Under the Consumer Duty ("the Duty") firms must regularly assess, test, understand and evidence the outcomes their customers are receiving. The FCA has published these findings following a request in December 2023 for the most recent Board and/or committee reporting from 20 larger insurance firms. These included general insurers, life insurers, and insurance intermediaries and regulated third-party outsourcers which service insurers. The FCA reminded firms that whilst there are proportionality rules in place, the FCA expects that smaller firms may take a different approach, applying a commensurate level of resource and with simpler governance processes where appropriate. Retail financial services firms in other sectors may also find these observations useful.
Summary of Findings
The FCA noted a wide range of quality in firms' responses including a number of good and poor practices and behaviours and has detailed these observations to give practical help to firms in complying with established rules and guidance.
Overall, many firms need to make improvements in their monitoring to enable firms to determine whether they are delivering good outcomes for retail practice to address concerns related to:
- Excessive focus on completion of processes rather than on outcomes.
- Reporting containing limited insight into actual customer outcomes; and
- Lack of straightforward evidence of where the monitoring has directly led to proactive action to improve the outcomes.
Observations
The FCA set out its observations in relation to the following key areas which we have summarised below:
- Design of monitoring approaches;
- Types of data.
- Interpretation and scrutiny.
- Monitoring distinct groups of customers, including customers with characteristics of vulnerability; and
- Actions taken by firms to address poor outcomes.
Design of monitoring approaches: Firms should aim for a comprehensive suite of metrics, with data required and mapped against each of the four outcomes, and with a clear view of the types of harm that customers might encounter. Whilst it is important to demonstrate that key processes have been completed, in most cases this alone is unlikely to provide insight into whether good customer outcomes have been delivered. For example, completion of a document review alone does not provide assurance that customers are equipped with the right information to make effective, timely and properly informed decisions.
Where firms aim for clearly defined and specific outcomes, they are likely to be able to determine meaningful metrics and data to monitor them.
Types of data: Some firms were unable to demonstrate clear thinking about the categories of data they required and were therefore unable to provide meaningful and comprehensive insights on consumer outcomes. The data should consider the firm's size, client bases and types of products or services they offer and include a more varied, holistic mix of data types; qualitative and quantitative, RAG-rated data, key indicators, trend data and more. Some firms increased emphasis on testing customer outcomes by better understanding customer journeys. The FCA saw examples of clear, risk-based approaches to testing customer journeys (including those for different customer types) which encompass the overall processes and impact on a customer’s outcome. Research determined that firms data is based on repackaging existing data, with limited consideration for gaps or the outcomes it is intended to monitor.
Interpretation and scrutiny: A key purpose of outcome monitoring MI is its ability to facilitate a) the understanding of how products and business processes are working for customers in practice, and b) scrutiny and challenge. Clearly articulated tolerances for key metrics and reporting will enable formal governance to demonstrate effective levels of scrutiny and challenge, with an expectation for firms to provide recommendations and/or actions on data where poor outcomes were highlighted.
Monitoring different groups of customers, including customers with characteristics of vulnerability: Firms should be able to distinguish between the outcomes of customers with characteristics of vulnerability and other customers, and demonstrate comprehensive approaches for monitoring different groups of customers across their suite of outcome monitoring data. The FCA observed that outcomes for vulnerable customers improve when specific, targeted actions are implemented after identifying potential poor outcomes and conducting root cause analysis. Firms were reminded of (FG21/1: Guidance for firms on the fair treatment of vulnerable customers) which sets out the FCA’s expectations for customers with characteristics of vulnerability. The FCA will conduct a review into how firms are acting to understand and respond to the needs of customers in vulnerable circumstances, and share their findings by the end of 2024.
Actions taken by firms to address poor outcomes: Where firms have identified poor outcomes, deeper analysis should be conducted in a risk-based manner to allow firms to further identify where improvements can be made. Limited evidence has been identified by the FCA and firms should take the appropriate action and evaluate the impact of any changes in a comprehensive manner
Four Outcomes
The FCA also set out some detailed findings in relating to their assessment of how firms had approached monitoring against the 4 Duty outcomes.
Products and services: Monitoring needs to consider more than the number and timeliness of product reviews completed to provide better insights. A wide range of metrics provides better insights and is likely to provide better outcomes. Firms should be wary of taking undue comfort solely from a review having been completed.
Price and value: Firms should be monitoring all key elements affecting a product’s overall price and value, including performance data like loss ratios and profitability. For example, some firms also made little or no mention of certain other aspects which determine the price a customer receives, such as commission or charges, or the operational costs in running the product, or key aspects of value, such as the use of overall product benefits.
A wide range of price and value metrics is likely to provide better insights and drive better outcomes. Firms should also make distinctions between products when setting standards or tolerances to ensure more meaningful monitoring of customer outcomes.
Overreliance on complaints data for monitoring value can be misleading. Firms should conduct root cause analysis to gain insights into customer outcomes rather than relying solely on complaint numbers.
Consumer understanding: Many firms could provide evidence of reviewing existing communications to assess whether retail customers were being provided with the right information to make effective, timely and properly informed decisions. However, it was less clear how firms were monitoring that their communications support good customer outcomes. Firms should ensure that there is a clearly mapped customer journey to assist with methodical testing of a varied set of metrics to allow firms to identify and make meaningful improvements to communication approaches to support the consumer understanding outcome.
Consumer support: The FCA continues to see that the insurance sector still suffers from substandard service levels. While all firms had some form of customer service targets or SLAs in place, the basis for these targets or SLAs were unclear and in some cases were unlikely to meet reasonable customer expectations. Again, a clearly mapped customer journey will allow firms to monitor more effectively for different types of customers to identify specific barriers, in particular for customers with characteristics of vulnerability.
Interaction with PROD 4
The FCA reminds firms that when implemented correctly, firms subject to PROD 4 rules will already be meeting the requirements of the Duty's products and service and price and value outcome for those products and services covered by PROD 4 and therefore may use any monitoring or reviews it carries out under PROD 4 in complying with its obligations under PRIN 2A.9.
It is useful for firms to note any outcomes provided the FCA's Product Governance Thematic Review which the FCA notes is still ongoing. In line with findings here, firms should be wary of taking undue comfort solely from a review having been completed.
Governing bodies
Monitoring outcomes can be demonstrated at many levels of a firm. Where monitoring is reported to different boards and committees, firms should ensure it is the right information to help those governing bodies fulfil their proper corporate functions. Firms should determine the nature and manner of oversight that is appropriate in the context of their business.
What actions should firms take now?
It would be remiss of us not to remind firms of the Consumer Duty deadline of 31 July 2024 for completion of:
- the review of closed book products and services; and
- the first annual Consumer Duty report.
The Consumer Duty requires firms' governing bodies to review and confirm that they are delivering good outcomes for its consumers. The FCA has made it clear that these are not attestations for its purposes, but rather are internal governance documents. Nonetheless, and perhaps unsurprisingly, firms can expect FCA to be looking at taking a sample of these reports, and it is likely to form part of supervisory discussions.
Moreover, where appropriate, the FCA will consider use of supervisory tools to make sure that progress is made to meet the requirements of the Duty.
Firms that identify any gaps in their compliance with the Duty should act immediately, putting robust plans in place to identify and address any shortcomings.
