This is the first post in a series bringing you the great conversations from our July Protection Forum. In this section, Johnny Timpson and Robert Sinclair from AMI explained the new FCA Consumer Duty, how it came about, and how it will affect the protection community.
I would urge everyone to pay close attention to this consultation. The FCA has found that only 35% of consumers felt that financial professionals were acting in the best interest of their clients. This is an anticipatory duty that says when managing data you have to anticipate the harms and the needs of your customers and be prepared to respond to them. We have to enable consumers to pursue their financial objectives and always act in good faith. The overarching objectives are: communication, designing products and services around customer needs and sold to those whose needs they meet, and fairness in the price and value of products. Companies have decided to accept fines for poor conduct as a cost of doing business, and that is not sustainable. It is surprising that after many years of campaigning, we still have only a handful of companies that have a credible annual benefit statement in the individual protection space.
Johnny Timpson:
I’m Johnny Timpson and I’m an independent consultant. I wear a couple of hats and obviously I chair the Access to Insurance Working Group, and I’m currently the Government Disability and Access Ambassador for Insurance. I sit in the Financial Services Consumer Panel and I’ve got another couple of professional body interests. Let me say, these comments are my comments, but I would ask everybody to really pay attention to this consultation. This is probably the most important regulatory consultation that, frankly, we’ve had in 20 years and is actually interesting. I joined the Transparency Taskforce discussion last night for about two and a half hours, and they basically reached the same conclusion.
So in order to understand the customer duty, I think we need to all understand its genesis. Where did it come from? And it basically comes from, the kind of pensions mis-selling that we saw in the 80s and the 90s and the fact in the 90s that indictments just did not perform. Because that gave rise 15 years ago to treating customers fairly as we know it now.
And the six outcomes that were required in terms of how, financial services and particularly protection, as we’re talking about today, should be treating customers. And, you know, those outcomes where having a culture and governance that had fair treatment of customers at the very heart of everything that we do. The second one was having products and services that are designed to meet the needs of customers and make sure that customers and target markets are clearly identified and the solutions were fit for purpose for those identified customers and their needs. Clear communication: customers provided with clear communication and kept informed pre the sales process during the service and through the lifetime of the product. And then it was advice and suitability. So making sure that advice takes account of all circumstances.
The next one was performance and standards. Products had to basically do what they said on the tin and perform and meet customers’ expectations. And then there was a piece on claims and compliance and charges– don’t put unreasonable barriers in people’s way, making sure that it was easy for people to switch and claim and make sure that customers were assisted wherever possible.
So that was 15 years ago. Then six years ago, we had the first Customers Vulnerability Paper, paper number eight, which introduced us to customer vulnerability because that flows into this duty as well. And then after that, five years ago with the senior managers in three years ago with insurance distribution directive. And today we’ve now got the first Consumer Duty Consultation Paper from the regulator. The consultation, this piece closes on the 31st of July. I’d encourage you all to read it and to– you don’t have to answer all the questions, but certainly respond to where you feel appropriate. And that will be followed by another consultation, as Adam alluded to, and we’ll have an FCA response at the end of the year.
But in addition to this proposal to have a consumer duty, you bear in mind that under insurance and agency law we already have an inherent duty to act in customers’ best interests. We’ve got the CII CIA member, the CIA Code of ethics requires you to act in the customer’s best interest. And indeed, under the COBS, ICOBS and NCOBS rulebooks, already have “acting in customer best interest” requirements. So why do we need this? Well, we need this because when the FCA were doing the Financial Services Financial Lives Review and they were consulting consumers, only 35 percent of consumers thought that we actually is an industry profession, acted in their best interest. So we need to stand up. Despite the fact we’ve had lots of regulation, we’ve not had a great deal of proactive enforcement that’s made a big deal, a difference.
Because we’ve still got a pile of issues, the business interruption insurance, I guess the issue is the one that’s probably impacted the industry reputation most. And most recently, and it’s incredibly high profile and frankly has diminished the reputation of the insurance industry across the piece. So this in many respects is a response to this and more. Equally, we had in Parliament and just at the beginning of this year when the Financial Services Bill 2021 was in its third reading, we had Parliamentarians voting to introduce an actionable duty of care. And obviously that’s still there.
And what we have today basically is an FCA response, I think, as much as anything else to that parliamentary intervention. So what is it? Well, this is intended to be an overarching principle that will sit on top of treating customers fairly and indeed replace some of the principles in time. Now, that would be welcome. And firms are required to take all reasonable steps to avoid causing foreseeable harms. And that basically means that this is an anticipatory duty. So when you’re talking about big data and managing data, you have to basically anticipate the harms and the needs of your customers and be prepared to respond to them.
We have to basically enable consumers to pursue their financial objectives. We have to always act in good faith. And it’s requiring four overarching outcomes. Communication: equip consumers to make effective, timely and properly informed decisions on the financial products and services they’re engaging with. Be aware of their options, the costs, the risks and the benefits of these products. But this is, again, a communication duty to be clear, accessible all the way through the customer journey, the customer lifestyle.
Products and services are to be specifically designed to meet the needs of consumers and sold to those whose needs that they are actively meeting. That also speaks to the vulnerable customer agenda, which has cost inclusion by design and taking input from lived experience into account as well, and brings that guidance, if you like, into regulation. In terms of customer services, it’s asking us to make sure that services meet the needs of consumers, enabling them to realise the benefits of the products and services that they’re buying and able to do so without any hindrance from the product provider. And it also speaks importantly to price and value. And there’s been a lot of focus on price and value in the general insurance and I’m conscious there’s dual pricing ongoing in the protection marketplace as well.
People need to be very mindful. Do not think for one minute that price in value stops at the GI world. It doesn’t. It extends to all financial services, products and services. So price and value is important. Price and value in services. And you need to be fair. We need to present fair value for consumers right the way through the product journey. In terms of the actionable duty that’s touched on the consultation paper. But the regulator basically is not advocating that at this point in time.
But why this is here is basically because consumers worldwide, but particularly in the UK, consumer groups and charities have been, over decades, mindful that a lot of institutions, because it is actually focused on institutions, basically are prepared to accept fines for poor conduct as just a cost of doing business. And you get to a point that’s no longer acceptable because who picks up the tab there? It’s the shareholders, or if you’re mutual it’s the members of your organisation. So there needs to be more personal accountability for those who set and manage policy within firms. And this is really what to some extent, what the actionable duty is speaking to. But, bear in mind that this consultation comes just as we really are hoping to see the implementation fully of IDD, the senior managers’ regime.
We’ve got the full value consultation piece of regulation coming through and we’ve obviously had vulnerable customer final guidance. For me, I think I’m actually in the scheme, having reflected on this at length, I actually favour having this customer duty, particularly if it does see a couple of the principles of TCF being replaced. I certainly do think that we need to do far more on value, we certainly do need to do far more and lifetime communication. From a protection perspective, I find it quite odd that only a handful of companies after years of campaigning, I have to say, by Ian and others, we still have only a handful of companies that have actually a credible annual benefit statement in the individual protection space.
And we’ve got far too many people who have occupational benefits that frankly just don’t know the benefits that they have and what they’re entitled to, whether entitled to it. We have added value services and employee assistance programmes that are underutilised because of poor communication. So lifetime communication is something that we really do need to address. But that’s probably enough for me at this point.
What the FCA is looking to do is change the way that firms should be thinking about the customer and how they put their service proposition together, and they’re committed to come out with an amended way that they’re going to supervise. There has been a huge change in the leadership at the FCA, and they want firms to be creating and selling products that they would be happy to sell to their loved ones. The product design will have to be focused on there being a genuine customer need and structure, and on ensuring that when the product is put together that it works effectively. We still have problems with dual premiums and price changing, and we need to be making sure that everything being done is transparent and justifiable. There is a clear concern about how firms use big data to produce answers that are not in a customer’s best interest. There has to be evidence that cohorts of customers are treated equally. There is a clear way the regulator expects people to behave, and they are focused on consumer outcomes. They’re putting a significant cost in front of us in raising the bar of conduct. My challenge to the regulator is to actually have feet on the ground and be actively enforcing this.
Robert Sinclair:
I think Johnny has given a really good comprehensive coverage there of what this means and why it would come to it, but maybe I can take this and I’ll try and maybe go down to the weeds a little bit as well, because I think some of the rationale as to why we’ve got to here is important. But similarly, I think the consultation is important because it does give the industry the chance to still make some input to the choices, although I think the FCA in terms of the discussions they’ve had and they did a one hour podcast not long after it was introduced, that sets out their thinking quite clearly. The document itself sets out the rationale really, really well. And as Johnny has said, I would encourage anybody who’s involved in the industry to read this because I agree with Johnny.
This is one of the most fundamental changes in the shape and structure of how we’re going to be regulated since regulation began. I was part of the team that was at Midland Bank. For those of you long enough to remember Midland Bank back in 1986 as we implemented the Financial Services Act originally. So I was responsible for training that into the whole of the bank. And this, I think is one of the biggest seismic changes I can see in that period, because what the FCA is looking to do is change the way that firms should be thinking about the customer and how they put their service proposition together. And asking the firms.
And they’re then committing as part of the second part of this process, to come out with an amended way that they’re going to supervise. So when we get this cascade of papers, I think over the next 12 months, we’ll see a succession of shifts and movement over how they’re going to operate. And we have to remember, this comes off the back of them being very roundly criticised by two judicial reviews in terms of the London Capital and Finance and Connaught Group. And we still have the Woodford Review to come where effectively the FCA have been found sadly wanting in their actions, by the way that they’ve authorised and supervised firms. And therefore they have taken out actually all of their senior management team at the top now.
There’s been a total replenishment of the top eight people at the FCA with new people coming in now. And those new people see the need to change this fundamentally in terms of how they operate, in terms of how they expect firms to think. And you listen to Nisha Aurora, who’s the policy director, talking about this. And what she’s saying when she speaks is the expectation that actually they want firms to think about “are you genuinely happy about the products you sell and the way you sell them? Would you sell these to your family? Are you proud enough to stand behind them and say, yes, everybody I know should have one of these?” Because if not, you should probably not be doing it.
And that is not a shift for many people in this industry, but for those people who work in other parts of the panoply. And, the financial sector has expanded significantly over the last few years. And you now have people like debt management people coming into the consumer credit regime that they dislike intensely. You have high cost credit, which has caused significant damage to homes, to people. We have the CMC regime, which many people see as helpful, but many people see as quite virulent, given the way that it works and has damaged certain elements of the mortgage sector.
In particular, by the way, they’ve taken claims across the interest-only mortgages into the courts rather than using the conventional mechanisms of the ombudsman scheme. But the contract here for firms is going to be different because the expectation is, I call it this is like putting TCF on steroids, and it’s taking all of those building blocks and saying “you’re not just going to have to think about how this works, you actually have to live and breathe it.” And the expectation is that the people in marketing cannot just design a product and find somebody to flog it to you. The product design will have to be focused on “is there a genuine customer need and structure? And when we put that product together, will it work effectively?” And that changes the landscape.
And Johnny talked about some of the things that still cause trouble in our sector and price walking and price changing is an issue that sat in the GI sector that is now being dealt with quite surgically by the regulator. We still have this issue of dual pricing of premiums and wooded premiums that sits as part of some firms’ service propositions.
And I think we have to stand back and look at this from two sides. One is from the distribution perspective of: why are we taking that level of commission and is it genuinely justifiable? And is the added value we’re giving by taking that additional commission justifiable fully by way of the process we’ve got? And is everybody in the management team and the executive team all the way up to the board– is it transparent, exactly what we’re doing and how we’re doing it? And I think an insurer has to look at it and say, “well, if we’re actually acquiescent to that, are we by doing it actually acting and by bribing firms to come to us, by actually giving and allowing that premium to happen through the process?”
Because these are genuine questions we should be asking ourselves if we’re serious about cleaning up an industry that the regulator says is still not in the right place, because generally that is what the regulators say here: You are still not acting in the right way because they’re giving us a choice of saying, are you acting to deliver good outcomes for retail clients or do you have to act in the best interests of retail clients? Now, they say those things are interchangeable and the words are not different.
But I believe actually they are very different because delivering good outcomes is a measure of what the end result is. Acting in the best interest is at the front end about how you think about how you deal with the customer. And we’ve got a choice here and they say they will place this will be no different. I think it will be different because it will change what they will be able to do by way of supervision and enforcement. And when they talk about this, they are talking about how they use these tools for supervision and enforcement, because for those firms that don’t come on the journey and get themselves in the right place, that is where they will end up quite quickly I think under all of this. I worry about the other element of this, which is perhaps relevant to the sector as well, at the start of their discussions, it comes out very clearly out of the consultation paper, is there is a clear concern about how firms are using big data and how firms are using big data and information asymmetry to perhaps produce answers for customers that are not in their best interests.
So they’re going to really challenge how firms use data to arrive at either targeting a customer or pricing a customer. And they’re not saying that every customer has to be treated equally. But what they are saying in terms of cohorts of customers, you have to be able to evidence that you’re treating them in the way that is fair and actually you’re giving a good outcome for that cohort of customers. So I expect there to be further debate and discussion around all of that. The element of fair value is another interesting element, because who decides what fair is? And fair is a concept which for some people fair is everyone gets the same price, for other people, fair is that is suitably priced for the risk that people are carrying.
And in the insurance sector, it is all about risk. And actually in the Intermediaries world, it is about risk as well, because you have the risk of will the customers stay in your books? And you also have the interesting element now, where today we have liable capital in the retirement interest-only mortgage market for the first time, bringing out a renewal commission that says “if you commit to that customer every year we’ll pay you.” It’s your commission of 13 bips. Now, that’s a sea change in the mortgage market that we might have to think about how we manage the ongoing relationship with customers who are introduced through Intermediaries, but then the insurer sees them as owning them, or do they? And how do we work together to make sure the ongoing discussion and debate with the customer about appropriateness and pricing and all of these things is right, because I don’t think we can be in the world anymore where we give advice, treat it transactional and walk away and think we don’t have to have any further discussion with that customer again, because I think this customer best interest and good outcomes change gets us a different place around all of this.
I think also as we just maybe open this up to questions and see if Johnny and I come up with some interesting answers around this is that I think firms will have to think about how they deal with the senior management regime, and they are also saying that this is not something that can be allocated to one senior manager. They expect it to be crosscutting and probably built into everybody who sits in the senior management regimes statements of responsibility. So it won’t be allocated to one particular place because it sits all the way up the hierarchy into everybody around that. But I do believe that in terms of helping the staff all across the piece understand the people will have to change where they are on their certificate.
There are rules around conduct. So the rules will have to be amended to deal with all of this, because I think this is such a clear cut change in the way that the regulator expects people to act and behave, that they are focussed on the consumer outcome, not on what might be in the best interests of the firm or the customer, that we will have to think about how we do all of that. By way of criticism, however, I do believe that what this does and the FCA are quite clear about this is what they’re saying is that they are doing this to raise the bar and it’s not about judgement or not about box-ticking. They want this to raise the bar on where we are today. Now, my concern is that they haven’t evidenced where people have failed to meet the bar that they’ve already set. I believe that firms that really failed here are way below the bar. In fact, I think most of the firms that really fail at all of this are at ground zero. Most of the firms that will be involved in this call and this discussion are way above that. And actually probably in terms of their working behaviour, are meeting the standards that are required by the FCA. And those firms are not the firms that cause the bad outcomes for consumers of over the last decade. However, what they are seeing is they want to raise the bar again.
But in raising that bar again, that puts firms a significant cost again and also puts a challenge in for all of us about how profitable we can be and do we want to stay in the game. And I think the challenge for manufacturing will be how do we make sure that distribution can stay in the game but at a price and value with the work that will have to be done in order to deliver the best outcomes in the best way with all the evidence that will be required in all of this structure.
So I think I still am concerned that with the regulatory failures that are driving this, which are things like on capital of finance, Connaught, Woodford and others, we have actually seen an FCA that has had bums on seats for too long pontificating, and not feet on the ground supervising. My one challenge to this is if they are going to take this and we as the industry, accept it and buy into it, we do expect a regulator with feet on the ground out there killing off the very people who do bad things. So that those who actually aspire to be above this enhanced level can deliver the right outcomes for customers in a great way. But those that get in the way and do damage are actually genuinely punished and taken out really quickly and surgically. And I suppose that’s the challenge. We will be laying back into the regulator as part of this.
The regulator said that this duty will not act with hindsight, and will not remove the consumer’s responsibility should they act against their own interest. It needs to be easier for consumers to register a complaint and have that complaint dealt with. The financial services compensation scheme is not sustainable in its current format.
Johnny Timpson:
I’d have to say I agree with that. I think it’s also important to look at some of the questions in the chat actually, the regulators stated that this duty will not be retrospective and not act with hindsight. That’s important. They also made it quite clear that the duty would not remove the consumer’s responsibility should they make decisions that are, frankly, not in their best interests either. I think that’s worth saying, too.
And I agree completely with Robert’s comments in you. We’ve had a regulatory environment the last couple of years where the regulator has been long on policy and pretty short on enforcement– that needs to be sorted and sorted pretty quickly. And I think, frankly, surgery is needed in terms of the Financial Ombudsman Service, because it needs to be far easier for consumers to complain. And that complaint dealt with quickly because, I mean, we’re looking at some people waiting two years at the minute. And that drives demand for an intervention such as the actionable duty, to be quite frank.
And I think equally we need to realise that the financial services compensation scheme is not sustainable in its current format. And we have a lot of people on this call, you know, mortgage brokers, general insurance brokers, protection brokers that frankly are paying more than your fair share to cover the costs of people acting poorly in other sectors of financial services. And you’re having to basically cover their costs. That needs to be addressed. And we still have probably have two or three years of high cost built into the financial services compensation scheme.
This duty needs to be positioned in a way that it does change conduct across the marketplace. It stops that behaviour that’s frankly costing all of us because, you know, I want to keep financial services accessible to all and to be more accessible to all. And frankly, it’s to the detriment of consumers if because of poor behaviour and the costs of compensation that we see the number of good quality financial advisers, mortgage brokers, insurance brokers, protection brokers, reducing in the UK.
Consumer communication has to be much more transparent and understandable.
Robert Sinclair:
And Johnny, I think there’s one thing as well, which I think comes out of a lot of the stuff we see in the press on this is that whilst they’ve talked about enhancing and changing the rules and making these rules rather than guidance around TFC, the other is that they have very much talked about Principle 7, which is about communications. So consumer communication has got to be much more transparent and understandable. They’re not going as far as saying as to be understood, but they are clear that it should be in language and structures, that customers means they understand what it is they’re getting and what the proposition is.
