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Expert comment on the FCA's review of fair treatment...

... for long-standing customers in life insurance

Lucinda Hallan, Director, Financial Services Advisory at Grant Thornton UK LLP said:

"Looking past the controversy around how Friday's announcement was made and its immediate impact on the markets, there are some home truths about the treatment of customers and the regulator's intentions for the life industry, which firms with legacy books simply cannot afford to ignore. 

"Fundamentally, the broad intent of this review as described in the FCA's newly published Business Plan is to explore whether firms are operating legacy products fairly and whether 'they have adopted strategies that exploit existing customers'. We've seen similar interest in other areas of financial services, such as dual pricing in general insurance and teaser rates in banking. The FCA's consumer protection objective means it is logical to identify whether particular groups of existing customers are being disadvantaged by the industry's natural drive to attract and support new business. This is a real and material issue that will not go away.  The industry shouldn't assume that the FCA will be diverted from this review, whatever negative publicity it may currently be experiencing.

"Firms need to be ready for the practical requirements and impacts of the review, but it's still unclear exactly how the regulator plans to investigate this issue, even though the timetable in the new Business Plan shows activities kicking off almost immediately.

"One thing the FCA has been clear on is that it will undertake sampling, rather than investigating the totality of UK legacy business.  Looking at past initiatives, we would expect the review is likely to involve at least some of the following:

  • an assessment of the clarity and fairness of terms and conditions for sample product types
  • an assessment of the suitability of sample terms and conditions for different retail customer segments, based on the demographic mix of policyholders in the legacy market
  • a look at comparative charges between new and existing policies of similar types, as well as consideration of the evolution of existing policy charges over time (how have they changed and why?)
  • a review of financial data from firms, including product and line-of-business costs and cross-charges
  • a look at the clarity and suitability of customer communication for these products

"A sampling approach won't require the cast of tens of thousands of case-handlers that some were imagining last week – but it would be unwise to underestimate the effort the industry may need to put into this exercise.  First, many organisations will have products on their books for which documented terms and conditions are patchy or unclear.  Second, internal cross-charging in large organisations is highly complex and digging out the data to prove or disprove the FCA's concerns on cross-subsidies will be challenging, as well as potentially requiring input from outsourced service providers. 

"Finally, once the review has concluded, the industry will face the sizeable task of implementing any changes required.  This will involve not just swallowing any financial impacts on business models, but also attempting to track down long-time 'orphan' clients: a notoriously labour-intensive job, with low success rates. 

"In the meantime, the disruptive impact of recent announcements and the public perception of the review means that there may well be an up-swell in customer complaints and a spike in policy surrenders for some legacy books.  This is likely to hit before the review itself delivers its conclusions, as policyholders head up to their lofts to dust off old documentation and pay attention to dormant policies for the first time in years. The industry needs to plan ahead and make sure, this year and next, that it has resources in place to cope with the data-gathering and analysis the FCA is likely to require and with the broader impacts on business flows. 

"It would also pay for all firms to consider – past internal reviews aside – whether there is substance to the regulator's concerns and whether they should be proactively altering old terms and conditions or even moving certain customer groups to alternative products.  As ever, prior preparation and the willingness to engage proactively with customers will be the key to minimising both cost and reputational damage and making it through this latest challenge intact."