many firms are already working within the regulatory framework to deliver good outcomes for customers, the FCA has indicated that, for many firms, the new proposals are intended to deliver a significant shift in culture and behaviour, consistently focusing on consumer outcomes.

The FCA has said that the new Consumer Duty would require firms to:

• ask themselves what outcomes consumers should be able to expect from their products and services;
• act to enable rather than hinder these outcomes; and
• assess the effectiveness of their actions.

Proposed form of the new Consumer Principle

The FCA has put forward two options for the new Consumer Principle:

• 'A firm must act to deliver good outcomes for retail clients.'

The FCA acknowledges that the concept of a ‘good outcome’ does not have an established legal meaning – the rules and guidance would give greater clarity on what “good” looks like but would not be exhaustive.  This formulation of the Principle – and the use of the word ‘delivery’ – implies that firms will be judged on consumer outcomes, rather than actions/inputs of firms or the procedures they have in place.  This [potentially] lends an element of subjectivity (since what constitutes a ‘good outcome’ to individual retail clients will almost certainly vary)  and also ‘judgment in hindsight’ to the formulation, which may present practical problems for firms.

• 'A firm must act in the best interests of retail clients.'

The FCA explains that, in practice, this formulation of the duty does not mean that firms have to deliver the absolute best outcome for each and every customer. But firms should satisfy themselves that their conduct could reasonably and objectively be said to be in consumers’ best interests. However, where individual retail clients were to take complaints to the FOS (or the courts if the private right of action (discussed below) is implemented) on the basis that a firm did not act in their specific best interests, then there is a risk that the duty might be treated as more akin to a subjective standard.

Private right of action?

In its earlier Feedback Statement FS19/02, the FCA said it would consider the potential merits and unintended consequences of introducing a private right of action for breaches of the Principles.

This Consultation Paper does not set out any specific proposals on a private right of action.   Instead, FCA is seeking stakeholders’ views on how a private right of action could support or hinder the success of the Consumer Duty proposals set out in the consultation and their intended impact on firms, consumers and markets.

It is clear from this, however, that a private right of action is still under specific consideration.

Implications for the insurance sector

The impetus behind this consultation paper is clearly in line with other recent insurance-focussed activities undertaken by the FCA, such as the General Insurance Pricing Practices Market Study (final rules were published in May 2021), as well as the FCA’s ongoing work relating to vulnerable customers.

The new proposals are undoubtedly intended to force firms to closely consider and evaluate their products and processes and to underline the need to focus on customer outcomes.  However, it is worth bearing in mind that the existing Principles already require firms to pay due regard to: the interests of customers and treat them fairly (Principle 6); and the information needs of clients and communicate information to them in a way which is clear, fair and not misleading (Principle 7).

As regards the Insurance Distribution Directive, the obligation is further enhanced, requiring firms to act in the customer’s best interests.  

Therefore, to the extent either of the proposed formulations of the new Consumer Principle is introduced, clarification will be needed on exactly how (if at all) this extends the current obligations on firms.  Of course, the Principles are necessarily high level and so firms will need to look to the details in the “cross-cutting” Rules and four Outcomes to assess the degree of specific change.

The proposed “cross-cutting” Rules and four Outcomes are likely to mean insurers and intermediaries will need to closely consider, review and evaluate their policies and processes for how firms design, sell and service insurance products and services, as well as considering the key contact points along the customer journey.

In many areas, the proposed new rules and guidance (particularly around the “Price and Value” outcome) are consistent with changes already being implemented in the insurance sector as a result of regulatory scrutiny (for example, coming out of the General Insurance Pricing Practices Market Study PS21/5).  They also dovetail with the wider work being undertaken by the FCA in connection with vulnerable customers.  Accordingly, any new rules and guidance ultimately implemented as a result of this consultation will add to the already complex regulatory landscape for insurers and intermediaries, but will also introduce new considerations. 

As regards any private right of action, the FCA’s Principles for Business are not currently subject to a private right of action, and have not been drafted with a private right of action in mind: rather, the responsibility for enforcing them rests with the FCA, as regulator. The existing regime under FSMA (s.138D) providing for a private right of action extends only to breaches of certain rules, not the Principles (though it is relevant to note that although this right already exists, it is not widely used, with consumers preferring to take complaints to the FOS).

As with the FCA’s other Principles, the two potential formulations of the Consumer Principle are high level in nature and it could be argued that it would be inappropriate for such high level principles to form the basis for a private right of action.  It will be interesting to see how the consultation responses might affect the FCA’s appetite to take this option forward and firms will want to think about the practical implications of the Consumer Duty on their businesses, and use these to inform their responses to CP21/13¹.

Next steps

The consultation is open until 31 July. Following that, the FCA plans to publish draft rules for consultation by the end of the year, with a view to bringing them into force in summer 2022. Responding to the consultation will ensure views from the insurance sector are heard and considered.  Insurers and insurance intermediaries may therefore want to think now about the practical implications of the Consumer Duty on their businesses and use these to inform responses to CP21/13.

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