Implementing the Consumer Duty in Life Insurance [pdf]

The Financial Conduct Authority, FCA, has published an open Dear CEO Letter addressed at life insurance undertakings and „their FCA-regulated outsourced service providers (OSPs)“ as regards the upcoming new consumer duty. Among other things, the letter thereby
– reminds firms of the implementation timeline of the new duty,
– summarizes the key pillars of the duty,
– outlines how these pillars apply towards such firms,
– provides feedback from a recent review of firms‘ level of adaptation to the new duty,
– sets out the expectations of the FCA in this context,
– provides some good and poor practices as far as the prioritization of the issue within insurance undertakings and OSPs and the effective transposition of the new requirements are concerned and
– summarizes some key issues insurance undertakings shall take into account when transposing their new requirements.
Some of the key issues addressed in the letter are briefly summarized below. It shall be noted in this context that the summary is far from complete which is why affected firms MUST review the original Letter.
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#### The key pillars of the new consumer duty
The new duty puts upfront the interests of consumers (hence the name) and requires firms to adhere to stringent rules in the following four key areas:
1. communications: firms must ensure that consumers get all the information they need to make informed decisions.
2. products and services: firms must ensure that their products are designed in a way that ensures that they meet the needs of consumers and that – in turn – they are only sold to those customers whose needs they are intended to meet.
3. customer service: firms must ensure that their levels of customer service meet the need of consumers and that such service does not hinder clients from achieving their desired outcomes.
4. price and value: firms must ensure that the products offered to retail customers are priced at fair value.
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#### The implementation timeline
– The policy statement to the new duty was published on July 27, 2022 (please see EventID 16865 in this context for more information).
– A corresponding guidance (FG 22/5) was issued at the same time.
– The FCA expects / expected that by October 2022, all management boards have agreed upon a plan to implement the new duty.
– By April 2023, manufacturers of products should have concluded their reviews to ensure that their products or services meet the above noted requirements (area 2 and to some extent area 1 noted above) and should communicate any relevant information to their distributors.
– On July 31, 2023, the duty comes into force for new or renewable products and services.
– On July 31, 2024, the duty comes into force for legacy products or services not subject to any renewals.
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#### Application of the new duty
Generally speaking, so the FCA, the new rule applies to all firms and persons that are engaged in retail customer business. It is thereby irrelevant whether or not such engagement is direct or indirect via the use of third parties. Depending upon the nature of a firm’s business, an undertaking may need to adopt different measures or review different business functions to accommodate the new consumer duty.
Specifically, in the case of insurance undertakings and OSPs, the FCA particularly emphasizes that insurance undertakings remain responsible over outsourcing arrangements and the impact of such arrangements upon consumers. That is, if an insurer outsources, for example, its customer relationship function to a third party service provider, it will be held responsible for the outcomes that are provided by such third party firm to consumers. Likewise, the third party conducting the service will also be subject to the new consumer duty, if it performs functions directly affecting retail customers.
The new duty will apply to all existing (non-closed) and new upcoming products and services from July 31, 2023. Therefore, insurance undertakings and OSPs – where applicable – must have reviewed their products and services by this date as regards
– the identification of the target market,
– the assessment of how the products and services meet the needs of this identified target market,
– the assessment of adequate distribution channels,
– the assessment of the adequacy of product disclosures, and
– the assessment of the fair value is concerned.
In terms of legacy contracts – which is expected to be a large portion of existing insurance business -, the FCA notes that the new duty will apply to these products and services as well, although the application date of the new consumer duty was postponed by one year (July 31, 2024). However, some of the requirements under the duty may not apply as the products or services have already been sold (e.g. target market identification, assessment of meeting consumers‘ needs, etc.). Nevertheless, because of the sheer volume of products affected, the FCA strongly recommends firms to take action as soon as possible and start their review of the products in light of the new duties. A particular emphasis thereby needs to be put on the value for money duty and the treatment of existing customers versus new customers to ensure a fair treatment of either two customer groups.
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#### Issues to be taken into consideration by insurance undertakings and related third service providers when transposing the new duty
The following list contains a number of issues that insurance undertakings and their related service providers shall consider in their transposition of the new duty. The list is far from complete and additional guidance in this context may be found in Annex II of the letter.
– the level and depth of interaction needed between insurers and OSPs, for example to identify any business products and services affected by the new duty and to determine joint measures to review and / or improve customer-facing activities;
– the volume and complexity of closed products and possible hurdles in this context, for example the location of corresponding documents (sales contracts, customer communications) on legacy IT-systems; or
– the specific requirements involving pension products, e.g. to help customers make informed and in-time decisions and to prevent any shortcomings in future pension benefits simply due to a lack of clear communications.
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The FCA concludes its Letter by noting that it will closely monitor the progress made by firms up to July this year and will continue to engage with stakeholders to provide further support and guidance where ever needed.