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The next step starts here on Consumer Duty

Insurers may have a head start on Consumer Duty but that doesn’t mean that they can afford to relax…

Alongside some of the other headline grabbing strategic and regulatory challenges, such as ESG and Digitalisation, Consumer Duty was also another prominent topic at this year’s ABI conference – and for good reason.

Unlike the majority of the regulatory change initiatives that have gone before it, Consumer Duty is distinctly different. Approaching it purely as another item of regulatory change will miss the point, and firms will struggle to meet the FCA's expectations. Instead, Consumer Duty represents a regulatory driven transformation opportunity which should be aligned to insurer’s own growth and customer agenda. It is more about creating the right culture within which the Consumer Duty can operate rather than solely and narrowly addressing each regulatory requirement individually. It genuinely requires a `hearts and minds' transformation programme.

However, insurers can certainly draw comfort from the fact that in the race to implementation finish line they are, a couple of steps ahead of other sectors. 

  • Client’s best interest and formal product governance rules came in under IDD (and MiFIDII) back in 2018. Other sectors do not currently have explicit rules about delivering appropriate products and services.
  • Back in 2016, for the Life sector, the FCA completed a thematic review that assessed the treatment of closed-book customers against four high level customer outcomes and recommended a range of remedies that insurers have addressed.
  • More recently, the GI sector has recently implemented enhanced product governance requirements and more specifically new pricing practices obligations to ensure products deliver fair value.

Therefore, on these core tenets of the FCA’s Consumer Duty, aspects of the insurance sector are already well placed to address the intentions of the Consumer Duty. Further, insurers generally have relatively more mature approaches to a customer-centric culture and clear purpose, an embedded conduct risk model and overarching governance arrangements.

However, despite all of this, it is not a time for insurers to become complacent about how challenging the implementation of all aspects of the Consumer Duty will be. This article explores some of the activities that insurers should be taking now to maximise the successful implementation of Consumer Duty and meet regulatory expectations.

Even though firms are now awaiting the final rules (expected in July), there is activity that insurers should be undertaking now. The next step starts here.

Gap Analysis

In order to effectively plan and execute the required changes, a gap analysis should be a key, and early, activity for insurers.

It is fundamental to assist them to consider the existing levels of maturity across functions, product/service lines and as well as specific products/services. As mentioned above, it will also require evaluation of many of the firms existing controls including, but not limited to, product governance, conduct risk framework and vulnerable customer policy and procedures – albeit the gaps are anticipated to be smaller.  

Evidencing outcomes

The challenges associated with evidencing customer outcomes scored highest in our recent webinar poll with 52.3% of attendees flagging it as the main challenge. This obligation is wide-ranging as it is required within all aspects of the FCA's four 'outcomes'.

Critically, there is also an overarching obligation for the board to consider annually whether the firm is acting to deliver good outcomes for its customers which are consistent with the Consumer Duty.

Therefore, the way firms design, implement, assess and monitor a solution to evidence outcomes should be a core focus of implementation activity - at all levels of management. The effective use of data and technology will be critical to meeting the FCA's expectations, especially with the FCA's more data led approach to supervision. This challenge is exacerbated by the, sometimes long and complex, distribution chains that insurers are involved in.

KPMG in the UK has developed “KPMG Decipher: Customer Intelligence” that brings together our people, methodologies, and technology to develop a solution that is focused on realising the opportunities of intelligent automation to evidence customer outcomes to respond to the challenge of the new Consumer Duty.

If you would like more information about the KPMG Decipher solution or to request a demo, please get in touch.

Fair Value considerations

The fair value outcome is a key part of the new Consumer Duty and one that presents a significant challenge for most firms in terms of outcomes testing. Although established for general insurers, firms will either need to develop (or transpose) an appropriate framework for their life business. They will need to consider how different customers use their products and services to develop frameworks to internally assess and benchmark price and value for specific user groups, including vulnerable customers.

KPMG in the UK has experience of working with a range of GI firms to implement and review implementation of the new GI pricing rules. We also have a dedicated Competition Economics team which specialises in providing financial and economic advice for firms in their interactions with economic regulators like the FCA – across a wide range of projects/sectors and with specific financial sector experience. If you would like to discuss further, please get in touch.

The above list is not designed to be exhaustive and there will be other challenges for insurers to consider. For example, how to determine and evidence consumer understanding will represent a challenge given the wide target market for many of their products and services. Equally, how insurers define and determine which aspects of its current consumer support, could represent, or be perceived to be, a sludge practice will require careful consideration.

Next Steps

This article illustrates many insurers will have some of the foundations required to help implement Consumer Duty. However, despite this, there is still a significant volume of changes required to ensure that when the new rules come in that insurers can evidence that they are aligned to regulatory expectations.

As such, even if the FCA grants a slightly longer implementation period than the proposed 9 months, insurers do not have the luxury of being able to await the final rules in July 2023 to commence implementation.

KPMG in the UK recently ran a Consumer Duty webinar (recording here) where many of the above challenges were discussed. Following the webinar, we published this article which explores the above key areas of focus in further detail and with practical implementation considerations.

Last updated 25/02/2022