FCA Consumer Duty review calls on firms to improve monitoring ahead of first Consumer Duty annual report deadline

FCA releases Consumer Duty review calling on firms to improve monitoring ahead of first Consumer Duty annual report deadline

Yesterday, on 26th June, the FCA published the findings of a multi-firm review undertaken to evaluate progress made by the insurance sector in compliance with the Consumer Duty.

To form the review, last December the FCA asked 20 large scale insurance firms, including providers and brokers, to demonstrate how they monitor, assess and test customer outcomes, along with the actions taken after poor outcomes were identified. Whilst predominantly aimed at larger firms, the review findings contain valuable guidance on the MI required ahead of the first Consumer Annual report, which insurers must file in just a month on the 31st June.

In the report, the regulator notes that “many firms need to make improvements in their monitoring to enable them to determine whether they are delivering good outcomes for retail customers”; this article will examine the key takeaways from the review to aid firms preparing for the board report.

Overview

The overarching theme of the review, and previous FCA communications regarding implementation of the Duty, is that a firm’s approach to monitoring, assessing, and testing consumer outcomes should a) align with their individual business and customer base and b) any data/MI designed, analysed, and collected should be actionable. A firm’s approach to monitoring and evaluating consumer outcomes should demonstrably drive, and evidence, delivery of the four outcomes under the Duty, and design and implementation of data collection and monitoring should genuinely consider how this can be delivered and tracked, in practice, in relation to the individual business and its customers.

This is an ongoing, ever-evolving process requiring time and dedication; one approach can be replicated across businesses, nor can an effective approach be achieved by engaging with the Duty on a surface level. Firms must engage with the core ethos of the Duty, and this must be reflected the type and level of MI collected and the way in which analysis, evaluation and subsequent action taken, drives better outcomes.

Key takeaways from the FCA’s review

Design of monitoring approaches

Firms should consider the data and metrics they require to effectively monitor consumer outcomes in the context of their business and target markets and clearly define and specify relevant consumer outcomes to derive and monitor meaningful metrics and data.
The FCA noted good practice where firms had:

• Considered data and metrics required to monitor consumer outcomes in the context of their business and mapped these against the four outcomes of the Duty.
• Identified the MI that would best inform them of whether good or poor outcomes had been achieved (regardless of whether this data was currently available)
• Identified the type and level of harm that could occur if poor outcomes were achieved.
• Demonstrated comprehensive monitoring, testing, assessment and understanding of claim settlements (e.g. analysis of overall settlement values, benchmarking of claim settlements, claims complaints, root cause analysis of declined or withdrawn claims, and internal deep-dive reviews, such as internal audits).

Many firms focused too heavily on metrics confirming the completion of processes, such as value assessments, which alone do not adequately measure customer outcomes. Such metrics were often reported with limited or no insight into learnings or actions to be taken. The regulator also observed little monitoring of outcomes related to claim settlements across firms’ overall customer base.

Types of data

Firms must ascertain the data sources which will derive the insights they need to effectively assess the delivery of good customer outcomes. The FCA noted good practice where firms:

• Considered categories of data required to provide meaningful, comprehensive insights into customer outcomes and identified additional data that could enrich their insight (regardless of whether this data was currently readily available).
• Utilised a varied mix of data types, e.g. qualitative and quantitative, RAG-rated data, key indicators, trend data, etc.
• Employed a risk-based approach to testing customer outcomes which involved understanding and assessing customer journeys to determine the impact these had on outcomes, enabling identification of poor outcomes and root cause issues.

The FCA noted poor practice where firms had insufficient data collection, or repackaged existing data without addressing gaps, specific needs or considering whether existing data was sufficient to properly assess and evidence consumer outcomes.

Interpretation and scrutiny

The FCA emphasised that outcome monitoring MI should enable an understanding of how products and services work for customers in practice and that oversight and reporting should allow senior management and boards to oversee customer experiences, and act if required, and boards to scrutinise and challenge the delivery of outcomes and approach to monitoring where necessary. The FCA identified good practice in firms which:

• Clearly presented and explained data and articulated relevant tolerances for key metrics.
• Established formal governance to provide a second line of scrutiny of the monitoring of consumer outcomes.

The FCA noted poor practice where firms presented data which was unlikely to allow scrutiny or challenge. For example; data presented with limited evidence of interpretation or no explanation, arbitrary thresholds/targets which were insufficiently granular, did not accurately reflect performance or trends, or were set in accordance with industry averages and not the firm’s intended target market.

The regulator also found some firms set tolerances at a level unlikely to be breached, preventing a true evaluation of threats. Firms should avoid data collection and analysis which obscures or hides poor performance, prevents the identification of poor consumer outcomes, and which is not justifiable as it does not produce actionable insights relevant to the implementation of the Duty.

Monitoring different groups of customers, including customers with characteristics of vulnerability

The FCA reported inconsistency in firms’ ability to demonstrate that they were monitoring, and possessed strong insights into, the outcomes of distinct groups of customers, to assess whether certain groups, including those with characteristics of vulnerability, experienced different or poorer outcomes. The FCA noted good practice in firms who:

• Monitored outcomes for customers with characteristics of vulnerability as a subset of data across a wide range of their overall customer outcome monitoring metrics (including data on loss ratios, complaints, claim settlements, and service levels).
• Performed detailed analysis where poorer outcomes these customers were identified and, where necessary, took action to improve outcomes for this group.

The FCA noted poor practices where firms insufficiently differentiated between different groups of customers when monitoring, resulting in a limited means to detect and address poor outcomes for specific groups. Even where firms could distinguish the between outcomes of customers with characteristics of vulnerability and other customers, many did not demonstrate that they had developed different approaches for monitoring these groups across their suite of outcome data, hindering their ability to assess whether good outcomes were being received across their overall customer base.

Actions taken by firms to address poor outcomes

Firms are expected to identify, understand, and act upon poor customer outcomes identified via monitoring and demonstrate that improvements have been made to customer outcomes. The FCA identified good practices in firms which demonstrated:

• A broad range of data was used to identify outliers and a thorough analysis was conducted in a risk-based manner to establish how actions could be taken to improve outcomes.
• That the progress of actions taken to improve outcomes, and the impact such action had on future outcomes, was tracked to evaluate the efficacy of changes made in response to identified issues.

Conversely, the FCA noted that some firms could not evaluate or evidence through monitoring the impact of changes made to improve customer outcomes following the identification of poor outcomes, with the regulator emphasising that firms should have a clear approach to testing the impact of such changes.

What’s next

All insurers, intermediaries and outsourced service providers should consider the findings of the FCA’s review, use them to inform Consumer Duty annual reports and identify gaps or weaknesses with their compliance with the duty and act immediately to address these.

If you require assistance with understanding and actioning the requirements set out by the FCA, or in preparing to file your first board report, contact UKGI Compliance via info@ukgigroup.com