This is the second post covering our January Protection Forum. In this section, Stacy Reeve of AMI and Johnny Timpson clarify aspects of the new FCA Consumer Duty that our attendees had questions about including measuring consumer understanding, budgeting and enforcement of the new rules, and definitions.

Considering that we have a national literacy age of nine years and a numeracy age of ten years, so how are we meant to manage that in terms of providing communication that consumers will understand?

Ian McKenna:

Johnny, particularly with your Financial Services Consumer Panel hat, can I ask you to think about this when you’re considering these rules. I mean, listening particularly to the points about making sure that communications are understandable. We have a national literacy age in this country of nine years. We have a national numeracy age of ten years. With the greatest of respect to the FCA and everyone else involved, is it, should not it be the duty of this industry to reflect those failings in education.

What worries me is, well, are we then… If that’s not the case do we have to test our clients for their literacy age and their numeracy age and actually say, well, you know, we can only communicate you a product, we can only offer you a product or a service if you meet certain numeracy or literacy standards? Because just listening… and I don’t question the need to make things understandable. But by the same token, I think in what the FCA are saying, there they are laying out an objective which because of the educational failures in this country over the last 50 years, we can’t do anything but fail.

You know, those numbers I’ve just quoted you, nine for literacy, ten for numeracy, I’ve just double checked while I’m sitting here, and I just don’t think it’s reasonable for any regulator to… the burden that is being asked is unrealistic. So, I think there needs to be some sort of tempering unless we’re suggesting… And I’ve just seen also apparently the average literacy age of a Sun reader is eight years.

So unless we are suggesting that every single communication should be understandable by an eight year old, I worry how we get to deliver on all of this. And what I’m saying is, I think we need some sanity in this. Absolutely buy into why everything that’s being said is laudable. But if the average individual in this country has a reading age of nine and a numeracy age of ten, what chance does the industry have of delivering to the objectives that have just been outlined? And I know it’s not you, but I’d really like you to take that back to the consumer panel.

We should be making sure that customers understand the process and the products we’re recommending.

Johnny Timpson: Thanks more than happy to do that, Ian. And, I’m happy to take back the all the comments that we get in response to this call as well. But I guess it’s probably just saying that we already have this as an issue because it’s part of what we should be doing in customer vulnerability. We should be just making sure that customers do understand the process we’re following, the needs we’re identifying, the solutions that we’re recommending and our explanation of how those solutions can be accessed and will work so. But fair comment.

Scott Taylor-Barr: In regards to funding, are the FCA proposing to increase budget for enforcement or will we be spending a lot of money adding rules for those who care to follow them and for others to carry on ignoring?

The FCA has said within the consultation that the costs internally in the FCA will be absorbed within existing resources and that will form a key part of its regulatory landscape of authorisation, supervision, policy, and enforcement. So we shouldn’t see an increase in fees.

The AMI website

Stacy Reeve: The FCA has put a bit on this within the consultation. It is a concern that AMI has in terms of, obviously the FCA feel like they need to put this Consumer Duty in force because the previous requirements have not created the desired outcomes. So we are concerned, particularly with the cost to the industry in terms of how the FCA will supervise and we will be putting in our response again, how key it is for the FCA to supervise and enforce thoroughly. The FCA’s said within the consultation that the costs internally in the FCA will be absorbed within existing resources and that it will form a key part of its whole regulatory landscape. So authorisation, supervision, and policy and enforcement. So we shouldn’t be seeing increases to fees because of this, and we’d certainly challenge that if that was the case based on what the FCA has said. But yes, that is a concern that it is going to need that supervision and enforcement. Otherwise, we’re not going to get where we need to be.

A historical issue with Family Income Benefit is that at the claim stage, the beneficiaries are given the option of a lump sum and they may have difficulties managing it. While the lump sum may be beneficial, it needs to be offered in conjunction with advice so claimants make the right choice for them rather than just taking the option that makes it simple for the insurers.

Emma Thomson:

There’s many of us on this call that are massive advocates of the benefits of Family Income Benefit. But the historical issue has certainly been that at claim stage, the beneficiaries are often given the option of taking a lump sum. Now, the adviser could have spent a long time at outset, obviously talking to their customer about the benefits of family income benefit.

There may have been family issues in terms of mismanagement of money, gambling addicts, people that really just cannot manage money properly. So their partner has made sure that their family income benefit is put in place to make sure that that money is there for the long term.

Now, if the insurer obviously offers that person who’s not good with money, “would you want a nice £200,000 lump sum or do you want an income over the next 10 years?” What are they going to do? They’re going to take that lump sum, which is going to be difficult for them to manage, they might fritter it away, and it’s actually undone all the good work and planning that the adviser did with the policyholder at outset.

And I just think that whilst absolutely circumstances may change in that period, and by the time a claim has come to pass, a lump sum might actually be advantageous and necessary for that family. But that should be offered in conjunction with advice so that the beneficiaries are offered the best option for them and not be tempted with this lump sum.

And the only real reason that insurers do that, from what I’ve been told historically is that, well, it’s obviously just good for them in terms of managing the claim. It gets off their books. Lump sum paid out, move on to the next. Rather than obviously an ongoing claims management process, which you would obviously have to undertake as part of a long term FIB payout, if that makes sense. So I think that’s something that really needs to be addressed.

It’s been cited to me by multiple insurers that they don’t push FIB, and some don’t even offer it, because of the high percentage of people converting to a lump sum when the claim takes place. Consumers don’t think that IP pays out, which is not true, and so they have an innate leaning against products that will help them.

Ian McKenna:

Very supportive of Emma’s comments, but I think there’s something else. Two things to add to that. Firstly, it’s been cited to me on many occasions by multiple insurers that one of the reasons that they don’t push Family Income Benefit more as a product and one of the reasons some of them don’t even have it as a product because there is such a high percentage of people, you know, converting to a lump sum when a claim takes place.

So there’s almost the argument of why do we put all of that infrastructure in place when we see that very regularly, people commute to a lump sum. But I do want to come back to predecessors of journeys in on the financial services consumer panel.

About five years ago, we were challenging very hard, why was more CII being sold than IP? And I think the overwhelming majority of people on this call will agree that IP really should be the first port of call. You know, dare I suggest that one or two people in that group at that time might have had an agenda which was not entirely complimentary about advisers?

What was really interesting, though, when they did that project, they actually commissioned some really good research, which sadly the consumer panel quite stunningly the research, if you track it down, it brought out some really valid points from consumers, which the then consumer panel, and I know it’s different people now, completely ignored in their conclusions, but the points that were relevant were and don’t shoot the messenger. I’m just repeating what this research said.

Advice consumers, one of the main reasons people opt for seeing over IP if they don’t believe that insurers will keep on paying claims year in, year out. Now I think there’s a lesson and we all know Adam, I think is it 38 years the longest IP claim we’ve identified? It’s certainly in the mid-30s.

[Adam Higgs: 36 years.]

Right? Ok, so we know that’s wrong. But I think when we’re looking at these issues and again, this is something… That research was conducted, the consumer panel own it and there are some great conclusions on it. But I think that needs to be factored into. There was an awful lot of consumer behaviour around why they weren’t going. Because it’s how do you deal with the situation where the adviser can absolutely focus on what’s in the customer’s best interest?

But if the customer has an innate leaning against what’s in their best interest, that’s a huge challenge. And I really think that research should be reviewed, re-examined and there are questions. What does that really tell us and we should put it into practise?