The FCA issued its finalised guidance on supporting customers in financial difficulty in early July and in line with the guidance being given back in January, when the work began, the rules take effect 31st July – a date that is not co-incidental given many of the new rules are aligned to the new Consumer Duty principles.

There are no real surprises in what has been proposed – with two exceptions. The wider background and proposals were covered in our previous article “Customers In Financial Difficulty – The New FCA Guidance” published back in January when Consultation Paper 23/1 was published.

Buried at the end of the related feedback on its review into the way home and motor insurers are supporting customers in financial difficulty and handling claims, is a reference to the Dear CEO letter issued back on 29th September 2022 and a reminder that firms must be:

“…able to demonstrate they have effective governance and controls in relation to our three key expectations…”

Those expectations are:

• providing appropriate support to customers in financial difficulty
• ensuring consumers get access to fair value products
• ensuring claims are handled promptly and fairly

What’s New

Responsibility to act

There is a new provision relating to the strength of relationship between customer and firm, where there is a complex distribution chain. It says:

“We recognise that firms with a direct relationship with the customer are likely to be in a better position to identify customers in financial difficulty and provide support. We are adding a provision into the guidance setting out that firms should consider whether, in the particular circumstances, it would be appropriate to refer the customer to another firm in the distribution chain who is in a better position to support the customer. However, we do not expect firms to push the onus to provide support onto other firms where it is not appropriate to do so.”

In most cases, it should be obvious which firm in the distribution chain is best-placed to provide support to a customer in financial difficulty and we expect to see little complication arise as a result of this change. That said, with some product manufacturers now using increasingly sophisticated data analytics, we can foresee scenarios where the product manufacturer may need to consider carefully the state of its knowledge, with specific regard to the second new provision introduced. By that we mean, that firms which have the capability to use tools which can analyse and identify issues and trends better than other distributors will bear the onus of evidencing why they should not have acted when others did or should have.

When should firms act?

The initial Consultation Paper contemplated a number of trigger points, with the primary one being the simple act of a customer contacting the firm and indicating they were in financial difficulty. But the FCA also considered a second, slightly more complex trigger point. That being the scenario where the regulated firm identifies that a customer might be in financial difficulty but has not been directly approached in that regard. This scenario gave rise to more discussion amongst respondents but has been adopted.

As highlighted above though, the firm that identifies the potential issue may not be the firm best-placed to provide support and guidance to the customer.

By way of an example, a broker is contacted by their client and advised that they cannot afford the current level of premiums. That distributor is on notice and must act, probably by contacting the insurer and looking for a solution which may be better payment terms or a payment holiday. What if, however, the customer has used a broker but does not contact them as premiums are payable directly to the insurer. The customer may not contact the insurer either, but there is a record of failings by that customer to pay the full amount of any monthly premium or its direct debits are declined several times. It will not be the distributor who has a duty to act but the insurer who is on notice and needs to act.

What Action Is Required

Firms should be well advanced in their planning to address the requirements of this guidance given most of it has been implemented as proposed in January. And that guidance was itself based on the ‘tried and tested’ response during the pandemic. But the two additional points will require some thought. The questions firms need to answer are:

• Are there any trigger points in my processes, systems or data that need to be flagged for intervention? These would be indicators of financial difficulty, such as missed payments or unexpected reductions in cover.
• Where you identify an indicator of financial difficulty, what is your process to consider who and how to respond to that, given there may be another party in the distribution chain who is better placed to advise the customer on their options.

With the continuing pressure on household finances, it is clear the FCA remain very concerned about consumers making decisions regarding their insurance protection that may not be in their best interests.

The Consumer Duty Connection

The FCA see this work as being complimentary to the new Consumer Duty rules and it is no coincidence both take effect on 31^st July. In responding to feedback on the general purpose of the new guidance, the FCA say:

“We consider that the guidance complements the firms’ implementation of the Consumer Duty. The guidance helps provide clarity to firms about how they can comply with ICOBS 2.5.-1R (the customer’s best interests rule) and the Consumer Duty obligations and provide appropriate support to customers in financial difficulty.”

On that basis, our final piece of advice to firms is to ensure you do not consider this guidance in isolation of your work on preparing for the implementation of Consumer Duty.

Good and poor practices

Alongside publication of the Finalised Guidance, the FCA also shared its feedback on the “Cost of Living: good and poor practice in the general insurance market”, which reports their key findings grouped into 7 areas:

1. Cancellations due to non-payment of premiums are currently low and stable. The FCA will be hoping that remains the case. Any variation should be an area for concern if seen.
2. The proportion of policies paid by monthly instalments is currently stable. This is another metric to track.
3. There are examples of lengthy claims handling times across motor and household and the FCA has observed this could impact renewal premiums.
4. The volumes of claim complaints is increasing and the FCA have reminded firms of the need to deal with claims and complaints fairly and promptly.
5. The FCA have noticed that rejected claims are also increasing and have reminded insurers of their obligation when advising customers to understand a customer’s demands and needs and only offer products that are in line with them. The percentage increase in rejected claims across motor and household was significant.
6. There has been minimal change in the number of customers abandoning claims but the FCA has said that it remains concerned and is a trend it will monitor.
7. There is much more to be done on the identification of vulnerable customers, with the FCA concerned that some firms were unable to demonstrate how they effectively identified vulnerable customers.

Conclusion

There are no real surprises in this guidance and the associated feedback from the regulator, but there are certainly some clear warnings for firms in terms of expectations. The research undertaken has set a clear ‘line in the sand’ against which the FCA will be judging firms. That line does of course only related to those motor and household insurers who were approached to participate, but if you are not monitoring your own performance against those metrics, you can expect to be asked some difficult questions by the regulator.

If you have any questions about the way your firm is responding to the regulator’s guidance on the issue of customers in financial difficulty, please do speak with the author, or your usual ICSR contact.