Financial services must heed the FCA’s warning to insurance on fair value and good outcomes

The FCA has released its thematic review of general insurance (GI) and pure protection and it’s safe to say it’s pretty damning. Not only is the regulator ordering insurers and intermediaries to remove products that do not offer fair value, it is weighing up both supervisory and regulatory action to address these issues, as well as firms that are not able to demonstate good customer outcomes.

It’s a stark reminder of the regulator’s intent to enforce Consumer Duty, which is now in full force across financial services. In fact, the regulator highlighted its commitment to engage with both GI and protection, as well as relevant trade bodies, to ensure its expectations are recognised and acted upon urgently.

Insurance or not, manufacturer or distributor, big or small, it’s another warning to all of the financial services sector that expectations are high for Consumer Duty – and all firms must be fully invested.

Vulnerable customers

A key shortcoming identified by the regulator was an inability to demonstrate how firms assessed whether a product delivers fair value to all customers, including vulnerable or outlier groups. It’s a clear requirement that fair-value assessments must include allowances for vulnerable customers. This has long been a focus of the FCA, with requirements that predate Consumer Duty. If anything, the new regulation only strengthened this commitment.  

In truth, the treatment of vulnerable customers in the insurance sector has become something of a black cloud, particularly with the recent report from Which? highlighting serious failings. It found that not only are consumers experiencing significant harms during the claims process, but clients in vulnerable circumstances are also regularly receiving worse outcomes than other consumers. With Consumer Duty now in place, and customer vulnerability guidelines well established before then, you have to question why poor outcomes are not already minimal.

A key reason is that many firms simply don’t know who their vulnerable customers are. The FCA’s Financial Lives survey suggests that around half of all UK adults are vulnerable in some way, yet many firms are still reporting few or even zero vulnerable customers. This simply isn’t possible, even with the most resilient of customer bases.

Part of the problem is that many firms are being reactive and waiting for consumers to tell them of their vulnerability. To get anywhere near the true proportion of customer vulnerability, the FCA has clarified that firms need to “actively engage” with consumers. Many firms are realising that identifying vulnerability is the hardest part of Consumer Duty – and one that requires a real change in culture and systems.

Good data

Alongside the report, Matt Brewis, head of insurance at the FCA, remarked that the regulator was still seeing “too many examples of insurers and brokers lacking the right information, governance or oversight” to ensure customers receive consistently good outcomes.

The report highlights the need for appropriate monitoring, utilising high-quality management information (MI) to ensure products provide fair value and customers regularly receive good outcomes. Good data is absolutely fundamental to generate the MI firms need to meet these requirements, but in truth, it’s the area where many firms fall down.

One of the biggest problems the FCA has raised on numerous occasions is firms trying to repackage existing data. In reality, financial services firms have to seriously consider the information needed to truly understand what ‘good outcomes’ and ‘fair value’ look like. Without the necessary data, it is impossible to identify problems and make the changes the regulator wants and expects to see.

It was fantastic to see London & Colonial Assurance, a life insurance provider based in Gibraltar, embracing customer vulnerability data – and adopting the MorganAsh Resilience System (MARS) to best support their clients both at home and abroad. This has to be the approach of more firms.

Investing in technology

A systemic issue facing the entire sector is a lack of investment in systems and technology to assess customers, identify vulnerabilities and monitor outcomes. Without this critical investment, it not only remains an arduous task, but firms lack the information needed to report on results on an ongoing basis. After all, how can firms truly show good outcomes or fair value with massive gaps in their MI?

The FCA itself is well aware of just how large the remit is, which is why it has long advocated for firms to increase technology adoption. Rather than building systems themselves, the technology already exists with platforms such as MARS. Through consistent and objective assessment, it is possible for firms to not only meet the requirements today, but throughout the entire client journey and product lifecycle. Plus, firms can offer a far better and more tailored service – which engenders customer loyalty and achieves a real competitive advantage.