In the first of a three-part series exploring Consumer Duty and the protection sector, Andrew Gething of MorganAsh explains the impact of the new duty on intermediaries and providers.
Businesses across financial services have been trying to get their heads around the FCA’s new Consumer Duty regulations.
From July 2023, firms will be required to ensure they deliver good outcomes for customers, with a clear focus on vulnerability, ongoing monitoring, and evidence. However, firms soon face the first deadline with implementation plans needing to be ready for FCA review by the end of October.
As the purpose of the protection industry is to reduce harm, it should be in a good position to meet the demands. While there are some challenges, this is a major opportunity for the industry.
But first, let’s look at what changes.
The requirement to self-police
Previously, the FCA had to identify consumer harms, understand the cause, highlight bad practice and then change the regulation to fix this.
Now we’re moving to a self-policing model, as every regulated firm must monitor and evidence itself to ensure it is providing good outcomes. Firms must also identify bad practice in their distribution chain and work with partners to change this. If this is not effective, firms must report the other firms to the FCA.
While most will say delivering good outcomes is what the protection industry already does, firms now need to evidence this is taking place. This will require a large amount of work to collate data and demonstrate compliance to regulators.
Notably this is far harder in a distributed market, where the intermediary understands the consumer needs but presently does not share this with the provider.
The requirement to evidence consumer characteristics
A major change is the requirement to understand and record consumer characteristics – previously referred to as vulnerable customers.
As approximately 50% of customers are potentially vulnerable, detection processes need to encompass all new consumers as there’s no easy way to identify the 50%.
Unfortunately, most organisations who do this pre-selection are returning low or zero cases of vulnerability compared to the FCA Financial Lives survey.
In addition to the vulnerable, firms must provide a process for any consumer who wants to divulge their characteristics/vulnerabilities.
Firms must also understand the characteristics of any consumer who experiences harm or a bad outcome. As it will be very difficult to retrospectively understand those characteristics and circumstances, it is far easier to collect this information at the time of sale.
As providing this information is voluntary for consumers, the regulations make allowances by not requiring this data for all consumers.
The requirement for technology
Within protection, health and lifestyle data is collected as part of underwriting, but this is typically not available or shared with intermediaries.
Traditionally intermediaries build relationships and understand their customers, but this is subjective, rarely recorded and hardly ever communicated. This traditional approach will be difficult to continue as it will not provide the data for evidencing for the Duty.
While many will want to continue as they are, Consumer Duty will likely dictate a move to a digital solution in order to communicate consumer characteristics and meet the reporting requirements.