Modern Insurance Magazine Issue 62

FEATURES
The Unintended Consequences
of Consumer Duty
The Financial Conduct Authority’s Consumer Duty came into force on 31 July 2023. However,
barely two months since its introduction, there are already worrying signs of unintended
consequences.
Consumer Duty requires firms to put
customers first in every area of their
business, as well as providing proof of
having done so.
Widely regarded as one of the most
substantial regulatory changes to impact
the insurance industry for decades,
the regulations have demanded many
insurers completely transform their
claims strategies, products and selling
policies in order to provide ‘fair value’ to
customers.
However, while the new regulations
are no doubt well-intentioned, the
ramifications could spell bad news for
both insurers and policyholders alike.
Crack down
With the Financial Conduct Authority
(FCA) promising to crack down on
companies that fail to comply, the
pressure is being applied to those
working within the insurance sector.
Already facing a severe skills shortage
following the ‘Great Resignation’ that
came about during and following
COVID-19, insurers could find themselves
facing an even greater challenge around
staff retention.
A study conducted by CoreData back
in August found that 11% of financial
advisors in the UK said that they were
considering leaving the industry as a
direct consequence of Consumer Duty.
Worryingly, 35% said it was having a
negative effect on their mental health,
while 63% said it was hindering their
ability to do their job. Nearly half thought
the new regulations would do more harm
than good.
Fall-out
If these findings are mirrored in the
insurance sector, the fall-out could
be stark. According to the Office of
National Statistics, there were more
than five vacancies for every 100 jobs in
the sector in the second quarter of last
year, while The Skills Shortages Report,
published by ECI, found that insurers
were facing the biggest recruitment
challenge in the UK, with just 570
LinkedIn searches per month compared
with over 46,000 job advertisements.
However, the FCA has insisted that
recruitment and retention problems will
not be considered a mitigating factor in
non-compliance, warning insurers that
they need to ‘manage the issue before
problems occur’.
Resilience
In a letter to CEOs last month, Matt
Brewis, the FCA’s Director of Insurance,
warned that a lack of operational
resilience could impact an insurer’s
ability to meet Consumer Duty
standards.
He said, “A significant part of our
activity over the next two years will be
to test firms against our priorities and
expectations. We will also continue to
use data to identify outliers and, where
firms are not meeting our rules and
expectations, we will take action”.
Meanwhile, another unintended
consequence of Consumer Duty could
be higher prices for customers, with
some experts suggesting that the
operational costs of meeting the new
regulations will be passed down.
Who pays?
Discussing Consumer Duty at the Defaqto
Smarter Financial Decisions Conference
in September, Jeffrey Mushens, Technical
Policy Director at The Investing and
Saving Alliance, said: “Who pays? It is
always the customers. The firms will pay
the initial costs, but this will eventually get
passed onto the customers”.
A report prepared for the FCA
Practitioner Panel in 2021 appears to
have accepted this. It acknowledged
that complying with Consumer Duty
would add ‘significant cost’ to firms,
and said that ‘these costs will be passed
on in some form, to either shareholders
or customers. Where markets are
competitive, the balance is likely to tilt
more towards these costs ultimately
being borne by customers.’
I Love Claims is set to explore the
implications of the new consumer
regulations and much more at its
forthcoming Risk and Compliance themed
event, ‘Consumers – more than just a
duty’, taking place on 15th November in
Manchester.
Email Rachael Hunt to find out more:
rachael@iloveclaims.com
MODERN INSURANCE | 49