A Broker's Duty Of Care: The FCA’s Consumer Duty

This article has been provided by Robin Wood, chartered insurance practitioner and expert on insurance broking market practice and standards, and Roger Franklin, Head of Insurance Litigation at Edwin Coe Solicitors.

This week we are joined by John King to tie the FCA’s Consumer Duty in with our work on the duty of care and the management of PI risk. 

This series of articles on a Broker’s Duty of Care are very timely with the FCA’s Consumer Duty, due to come into force on the 31 July. 

Although the main purpose of these articles has been to help brokers minimise their own professional indemnity risk, there are obvious parallels with the FCA’s Consumer Duty, Nikhil Rathi’s flagship policy and “the biggest regulatory change for 20 years.” 

Under the Consumer Duty’s new Principle, “a firm must act to deliver good outcomes to retail customers.” 

The Consumer Duty applies across all financial sectors and not just insurance. 

During the consultation process for the Consumer Duty, there was a lot of debate about the scope of customers covered by the Duty and the regulator has landed on the scope of existing sourcebooks, so ICOBS for general insurance intermediaries, and so SMEs are covered by the Duty as retail customers. 

Under the Consumer Duty there are three cross-cutting rules, that firms must: 

1. Act in good faith toward retail customers.
2. Avoid causing foreseeable harm to retail customers.
3. Enable and support retail customers to pursue their financial objectives. 

Although the language is slightly different, this is what has been discussed in previous articles such as assessing the client’s demands and needs, ensuring that there are “no surprises” and that the client understands and accepts when a claim is not (fully) paid. 

With the FCA becoming an outcomes-based regulator there are four outcomes under the Consumer Duty: 

1. Products and Services. This is really product governance, that the products are fit for purpose and are designed to meet the customers’ needs and targeted at those customers.
2. Price and Value. That customers receive fair value.
3. Consumer Understanding. Communication must support and enable customers to make informed decisions with information provided at the right time, presented in a way they can understand.
4. Consumer Support. Firms must provide a level of support that meets customers needs throughout their relationship with the firm.

Although the Consumer Duty applies across all financial sectors and the points above are new concepts for some sectors, in general insurance we have had rules covering these areas (certainly the first two outcomes above) for a number of years and so it should not be new. 

The Consumer Understanding outcome is closely related to the underlying theme of these articles. Ask yourself: does the customer really know what they are buying, what the policy covers them for and what it does not cover them for? Under the Consumer Support outcome, how are you going to assist clients when they have a claim and/or their circumstances change during the year? 

The FCA is gearing up its staff, especially in Supervision and Enforcement, to ensure that firms are complying with the Consumer Duty when it comes into force at the end of July and to take action where they are not.

However, by complying with the Consumer Duty and following the points covered in previous articles, this will help firms minimise their own professional indemnity risk of being sued by their clients. 

Foreseeable harm is one of the key aspects of both our work in reducing risk and also the FCA’s objectives.

To do this, we have to learn what can go wrong and that is going to be the next and promised stage of this series of lessons.

The FCA and the law is driving us towards a level of competence that prevents things going wrong for the customer, so just having experience in the form of time in the industry is frankly an incompetent route to competence.

You cannot even hope to know what foreseeable harm is if you don’t have the knowledge and understanding in the first place.

We are going to leave you with a case study where foreseeable harm was not seen by the most senior person in a major authorised firm.

It was the simple case of a hotel owner on the South Coast whose property burnt down for the second time in 5 years and the underwriters had rejected a multi-million-pound second claim on the basis of non-disclosure. The first fire was caused by a kitchen fire and the owner had rebuilt without a restaurant and kitchen. He had not disclosed this information and the underwriter claimed this was material and repudiated the claim and the policy.

When the details were presented to us the flaw in the insurer’s argument was obvious. Can you spot it? Answers on a postcard, or email us at: ruylopezuk@btopenworld.com and roger.franklin@edwincoe.com.