Clifford Chance

Following a statutory mandate under the Financial Services Act 2021, the Financial Conduct Authority ("FCA") published a consultation paper in May proposing a new Consumer Duty that would set higher expectations for the standard of care that firms, including insurers and intermediaries, provide to their retail consumers. 

The Consumer Duty consists of three features:

• A new 'Consumer Principle' that will represent the overall standard of behaviour the FCA expects from firms servicing retail clients. Stakeholders are invited to comment on two alternative options: a duty to "deliver good outcomes for retail clients" or "to act in the best interests of retail clients" with the latter amplifying existing requirements under FCA conduct rules for insurers to act in the best interests of their retail clients.
• 'Cross-cutting rules' that describe the FCA's expectations of firm conduct and how the Consumer Principle will apply in practice. Among the most significant proposals levied by the regulator are requirements for firms to (i) act in good faith; (ii) avoid causing foreseeable harm to customers and (iii) take all reasonable steps to enable customers to pursue their financial objectives.
• 'Four outcomes' which set out more detailed expectations for how firms can comply with the Consumer Principle and cover the following consumer-focused objectives: (i) clear customer communications; (ii) products and services designed to meet consumer needs; (iii) effective customer service and (iv) fair value in pricing.

The FCA's Consumer Duty proposals are broad in scope and, if adopted, will apply to direct insurers but also intermediaries given their involvement in the supply of insurance products and services to retail clients. As the FCA's proposals apply even where there is no direct relationship with the end customer, this then potentially captures wholesale markets where a firm is part of a distribution chain for retail products or services.

Changes for every level of an organisation

The FCA describes their proposed changes as requiring a "significant shift" in the culture and behaviour of firms, with a firm needing to consider the new measures “at every stage of its processes and at every level of its organisational structure”. The FCA considers that, in many cases, firms will need to exercise more judgment in determining how their behaviours, policies, and processes help to achieve positive outcomes for consumers. The degree of overlap with the new Consumer Principle and the FCA's current Principles of Businesses may prompt firms to question what the new principle requires over and above existing requirements to treat customers fairly.

In the application of the new Principle, the FCA refers in several places to "reasonable steps being taken" and to the "reasonable expectations of consumers" regarding the products and services provided to them. Firms may want some additional certainty regarding how reasonableness will be judged, either in the more detailed rules or guidance from the FCA. There is also reference to a requirement for firms to "act in good faith" but it is not clear how this standard will be judged and whether existing legal concepts of good faith will be applied.

The consultation also questions whether individuals should be empowered to initiate private proceedings against firms for loss caused by a breach of the Consumer Principle (or any of the FCA Principles for Business). If implemented, this right of redress will undoubtedly heighten the accountability of firms to consumers.

Current proposals raise difficulties

The FCA's proposals present challenges inherent in principles-based regulation, including difficulties in identifying a clearly defined set of rules and standards to comply with. But it also raises questions on what effect such an open-ended legal liability will have on the insurance market:  will it lead to more homogenised products and pricing? Or will it put pressure on profitability, drive consolidation and reduce competition? Alternatively, it could help present a more positive public perception of the insurance market if better consumer outcomes are a result.

The FCA requests feedback by 31 July 2021, with new rules expected by 31 July 2022. As the consultation does give rise to several issues, we encourage insurers and intermediaries to engage with the consultation process and we would be very happy to discuss any proposed feedback response.