In December, the FCA set out its findings from a multi-firm review assessing how firms satisfied themselves that they had appropriately implemented a key aspect of the GI pricing practices requirements. The review was in relation to the pricing rules and how both insurers and intermediaries satisfied themselves that they do not discriminate against motor and home insurance customers. The review did not cover the other aspects of pricing practices such as product governance, reporting and auto-renewal. Whilst the findings will be of interest to all firms in the insurance sector, the nature of the requirements and close alignment to Consumer Duty means that the findings will be of wider interest to all firms as they implement the Consumer Duty in advance of the July deadline.
Background
At the very start of 2022, the FCA introduced new rules that prohibited firms from systematically discriminating against motor and home insurance customers based on the number of years they have held their policy, including at renewal. With striking similarities between this and Consumer Duty objectives, the GI reforms were designed to:
- Promote competition through ensuring consumers have a realistic picture of the long-term cost of their chosen product when purchasing it and incentivising firms to compete for consumer business on this basis
- Protect consumers by ensuring that they are placed in a position where they can understand the long-term cost of their product
- End price walking by ensuring that consumers renewing their home and motor insurance pay no more than they would as a new customer, when using the same distribution channel
To assess how well firms had implemented these new forward-looking requirements, the FCA undertook a desk-based review of a sample of firm's senior management pricing attestations and the evidence that was provided to support the attestation.
Overall, the FCA found that based upon evidence provided, most firms in the review had taken appropriate action to comply. However, it has noted examples of poor practices.
The key themes of the findings were in relation to:
- Accountability
- Maintaining appropriate evidence
- Ongoing compliance
- Incentives
- Breach reporting
Key Findings
One of the central tenets of the requirements is for an individual to attest that the firm has complied with the pricing rules. The attestation was generally provided by the Chief Executive, an Executive Director or the Chief Underwriting Officer. However, in a small number of cases the individual providing the attestation on behalf of the firm did not have appropriate seniority within the business (e.g an SMF) and/or held a compliance role.
This finding provides three Consumer Duty insights:
- The FCA views individual accountability as a key supervisory tool in ensuring that firms are placing appropriate importance on regulatory change — and that firms continue to meet the regulations on an ongoing basis
- Change of this nature should be driven and owned solely by the first line of defence (i.e. the business itself). Although compliance, as the second line, plays a key role in both support and oversight, ultimately accountability must be appropriately senior and from within the business
- Beyond the business itself, it provides insight for the Consumer Duty Champion as they consider how the board will formally confirm, in 2024, that it is comfortable that the firm is delivering good outcomes
A firm is required to make and maintain evidence to capture how it satisfies itself that it is complying with FCA's GI pricing requirements. From the firms sampled:
- Only 11 of the 66 (17%) met the FCA's record keeping requirements
- For 28 of the firms (42%) the information was not sufficiently relevant or granular for the attestor to confirm compliance with the requirements
- The final 27 firms (41%) fell short by not providing evidence that the controls were working as intended
The critical finding here for firms (including those implementing Consumer Duty) is the need to maintain an appropriate framework that captures the evidence to support the attestation from the business itself. This is essential. Firms cannot simply attest or assert they are delivering good outcomes, critically, they need to be able to show the significant and objective evidence that proves it.
The FCA assessed the policies and procedures firms had in place to ensure ongoing compliance. Most firms provided evidence of pricing governance and controls, and procedure documents to demonstrate their ongoing oversight and compliance processes including management information (MI) requirements. However, with 24 (36%) of the firms reviewed, the documented governance, systems and controls were insufficient. The FCA also found instances of an appropriate control framework being in place but not being utilised. Equally it found issues where firms stated that they had monitoring/QA and/or MI reports in place but there was no detail provided on assurance testing to prove it was an appropriate oversight and compliance framework.
Both with GI pricing, and Consumer Duty more broadly, the FCA expects firms to test whether the controls are working with appropriate, objective and robust governance arrangements. This will include appropriate use of internal or external assurance to provide additional comfort— not as an alternate control.
When calculating the equivalent new business price, a firm must include any cash or cash-equivalent incentives. This is designed to prevent firms from subverting the intended outcomes of the new rules by overly relying upon a customer's behavioural bias to win business. Of the 66 firms in the review, 22 gave their customers some form of pricing incentive during the first six months of the year. Whilst the review did not identify any material issues or concerns, interestingly, the FCA observed that many firms have now discontinued the use of incentives altogether. This is likely to be because firms now also have to offer the incentives to renewing customers as well as new business customers.
From a Consumer Duty perspective, this is an excellent example of firms taking a more holistic view on their product proposition, pricing transparency and the ability for customer to make comparisons and therefore informed decisions. It illustrates firms employing thinking beyond 'can we?', and instead 'should we?'. This recognises the behavioural biases that can exist around up-front incentives and illustrates a strong alignment to the incoming cross-cutting rules.
As part of its review, the FCA asked firms to detail any breaches of its pricing rules which had been assessed as non-reportable to the FCA. This was designed to ensure that firms can correctly calibrate the boundary between non-reportable and reportable breaches. Nine firms provided details of potentially reportable breaches but, to finish on a positive note, the FCA agreed that all firms were correct in their decisions.
This will provide reassurance for these GI firms but, under a similarly subjective regime such as the Consumer Duty, firms will need to gain comfort that they are appropriately reporting where material good outcomes cannot be evidenced. From the work the FCA carried out on GI pricing, it is clear that this is an area of focus. The FCA will expect breach notifications after July and therefore firms will want to ensure they capture an appropriate level of detail to capture why (or why not) they decided to notify the FCA on Consumer Duty breaches.
Next Steps
On GI pricing, the FCA will continue to monitor firms' compliance by actively reviewing and scrutinising firms' attestations and the systems and controls that underpin these, aligned to their regulatory reporting on pricing data. The FCA will also expect firms to make improvements to address the issues identified in its findings.
Firms in all sectors are currently working at pace to implement the Duty as robustly and efficiently as possible. However, they should consider these findings and determine the degree to which in-flight enhancements to their plans, policies, procedures and overarching systems and controls may need to be made to maximise their alignment to the FCA's detailed expectations. For further insights and articles on Consumer Duty, please visit our dedicated hub.
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