Consumer Duty – Q3 2023

Lessons from the insurance sector on the price and value outcome

The FCA’s regulatory approach is intended to lower the prices paid by consumers, although it falls short of direct price regulation - unsurprisingly, given the FCA's often-repeated mantra that, despite its powers, it is not a price regulator.

One key insight comes from the insurance sector - which is an early indicator of FCA intent in relation to price and value because, under the FCA's PROD rules, insurance firms have been subject to some Consumer Duty-like requirements for some time before the implementation of the Consumer Duty regime more generally on 31 July.  

On 29 September the FCA published its final rules relating to multi-occupancy building insurance; from 31 December 2023, the amount of commission, relating to those contracts, which is paid to intermediaries must be disclosed - as well as the amount of commission paid by intermediaries to third parties (including unregulated third parties).  But going beyond disclosure requirements, the FCA also said that it expects commission charges to fall.  That expectation was rooted in the FCA's belief that the levels of commission charged historically do not represent fair value, especially where commission is calculated on a percentage basis such that an increase in premium automatically leads to an increase in commission, without any change in benefits. 

That might make for uncomfortable reading for those in other sectors where fees calculated on a percentage basis are common.  Although there have been many regulatory interventions in the asset management sector - including extensive Market Study work - there has not so far been the same focus on fees charged on a percentage basis as there has been in the insurance sector.  One reason for that cross-sectoral difference in approach may simply be timings: with the price and value outcome under the Consumer Duty only having come into force for asset managers on 31 July, those firms have not had as long to adjust to those fair value requirements as insurance sector firms.  In making changes to their charging structures, firms will be mindful both of their obligations under the Consumer Duty but also the market impact of making changes as a result of the Duty.  Making fair value assessments, recording the basis for those judgements and being mindful of the importance of how to communicate those changes most effectively are challenges which we are seeing many firms face under the Duty.

A broader issue is the FCA's inconsistent approach as between different sectors of financial services.  Banks are waiting for the outcome of the FCA's work on deposit interest rates, and the FCA has told firms in the investment platforms sector that its top key harm is that fees and charges may not represent fair value. The outcomes of the FCA’s work in these sectors may give a good insight into the regulator's approach to the price and value outcome under the Duty.