Home Compliance UK Insurance Sector Adjusting to Sea-Change Consumer Duty Regulation

UK Insurance Sector Adjusting to Sea-Change Consumer Duty Regulation

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Starting this week, the UK’s Consumer Duty Act is in force for new and existing insurance products or services open for sale or renewal. The new law marks a significant shift in the Financial Conduct Authority’s expectations for firms in the insurance industry. Charles Rowley, managing director of business management consultancy DA Strategy, gives an update on the challenges the industry has faced when it comes to compliance — and the solutions they need to deploy.

The FCA’s consumer duty requires firms to act to deliver good outcomes for retail customers, to act in good faith toward consumers, avoid causing them foreseeable harm and enable and support them to pursue their financial objectives, the agency has said.

While the UK’s insurance sector is busily working to ensure compliance with the FCA’s new regulations, much work is ahead to avoid a compliance gap emerging. According to statistics published by the FCA at the end of June, 69% of insurance brokers believed they would be fully compliant with all requirements by the July 31 implementation deadline. An additional 27% of personal and commercial lines insurance intermediaries anticipated being able to meet most of the requirements but acknowledged the need for further work.

Recognizing the importance of this transition, the FCA has emphasized that firms must ask themselves the right questions to ensure they are ready to hit the ground running.

The regulator expects insurance boards and equivalent management bodies to have clear oversight of implementation plans, and firms should already have identified any potential gaps or weaknesses in their compliance and developed strategies to address them.

In fostering collaboration across the supply chain, brokers are leading the way in discussions about consumer duty requirements with other firms. The FCA’s findings indicate that 80% of insurance brokers have engaged in these discussions, while 60% of all insurance firms have done the same.

A cooperative approach is essential

Working together, industry participants are ensuring that partners have the necessary information to fulfill their obligations. This cooperative approach is essential for a comprehensive and effective implementation of the regulations.

While the insurance sector remains committed to meeting the consumer duty regulations, there are several core operational and data challenges faced by delegated authority businesses in complying with the regulations and exploring the opportunities for proactive compliance.

One of the key challenges has been defining the scope and proportionality of the review process. Establishing what falls within the scope and what does not can be a complex task, exacerbated by mixed messaging from regulators. It is essential for businesses to finalize their product review population and project manage the reviews within set timescales. A proportional approach, setting expectations for different risk levels, can help balance the carrier’s approach with its product governance risk appetite.

The product data learning curve

At the same time, gathering data to demonstrate value, understanding and service in products has been a significant learning curve for many specialty market participants. Acquiring evidence of value, such as customer feedback, audit findings and external reviews, can be challenging, especially when it is held at different levels within the supply chain. Coordinating data from multiple sources remains a complex task. Ensuring consistency in metrics and measurements is crucial to avoid inconsistencies and effectively monitor product risks.

Product-level reporting has also stretched many insurance management information systems, which have typically focused on class of business rather than individual products. Embedding product coding within underwriting systems can enable meaningful monitoring statistics by product and carrier.

This becomes particularly relevant for packages with sections provided by different carriers, where the impact of issues with one section on the overall product value and service needs to be evaluated. Developing product-level reporting requires careful coordination and a thorough understanding of responsibility within joint or co-manufacturing arrangements.

Resourcing is another significant issue, with limited expertise available internally and externally. Accessing knowledge and data across various teams within organizations can be challenging, as information is often siloed. Awareness and training on product governance, fair value assessment and consumer duty are essential for engagement and understanding across all relevant teams, including non-compliance carrier teams, coverholders and brokers. Overcoming pushback from market participants due to commercial pressures remains an ongoing challenge.

Non-responsive partners

The FCA expects carriers to gather information from all brokers selling the carriers’ products, and failure to comply could result ultimately in a carrier having to cease trading with those brokers. Coordinating assessments, reviews and establishing frameworks for challenge internally and externally can be resource-intensive. The industry should continue to take a proactive approach to ensure compliance with regulations and guidelines, building trust with customers and maintaining a viable business. Non-compliance can lead to reputational damage, increased regulatory scrutiny and a potential reduction in business.

Firms must clearly remain vigilant and proactive in their compliance efforts. By addressing the FCA’s guidance and asking critical questions, insurance companies can ensure they are well-prepared to provide the highest standards of consumer protection.

The FCA will focus on serious breaches

It’s likely the FCA will continue to prioritize addressing the most serious breaches and swiftly take action when evidence of harm or risk to consumers is found. Therefore, it is crucial for insurance firms to continue working toward actioning areas for improvement to avoid potential penalties and maintain the trust of their customers. 

Proactive steps toward compliance, including clear product governance, robust data gathering, consistent metrics and proactive training, will help businesses operate transparently and ethically. 

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