Consumer Duty for insurers: One year on

The Consumer Duty (the Duty) came into force for open products and services on 31 July 2023. It has had a significant impact on the way that firms design, sell and operate their products after only a single year of operation. Under the Duty, firms must regularly assess, test, understand and evidence the outcomes their customers are receiving and in the year since the Duty has come into force, the FCA has reviewed how larger insurers are monitoring outcomes under the Duty. Whilst some firms have delivered better outcomes, some are ‘lagging behind’. 

As an ‘outcomes based’ regulation, the Duty aims to encourage firms to create an environment for healthy competition and innovation in a way that benefits firms, consumers and the economy. 

In December 2023 the FCA requested the most recent board and/or committee reporting from 20 larger insurers, including general insurers, life insurers, insurance intermediaries and regulated third-party outsourcers which service insurers. The FCA asked firms to show how they monitor, assess, and test the outcomes customers are receiving, along with actions firms had taken after identifying poor outcomes. The results were published last week. 

The requirement to monitor customer outcomes 

Being able to measure if good outcomes are being achieved is a fundamental requirement of the Duty and under PRIN 2A.9 a firm must regularly monitor the outcomes retail customers receive from the products the firm manufactures or distributes, the communications the firm has with retail customers, and the customer support the firm provides to retail customers.

Naturally, insurers have had to put in place rigorous outcome testing plans in order to monitor customer outcomes. Outcome testing, however, can be tricky, particularly where the industry may have historically been focused on processes being completed rather than outcomes being delivered.

The FCA multi-firm review is helpful in that it identifies what the FCA considers to be ‘good practice’ and ‘poor practice’ and where areas of improvement might be needed for those firms who are not delivering good outcomes. 

Processes vs outcomes 

The key here is that firms must aim for clearly defined and specific outcomes with insight into whether the outcome is delivered rather than focusing on whether a process had been completed. While it is important for firms to demonstrate key processes have been completed and data collected (ie document reviews, communications reviews, claims management), in most cases the completion of these processes alone is unlikely solely to dictate whether good customer outcomes are being achieved. 

Data

Where firms can document and identify foreseeable harm, they will have a better understanding of the data they require to monitor outcomes to avoid these harms. It’s not just about data collection, it’s about making sure that firms are identifying relevant sources of data and considering whether that data enables firms to achieve the insight they need in order to deliver a good outcome for customers. The FCA has made it clear again that while it would expect firms to make use of existing data capabilities, it also expects ‘firms to appropriately consider whether the data they have is sufficient for the customer outcome monitoring required by the Duty’. Firms simply cannot hide behind the non-collection of relevant data as a reason not to monitor harms.

Management information 

Ultimately, senior management within the firm and boards need to oversee retail customer outcomes and need to take action where required. Boards need to challenge management on the outcomes being delivered and the approach to monitoring taken. In order for this to happen successfully there needs to be clear reporting, not just the data, but an explanation of what the metrics mean and recommendations or suggestions of potential actions where poor outcomes were highlighted. 

Monitoring different groups of customers and vulnerable customers 

The Duty requires firms to identify whether any group of retail customers is experiencing different outcomes compared to another group of retail customers of the same product, and to understand why. 

Good practice means firms should be carrying out detailed analysis and taking action to improve outcomes for this group of customers. Firms need to be investigating and making changes to processes where necessary in order to deliver better outcomes. This analysis includes for example understanding where issues that customers with different characteristics of vulnerability stem from. Firms need to have in place comprehensive approaches for monitoring different groups of customers – that is, monitoring of outcomes between customers with characteristics of vulnerability and other customers. 

Addressing poor outcomes 

Unsurprisingly, where poor outcomes are identified through monitoring, firms have to take action that leads to an improvement in customer outcomes. This may include steps such as the creation of a dedicated team to improve the customer experience, to deal with complaints or to improve customer understanding of a product.

Consumer Duty outcomes 

Under the Duty, the monitoring carried out by a firm must enable it to determine at least whether retail customers are being, or have been, sold products that have been designed to meet their needs, characteristics and objectives; whether the products that retail customers purchase provide fair value and appropriate action has been taken to address products identified as not providing fair value; whether retail customers are equipped with the right information to make effective, timely and properly informed decisions; and whether retail customers receive the support they need.

There is still work to be done by firms in order to meet these requirements. 

Products and services 

Board or committee reporting should focus on more than number and timeliness of product reviews completed and should consider the actual findings of such reviews. Insight into customer outcomes should be provided and evidence of actions being taken by firms because of these reviews should be clear. 

Price and value 

Monitoring must enable a firm to determine whether the products that retail customers purchase provide fair value, and that appropriate action has been taken to address products identified as not doing so. This monitoring, again, should be more than just process driven. It should be comprehensive and contain a wide range of product data including for example performance data (such as loss ratios or profitability), commission or charges, the operational costs in running the product, key aspects of value, such as the use of overall product benefits. The data should be granular and cover different customer types (including vulnerable customers). 

Insurers need to consider the data they require to monitor effectively and each of insurers, insurance intermediaries and outsourced service providers need to consider this in relation to their insurance products.

Customer understanding 

Insurers should be able to demonstrate clear monitoring of whether retail customers are equipped with the right information to make effective, timely and properly informed decisions. Testing throughout the customer journey and using the insights provided from this is the key to achieving good outcomes when in respect of customer communications. 

Consumer support 

Again, firms should map all key customer journeys and monitor relevant service data. Taking on board customer feedback and complaints, together with identifying points where service improvements could be made to enhance the customer support offered by the firm, are positive contributors towards helping customers achieve a good outcome.

The FCA remains focused on the implementation of the Duty and it is expected that the FCA will contact some 400 firms across different sectors to get further insight into how they are supporting their customers. It is also expected that the FCA will request more detailed information from a smaller sample of firms in order to identify and share good practices and to challenge firms who provide poor levels of customer support, including to vulnerable customers. The findings from this review are expected in early 2025.

If you would like more information, please contact the blog authors or your usual Freshfields contact.