Insurance wordings and implementation of the Consumer Duty: a view from the FCA

Since 31 July 2023, the Consumer Duty has been in force for all open products and services.^[1]

Under the Consumer Duty Principle, insurers are required to "act to deliver good outcomes for retail customers". Insurers are required to:

1. Act in good faith towards retail customers;
2. Avoid causing foreseeable harm to retail customers; and
3. Enable and support retail consumers to pursue their financial objectives.

Theses are known as the Cross-cutting Rules. These are further supported by the four Outcomes required in relation to:

1. Product and services;
2. Price and value;
3. Consumer understanding; and
4. Consumer support.

The Financial Conduct Authority ("FCA") has recently published their review into good practice and areas for improvement across a number of areas^[2] which build upon the FCA's Finalised Guidance published in July 2022.

This article highlights key points arising from the FCA's publication for those involved in insurance wordings.

Products and services

The FCA has seen harm to consumers where products or services were designed poorly and/or distributed to a wide group of customers that the product was not designed for.

Good practice

The FCA has seen firms:

• Carefully and precisely define the target market for products and services that could cause harm if sold to the wrong consumers. Insurers have then ensured those products and services are sold correctly. For example, redesigning sales journeys to be clearer on the types of customers and needs products are appropriate for. Others have introduced new products to meet different customer needs.

• Adapt products and services to deliver additional benefits for their customers. For example, by introducing controls to limit exposure to financial loss and avoid the risk of foreseeable harm to customers.

• Make positive changes to their product development processes, with greater focus on how new products will meet the needs of a specified target market and deliver good outcomes for them. For example, one firm introduced ’11 golden rules’ for designing new products linked to the Consumer Duty requirements. Some firms have increased emphasis on consumer research and testing to help ensure products work well.

• Simplify their product offer so there are not products with similar or overlapping features, where this benefits customers. This makes it quicker and easier for consumers to identify and access the products they need.

Areas for improvement

The FCA has seen firms:

• Not share information effectively across supply chains. The FCA wants firms in the same distribution chain to share relevant information with each other. This will help firms to quickly address issues to prevent consumer harm and deliver good outcomes. For example, manufacturer firms need to inform distributors of the characteristics of a product or service, its target market and the value it is intended to provide to customers. To support manufacturers reviewing a product or service, distributors need to provide relevant information to them. Firms in a distribution chain should consider what information they need from each other, with the joint goal of delivering good outcomes for the customer.

Price and value

In terms of this Outcome, we often draw attention to the value of core covers, additional covers, and extensions.

Good practice

The FCA has seen firms:

• Enhance the benefits of products and services to improve value. The FCA has seen some insurers enhance product cover to include new benefits, such as physiotherapy and virtual medical care, widen the definition of certain terms in policy wordings to cover more eventualities, or increase product cover limits at no additional cost.

Consumer understanding

The FCA wants customers to be given the information they need, at the right time, and presented in a way they can understand. This is integral to insurers creating an environment in which their customers can pursue their financial objectives.

Good practice

The FCA has seen firms:

• Work with experts to improve their communications across different channels and increase customers’ understanding of their products and services. For example by:
  • changing the layout and presentation of content to improve clarity and boost customer understanding;
  • simplifying the language used, with one firm rolling out a 'jargon buster' library across its business to help simplify documents; and
  • improving the accessibility of websites, making it easier for customers to navigate to contact details for further support.

• Redesign customer journeys, focusing on how consumers behave in practice and risks of harm, to better support understanding. For example, an insurer adapted its approach to highlight its policies’ exclusions on its website before customers start their application, so it’s clear up front what the policy doesn’t cover.

• Develop ways to test customer understanding such as surveys, experiments, and interviews.

Areas for improvement

The FCA has seen firms:

• Undermine customers’ trust by pushing products or services that are too high-risk or complex for them.

Comment

The FCA's recent publication builds upon its previous guidance on the Consumer Duty, in particular its Finalised Guidance published in July 2022.

The FCA's recent publication does not contain much that is new but insurers should take time to consider the FCA's publication and how it might influence their own product development processes and wordings.

Our firm has extensive experience of working with the insurance market to respond to the regulatory requirements of product development. Our wordings team regularly advise on wordings, and associated documents, that fall within the ambit of the Consumer Duty. We are also called upon to consider discrete aspects of the Consumer Duty.

[1] For closed products and services, the Consumer Duty comes into force on 31 July 2024.

[2] https://www.fca.org.uk/publications/good-and-poor-practice/consumer-duty-implementation-good-practice-and-areas-improvement