An insurance broker’s primary duty is to ascertain a particular client’s insurance needs and then advise on and procure suitable insurance cover to match those requirements.
Levels of sophistication and understanding of insurance matters vary hugely among policyholders and a broker must ensure its advice reflects this. Of particular relevance to brokers of personal lines, but also those dealing with smaller commercial clients such as SMEs and clubs, is how to deal with vulnerable customers.
Following two consultations, the FCA published its long awaited Finalised Guidance on the fair treatment of vulnerable customers on 23 February 2021. The guidance will be of particular interest to insurance brokers and their professional indemnity insurers.
The guidance is intended to complement the existing FCA Principles (as well as the provisions of the Insurance Conduct of Business Sourcebook (ICOBS)) and is aimed squarely at trying to enhance the service that vulnerable customers receive from FCA regulated entities.
Who is a vulnerable customer?
The FCA considers a vulnerable customer to be someone who: “due to their personal circumstances, is especially susceptible to harm - particularly when a firm is not acting with appropriate levels of care.”
In other words, vulnerability is very much to be viewed as a spectrum of risk and there are numerous reasons why an individual could fall within the classification of a vulnerable customer. These could include poor health, cognitive impairment, life events such as new caring responsibilities, low resilience to cope with financial or emotional shocks or low capability (such as poor literacy or numeracy skills).
What does the FCA expect?
In broad terms, the Finalised Guidance makes clear that in order to improve outcomes for vulnerable customers, all FCA regulated firms (including insurance brokers) should take action to:
- Understand the needs of their target market/customer base;
- Make sure all staff have the right skills and capability to recognise and respond to the needs of vulnerable customers;
- Respond to customer needs throughout product design, flexible customer service provision and communications; and
- Monitor and assess whether they are meeting and responding to the needs of customers with characteristics of vulnerability, and make improvements where this is not
Brokers can expect in due course to be asked to demonstrate how their business model, the actions they have taken and their overall culture ensure the fair treatment of all customers; including vulnerable customers. They should therefore document the steps they have taken, review those measures periodically, and ensure the approach is endorsed from the top down, so that ensuring the fair treatment of vulnerable customers becomes part of the culture of the firm.
The implications:
Not only could non-compliance with the Guidance lead to FCA enforcement action, it could equally lead to professional negligence claims against insurance brokers when firms do not get it right. The Guidance is also likely to be referred to by the FOS when considering complaints against insurance brokers.
Whilst the implications of the Guidance will be more keenly felt in the personal lines insurance sphere, it is clear that the principles could equally apply to commercial lines insurance; particularly, if the broker is dealing with a company director who may possess one of the characteristics of vulnerability or if the directors are particularly inexperienced in matters of insurance.
The Guidance will be particularly important in situations where the broker is dealing with a customer who is not particularly sophisticated, or who may have a very limited understanding of insurance matters generally. In those circumstances, the Guidance makes it clear that a broker will be expected to do more; in terms of (i) recognising the client’s vulnerability, (ii) ascertaining the client’s insurance demands and needs and (iii) taking the time to really explain the scope of the insurance and in particular any onerous terms of the policy.
As to the possible impact of the Guidance on professional negligence claims, it is already well established that a broker must tailor his or her advice to the individual needs of each client; responding to the client’s overall sophistication. What is likely however, is that claimants will seek to rely upon the principles outlined in the Guidance to support allegations of negligence against the broker if the claimant does fall into the vulnerable category.
For further assistance and guidance on this issue, please do not hesitate to contact either Marcus Campbell or Mark Cawthorne using the contact details below. Both Marcus and Mark are part of DAC Beachcroft’s specialist insurance broker service line and are experts in defending E&O claims against insurance brokers.
