The Financial Conduct Authority has published a new consultation paper CP23/1, entitled “Insurance guidance for the support of customers in financial difficulty”.

In simple terms, what was a focussed piece of guidance driven by the need to respond to the social issues resulting from the COVID pandemic is now being turned into permanent guidance, through a consultation process. The initial consultation period runs to 11^th March 2023.

The publication of such a paper tells us:

1. that the regulator has identified risks of harm to customers;
2. that by suggesting solutions to mitigate those risks of harm, it is sending a message to the market; and
3. that those suggestions are very likely to become Rules in due course.

Being directed towards the protection of Vulnerable Customers and thereby implicitly impacting insurers and brokers dealing with consumer lines business, it must be tempting for the average commercial insurer or broker to instinctively react and wonder if this is relevant to them, or if it is simply a case of the regulator telling them they cannot cancel a policy for non-payment. In fact, it is relevant to the commercial sector and the complexity of the measures proposed requires some analysis to fully understand the impact on insurers and brokers. Here we see a prime example of principles-based regulation combining with the regulator’s desire to protect consumers and the cultural change that the new Consumer Duty is intended to drive – no longer ticking boxes but asking “what is right?”

That there is currently a harsh economic climate is beyond denial, and households and businesses are cutting back on spending, or perhaps worryingly for the future, falling back on credit sources simply to maintain normality. The FCA’s own 2022 Financial Lives Survey found that the number of UK adults with low financial resilience increased from 10.7 million in 2020 to 12.9 million in 2022.

Separately, research published by the Federation of Small Businesses in September 2022 found that 96 per cent of all small businesses say they are concerned about the wider financial implications of rising energy costs, with 38 per cent saying they are extremely concerned. Small firms in accommodation and food (68%), wholesale and retail (45%) and manufacturing (43%) report high levels of extreme concern. Those concerns risk implications for insurance spending decisions, which will no doubt add fuel to the fire in terms of the regulator’s concerns.

The proposals will amend and build on  guidance introduced in 2020 during the Covid pandemic and will support the guidance already in place for the fair treatment of vulnerable customers. Add to this the Dear CEO letter in September 2022 and it quickly becomes clear that this is not something that insurance firms can ignore.

The main obligations on firms currently are under the Principles for Business (fair treatment and clear communications) and the ICOBS sourcebook (ICOBS 2.5.-1R, the customer’s best interests rule). However, the FCA explicitly reference the new Consumer Duty and the new 12^th Principle for business, although this doesn’t take effect until July. Firms should certainly be thinking about how they comply with that Principle and the Duty, and it is our view that making the effort now will make things easier later in the year, when the new rules are in place and the regulator may be looking for firms to make examples of for non-compliance.

The Regulator’s Expectations

So what support is the regulator expecting to be offered?

• Risk profiles should be re-assessed. Risk information may have changed since inception; can any factors be found which might justifiably reduce the premium?
• Are alternative products available to provide appropriate cover at an affordable price?
• Can any ’add-ons’ be removed, or cover be temporarily adjusted?
• Can there be any temporary forbearance on instalments, without committing the client to credit charges?
• Ensuring that customers understand the implications of cancelling their policy, particularly when it combines a number of cover elements. The paper gives the example of travel insurance and the medical expenses cover that would be lost (it is worth noting here the Consumer Duty again – the customer understanding outcome).
• Temporary pauses on cover – particularly if cancellation would mean difficulties in obtaining new cover, for example due to medical conditions.
• Extended payment periods.

If ultimately there is a decision to cancel a policy, firms need to consider whether it is appropriate to charge their standard cancellation fee. It would seem harsh to do so, and the regulator implies it may not be fair treatment.

The regulator will be looking for firms to have been clear in their information to customers permitting  customers to be able to make informed decisions. They also expect that firms make clear that support is available in the first place.

The consultation closes on 11^th March and the regulator aims to publish a final Policy Statement, including responses to feedback, in Q2 2023. If the guidance is made it will come into force on 31 July 2023, coinciding with the Consumer Duty.

Taking Action Now

As is so often the case, the Consultation Paper is likely to be very close to any final guidance and our advice to firms is to start considering their approach now, particularly so given the implementation period is likely to be short and that all firms in scope will already be undertaking their Consumer Duty Projects. Why make it more complex by undertaking two concurrent projects or activities when they are so connected.?

So what should insurance firms be doing now?

• It’s important to read and digest the FCA’s suggestions in the consultation paper and find ways to put them into practice. For any firm operating during the Covid era, it is worth looking at how you responded then.
• What options are appropriate and available for your products and services?
• Think about how the Consumer Duty will be embedded in your business – this is a cultural change more than a documentation or procedural one.
• Consider what customer harms are foreseeable if they are in financial difficulties.
• Start issuing messages to customers about support and how they can submit requests for assistance.
• Put yourself in the customer’s place and see your business from the outside – can you contact who you need to, and can you get the support you need?
• Ask your employees about your processes – they may know of blockages and friction. Do you use employee surveys? Add Consumer Duty themed questions.
• Consider particularly how vulnerable customers might be disadvantaged by financial problems.
• If you do not have retail (direct) customers, can you materially affect their outcomes in your distribution chain?

If you have any questions about the Consultation and how it may affect your firm, please do speak with the author or any other member of the ICSR team. Having worked with firms responding to the previous guidance on customers in financial difficulties, we are able to offer practical examples of how other firms have responded, and guidance on how to integrate this work with your approach to implementing the new rules on Consumer Duty, work that should be well underway already based on the regulatory expectations.