COVID-19 regulatory spotlight: FCA action on BI insurance

Gavin Stewart Gavin Stewart

This is the latest in a series of blogs looking at the impact on regulators with the intention of shedding light on a particularly significant regulatory event.

Last Friday, the Financial Conduct Authority (FCA) published statements and draft guidance relating to COVID-19 which have important implications for the insurance market. Here we summarise these announcements and provide our latest insights on business interruption (BI) insurance, product value and customers in financial difficulty.

My thanks to Ben Farmer and Paul Staples for their help with this analysis.

Business interruption insurance

The FCA intends to seek an “authoritative declaratory judgement” on whether a sample of business interruption (BI) policy wordings provides cover for COVID-19-related claims. This represents a noticeable shift in approach from its previous 'Dear CEO' letter (15 April 2020) when it saw no reasonable grounds to intervene. So, what’s changed? Previously, the FCA appeared content to leave the matter with the industry and the Ombudsman to decide. But, amidst mounting industry speculation of class action lawsuits and an increasing political focus on government assistance for small businesses, the FCA has sensibly decided to take a more proactive stance. This should also help counter any later suggestions that it was a bystander to a systemic issue. 

The proposed court action itself raises several questions, and its outcomes will only go so far. While it should increase clarity around those selected disputed BI wordings, it won’t provide a ‘silver bullet’. BI clauses vary significantly across the industry, and indeed across the products and schemes of individual insurers. Expectations for the judgement therefore need to be tempered since complete clarity cannot be achieved from the FCA’s sample approach alone.

The FCA has signalled its intention to seek a “timely” judgement; although, given the current upheaval within the court system, a speedy verdict is unlikely. So, firms will have to continue managing their customers’ expectations through an indefinite and probably extended period of uncertainty.

The FCA’s statement also highlights the perennial gap between firms’ and customers’ understanding of policy coverage and the potential for complaints around mis-selling, particularly where causation (the link between cover and loss) is interpretative. And so the regulatory focus on customer understanding, previously directed at the retail market (e.g. the FCA’s market study around the sale of general insurance add-on products), is now broadening its reach to commercial and small business customers, pushed by the circumstances of the crisis .

Mis-selling scandals do not serve the long-term interests of firms or their customers. Firms and the FCA will therefore need to manage this emerging hotspot.

Product value

The FCA has also issued draft guidance for firms to consider COVID-19’s impact on the value for money offered by products. It is noteworthy that this doesn’t attempt to create a level playing field. For example, in situations where, due to COVID-19, a product is no longer able to offer any benefit, or where an insured event can no longer occur, it is only setting minimum expectations. The option for firms to go further than this is “welcomed” by the FCA, but not “required”. So, unhelpfully, firms are left asking whether they should go further and, if so, how far. High-profile examples that affect the largest numbers of customers, such as reduced mileage on motor insurance policies, are left to firms’ own discretion. There is a great deal of commercial, ethical and reputational currency weighing on these types of policy decision, and firms will want to implement and manage such decisions through formal governance channels in quick order before the FCA’s ‘rapid’ consultation period ends on 15 May 2020.

Given the regulator’s firefighting elsewhere, it is unlikely firms will see direct regulatory engagement on this topic in the short term. But this guidance provides a clear signal of regulatory expectation and future intent in the evolving area of Value For Money and Fair Pricing, and it will serve to progress and embed the FCA’s previous thinking (such as in its Feedback Statement and Consultation Paper). A clearly stated expectation that firms can demonstrate how they have met these obligations at a product level suggests that a detailed review of individual products is likely in the future.

Customers in financial difficulty

The FCA has already set out its expectations in relation to other areas of consumer credit, but has now provided more sector-specific guidance for firms operating in the insurance and premium finance markets. Of particular note is an explicit requirement for any change to the ‘value for money’ offered by the insurance product to be considered when engaging with customers in financial difficulty. Such conversations are, in any case, often inextricably linked with customers' perceptions of value-for-money, so firms shouldn’t view these latest regulatory interventions in isolation.

FCA seeks legal clarity on business interruption insurance alongside package of measures to help consumers and small businesses (1st May 2020)