UK life insurance companies have been given a clear sense of the issues likely to fall subject to close regulatory scrutiny over the next two years in a new letter published by the Financial Conduct Authority (FCA), according to experts at Pinsent Masons.
Chris Riach and Hannah Ross of Pinsent Masons were commenting after the FCA issued a ‘dear CEO’ letter (9-page / 194KB PDF) that set out its life insurance market priorities from now until the end of 2025.
Riach said: “This is an important letter for the industry, setting out how the FCA’s priorities for the life insurance sector interplay with its focus on the consumer duty and the FCA’s priorities more widely. There’s a lot of detail for the industry to absorb, with clear steers of the FCA’s key concerns and focus over the coming year. Based on regulator action following previous portfolio letters, there is good reason for firms to take heed of these warnings and carefully consider how their businesses stack up.”
Alongside its letter to life insurers, the FCA also issued other ‘portfolio’ letters in respect of the retail and wholesale insurance markets, and in relation to funeral plans. Four common themes for the whole insurance market emerge across the letters – the FCA’s drive to ensure firms are putting customers’ needs first; its focus on progressing the diversity, equity, and inclusion agenda; the emphasis on addressing operational resilience and risk attached to dependence on third parties; and the regulator’s focus on improving standards in relation to the ‘appointed representatives’ regime.
Alongside these general themes, the FCA priorities specific to the life insurance market all place a heavy emphasis on putting customers’ needs first.
The FCA cited the consumer duty requirements on firms to deliver fair price and value. It is focussing on ensuring firms have a transparent charging process and avoid excessive fees for customers. Those expectations extend to “closed book products invested in unit-linked or with-profits funds”, it said. The FCA expects firms to make assessments of fair value of open and closed book business to the customers that have them. The FCA says it will focus in particular on unit-linked investments.
“As part of this work, we want to understand what actions firms have taken where they have identified instances of unfair value and how they will be measuring this on an ongoing basis,” the FCA said. We will use this data to evaluate whether remedies are needed.”
Ross said: “The FCA explains its focus on unit linked investments is due to them having not previously been subject to same requirements as authorised funds regarding assessing value. It is important to remember that the funds will constitute ‘products’ under the consumer duty and so require separate assessment from the insurance investment products via which they are accessed. With the FCA having made this distinction, firms should consider the FCA’s review of fund managers’ value assessments, to get an indication of what the FCA will consider best practice and areas for improvement here.”
The FCA also emphasised the need for firms to lift the overall standard of customer service. In particular, it highlighted the need to deal with slow transfer and claim settlement times, as well as lengthy response times, as a matter of urgency. In particular, the FCA noted that much of the poor service it had identified in the sector was linked to migrations and transformation projects on legacy books of business.
Riach said: “The FCA is showing a real focus on legacy migration and transformation activities, noting that these are key projects for many firms. The FCA recognises that many firms are relying in part on migration and transformation to deliver consumer duty compliance for closed books and emphasises the need for a clear roadmap to the 31 July 2024 deadline. It is not enough that the end state may improve outcomes: firms must focus on how the migration or transformation journey experience delivers the right outcomes also. Strong governance of these critical projects will be key to meeting regulator expectations.”
Ensuring suitability and value of life protection products is also an area of focus for the FCA. It has set out that it expects effective support, good outcomes, and fair value – in accordance with the consumer duty – to be provided to customers throughout their journey. It said some reviewable whole of life (RWOL) policies had not delivered good outcomes for consumers and reminded firms of its expectations in relation to support consumers with the rising cost of living.
Riach said: “The Financial Ombudsman Service (FOS) has also recently updated its guidance in regarding RWOL policies and so this seems to represent a collective shift in approach. Both the FOS and FCA are taking care to avoid criticism that it is applying consumer duty standards retrospectively here. Both instead emphasise the importance of alignment with the fair treatment of long-standing customer standards, which the FCA previously set out in a 2016 thematic review and included requirements for proactive reviews to ensure products continued to meet needs.”
The FCA’s desire to minimise the impact of operational disruptions, and ensure the effectiveness of outsourcing oversight, was also relayed in its letter. The FCA said that reliance on third party administrators (TPAs) within the life insurance sector presents a risk to life insurers which the FCA anticipates will “form a key part” of firms’ risk assessments. The FCA reminded firms that, where TPAs are involved, the ultimate responsibility for customer outcomes lie with the insurer.
Riach said: “The FCA flags to the industry that it may intervene to restrict or delay additional outsourcing arrangements, where firms cannot demonstrate they are meeting their responsibilities under the consumer duty. In light of this, firms should review their TPA-led activities and ensure they have robust systems and controls in place to provide TPAs with adequate oversight. This is particularly important where further material outsourcings are being planned.”
The concept of effective customer journeys was also emphasised in the FCA’s letter in the context of providing customers with sufficient guidance, recognising at the same time that many firms want to avoid straying into offering financial advice for which they must be regulated. The FCA published recent guidance to support firms in getting closer to the advice/guidance boundary in an effort to support customers.
On ESG, the FCA said a priority in the UK life insurance market will be sustainability-related investments and disclosures. Alongside noting the importance of good disclosures and that life insurer may be in scope for the FCA’s Taskforce for Climate Related Financial Disclosure (TCFD) rules, the FCA noted that some firms are tilting defaults to sustainable investments.
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