Scrutiny of consumer duty compliance tipped to grow for UK insurers

Matt Saward of Pinsent Masons said that a new parliamentary report (46-page / 662KB PDF) “signals where firms can expect greater regulatory scrutiny”, particularly around how home and travel insurance is distributed and whether consumers are supported to understand the value of the products they buy.

The House of Lords Financial Services Regulation Committee, which published the report, said it cannot see that there have been “clear and consistent improvements in consumer outcomes across the home and travel insurance markets” stemming from the introduction of the ‘consumer duty’ in 2023. It said it would have expected to see “stronger evidence of market-wide change by this point”.

To meet their consumer duty requirements, financial services firms must act in good faith, avoid foreseeable harm and enable and support their customers to pursue their financial objectives.

The committee’s inquiry examined issues identified in a super-complaint raised by Which? last autumn. The consumer watchdog alleged poor claims handling and sales practices in the home and travel insurance market. This obliged the Financial Conduct Authority (FCA) to respond in December last year, when it acknowledged that firms “must do more” to meet the standards required to accord with the consumer duty.

However, the committee said the FCA has not followed up with a sufficiently clear framework for implementing the consumer duty since. It called on the FCA to clarify its regulatory expectations in respect of the implementation of the consumer duty in the home and travel insurance markets. In developing and publishing such a framework, the FCA should further “set out how it will assess firms’ compliance consistently and compare consumer outcomes across firms, so that it can identify and address poor performance” and should publish a “roadmap” setting out “its planned programme of work relating to home and travel insurance with expected delivery dates”, the committee said.

In its inquiry, the committee examined how consumer understanding of insurance products has been impacted by the involvement of price comparison websites in the market and growing use of generative AI tools for finding suitable home and travel insurance cover.

The committee described home and travel insurance products as “inherently complex” and raised concern that the value of those products is often unclear until a claim is made.

The committee said the involvement of price comparison websites in the market has driven intense price-led competition, bringing benefits such as affordable insurance for consumers. However, it said this means there is a greater focus on price than on “overall product value”.

The committee said that while using AI could enable better consumer engagement and understanding of insurance products, it also “carries a risk of harm and may provide misleading or incorrect responses”. It said it is “not convinced” the FCA is giving “sufficient attention” to the risks associated with use of general-purpose AI tools by consumers in researching home and travel insurance.

To address this, it called on the regulator to speed up its response to the Mills Review and said that it should specifically add the examination of how consumers use AI in the home and travel insurance markets to the AI-related review it has been recommended to undertake.

“We do not think it is clear whether AI models currently provide consumers with financial advice that would otherwise be regulated if provided by a person or firm,” the committee said. “While some witnesses have suggested that the regulatory perimeter needs to be changed, it is not clear that a case for bringing AI tools explicitly inside the regulatory perimeter has been made. While the regulatory perimeter is ultimately a matter for Parliament, the FCA should consider what it can do itself to protect consumers and warn consumers about the limitations and risks of using general-purpose AI tools for financial decision-making.”

“We believe that the current regulatory regime is broadly capable of addressing the issues identified during this inquiry, notwithstanding the emerging risks arising from consumers’ growing use of unregulated AI tools. We do not consider that further prescriptive rules are generally the answer. If effectively implemented, supervised and enforced, the Consumer Duty has the potential to address the concerns identified and improve outcomes for home and travel insurance consumers,” it added.

The committee also wants the FCA to do more to help improve financial literacy and consumer understanding of financial products, in general.

Matt Saward of Pinsent Masons said the committee's report has broader relevance to insurance firms operating in all consumer insurance markets in the UK, adding that it provides a “clear signal” to such businesses that scrutiny of those markets “is likely to intensify its focus on consumer firms demonstrating that their products deliver fair value and good customer outcomes”.

“While the report recognises the benefits that competition and comparison tools have brought to consumers, it highlights persistent concerns around consumer misunderstanding, claims experiences and the availability of meaningful data on product value,” Saward said.

“The industry will welcome the committee’s conclusion that further prescriptive rules are not generally the answer. But the report gives firms a clear steer on where action is needed: reviewing product governance to ensure distribution channels support value and better consumer decision-making; testing whether arrangements, oversight and controls for outsourced claims handling are robust; and assessing whether their data can genuinely demonstrate good consumer outcomes. Firms should identify and address any gaps, particularly given the increased regulatory scrutiny likely to follow the report,” he said.

“The committee's call for the FCA to publish a roadmap with clear delivery timescales also reflects a wider desire for greater certainty for the home and travel insurance market,” he added.