How to implement the FCA's demand for 'customer-centric' operation in the insurance market

Out-Law Analysis | 10 Feb 2014 | 11:16 am | 4 min. read

FOCUS: The Financial Conduct Authority has sent a strong and consistent message to insurers over the past year: companies will be judged on the degree to which they put the customer's needs at the centre of all decision making. 

In speech after speech senior FCA figures have made it clear that financial services companies will increasingly be judged not just by specific rules and the regulation of processes in specific ways, but by their overarching commitment to sell customers products that meet their needs.

It is a broad principle that colours the FCA's action, rather than a detailed rule to follow. That makes it hard to comply with, but do not underestimate the FCA's commitment to the principle. Already it has informed an £11.2 million fine imposed on Swinton, and it will be a factor in other actions.

Being customer-centric is an easy demand to make but not necessarily an easy one to satisfy. It requires a new way of thinking about almost every aspect of a business.

Defining what it means to be 'customer-centric' can quickly become an exercise in vagueness and nebulous statements framed in marketing jargon. You can all too easily fool yourself into thinking that a few cosmetic changes or woolly claims will satisfy the FCA.

They won't, so don't try. Instead follow these steps to ensuring that you meet the regulator's demands. It will help keep you out of regulatory trouble, but will also improve your customer relations.

Culture
The FCA has rightly identified 'culture' as the most powerful force in changing a company's behaviour. If the culture does not prioritise the customer's needs then no amount of box-ticking, form-filling or systems re-alignment will do it.

Culture is defined by a company's leadership but to take effect it must be emphasised, re-iterated and in the last resort policed by managers throughout the company.

To change a company's culture the leadership group needs to discuss and agree the changes they want. This must be communicated directly, unequivocally and repeatedly. This is a board-level task and if the board is committed to these principles, employees will see that and will understand how vital this is.

It can't stop there, though. If behaviour is really to be changed then it needs to be audited, recorded and the changes demonstrated to the FCA on demand.

You might not even know if your company is customer-centric or not. To find out, look at the decisions your company makes. Look at the product design, and at the way that decisions are made about products and processes. What is driving those decisions? Is it value for the customer? Are products engineered to give the customer the best deal, the best experience, the most appropriate products? If not then you have an issue to tackle.

Then look at the experience a customer has when buying products and when making a claim or a complaint. Are the customer's needs understood and met? Are claims or complaints handled to their advantage?

Looking at a business in this way is a major change. Yes, a business has to make a profit, but the FCA has said time and time again that if products and services do not serve a customer's interests they will attract regulatory attention.

Systems
Being customer-centric cannot just be an aspiration or an ill-defined goal. To satisfy the FCA it should be embedded in how the company operates, and that means making sure that it is supported by the company's systems.

Firstly a company needs to make sure that the quality of the data in its systems is up to FCA scrutiny. Then it needs to analyse its systems and processes to make sure that they support the customer's needs.

This also means looking at how the company uses intermediaries. You might outsource some of your systems and processes but you have to remain responsible for them, to make sure that those intermediaries behave in a way that aligns with your customer-centric approach.

Customer experience
At any point in the process if you are unsure how to proceed, ask yourself: what is the customer experience? It must be a positive experience at every point in the process, and must meet the customer's expectations.

A company's analysis of the experience must deal with the big picture: the product design; its lifecycle, its governance. But it must also go right down to the level of day to day detail.

Are customers given enough information, and given it clearly enough, in a product's terms and conditions? Are the products being properly sold? Sales scripts must be monitored. In the Swinton case a failure to keep sales scripts meant that, from the FCA's perspective, any sale could have been a mis-sale.

Be self-critical
When looking at these issues the board needs to be honest with itself. The FCA's Martin Wheatley said last year that "boards need to look into the corporate mirror and deliver candid assessments on their products. Good morals are not an infinitely elastic concept.  In business or any other part of our lives. Chairs, chief executives and directors should be asking whether products are suitable for the customers they are pitched at. Do they advance their interests?"

"If they can’t answer ‘yes’ to both questions, those products will almost certainly be attracting regulatory attention in future. Prompting questions and scrutiny," he said.

Wheatley's, and the FCA's, view is clear – real change is needed, and companies need to be able to demonstrate that change is occurring. This is a move away from regulating purely through compliance with specific rules and towards a demand that businesses comply with the broad principle that they prioritise customers' needs.

The message, which we will discuss in our upcoming conference on the future of general insurance distribution, is clear and consistent, and companies should take the steps outlined above without delay.

Alexis Roberts is an insurance specialist at Pinsent Masons, the law firm behind Out-Law.com. On 30 April Pinsent Masons will host an event covering some of these issues, the Strategic Forum 2014 - The Future of General Insurance Distribution