FG16/8 FCA’s Final Guidance on Fair Treatment of long-standing customers in the life insurance secto
The FCA carried out a thematic review of long standing customers in the life insurance sector and published a Thematic Report on 3rd March 2016. There has then been a period of consultation on Handbook guidance. This document is the final version of that guidance after the FCA have taken all the consultation responses on board. There are four major outcomes each with sub outcomes that the FCA wishes firms to prove that it delivers. It should be noted that the FCA are stating that this is guidance on how it wants its existing rulebook and (more importantly) its principles interpreted by firms.
The firm’s strategy and governance framework results in the fair treatment of closed-book customers. This has 4 sub-outcomes:
- Clearly articulate a strategy for closed-book customers and how the firm will achieve fair outcomes. Fair outcomes and Principle 6 of the FCA should be deemed to override terms and conditions if necessary. Generic statements are not sufficient. Administration solutions need regular reviews – should you out-source or in-source and who should be the out-sourcer?
- Periodic product reviews to ensure closed book policies remain fit for purpose. Under Principle 6, FCA will expect the firm to review regularly the product and check it meets customers’ reasonable expectations. At least every five years and with triggers to make more frequent if appropriate. MI, complaints, media articles all should be used. Regular assessment is required of investment performance and especially whether product charges are reasonable given the returns generated. Reviews should look back at point of sale literature and what was the customer expectation from the literature. Any issues require a plan for action approved by the Board within 6 months. Customers need to be notified of any remedial action.
- Adequate governance in place. Minutes need to show that consideration is given if source documents do not. Need to have a “voice of the customer” who is either an individual or a committee. Oversight of this by a SIMF or SIF is required.
- Remuneration, reward and performance management need to be consistent with fair treatment. Firms should not unduly award for high persistency of customers and reviews should be carried out to ensure remuneration is fair.
The firm’s closed-book customers receive clear and timely communications about policy features at regular intervals and at key points in the product life cycle to enable them to make informed decisions. Divided into 4 sub-outcomes although 2.2 and 2.3 are in one section.
- Regular communications to customers to provide them with sufficient information to make informed decisions. “Issued at least annually” unless the firm can justify otherwise. Should include current value including surrender value plus value at previous report plus premiums paid since previous report and the charges levied. For with-profits, you need an explanation of the charges levied. Reminders of options and benefits provided. Firms may find consumer testing is useful in the design of the pack. Digital information could be used if appropriate for the customer.
- Communications at time of key policy events are clear, accurate and enable them to make informed decisions.
- Communications with customers make them aware of guarantees and options (whether time critical or not). Need to make sure reminded on an ongoing basis (firms need to carry out an assessment of the features of the policy). Life cover needs a statement of the amount provided and do not cherry pick benefits or options. Key events need to be carefully communicated. Again consumer testing would be useful. Firms need to make customers aware of any secondary market for their policy.
- The firm takes effective action to locate and make contact with “gone away” customers. Clear defined process is needed. Firms need to monitor the effectiveness of the programme, attempt to recontact at point of gone away and follow up for three years. Electoral register, credit reference agencies, DWP letter forwarding, BT and 192.com, insolvency data, internet research, bank letter forwarding services and beneficiary tracing services all could be used. Full contact details of clients’ needs to be stored (phone, email, mobile and address). Make sure all systems have consistent data.
The firm gives adequate consideration to and takes proper account of fund performance and policy values in a way that it ensures it treats its closed-book customers fairly and proportionately. There are 4 sub-outcomes here:
- Firm takes steps to deal with poor performance with closed and actively managed funds given equal attention. Due and appropriate oversight is expected for all funds irrespective of its status. Firms need clearly described and effective processes for: identifying poorly performing funds, appropriately frequent reviews (quarterly at least), appropriate and relevant benchmarks, using appropriate triggers (bottom quartile mentioned), take effective action to mitigate poor performance including making sure fund managers understand mitigation and have appropriate timelines. Longer term and shorter term performance should be considered as well as longer and shorter term volatility and Sharpe ratios could perform a useful metric.
- Overall expenses are allocated fairly to closed-book products. Regular reviews (at least annually) of expense allocation should be carried out and that the expenses reflect the benefits given to customers. Also require scrutiny and governance on “in-house” service companies. Fairness between generations and between different policy types and different premium statuses needs to be considered. All of this needs clear documentation.
- Regular reviews of overall fairness of cost allocations against customer outcomes and applies consistent basis for these reviews. Appropriately regular, formally documented cycle is required checking whether the current and future expense allocations and charges is commensurate with customers achieving a fair outcome. Also firms need a regular cycle for reviewing customer payouts (maturities and surrenders) on all policy types. Firms need to assess payouts against what a well informed customer would expect.
- Proactively monitor the actual experience of its closed books of business and pass on costs and benefits to customers to extent permitted by policy conditions. Consistent and documented approach necessary for charges of all types. Mortality and risk deductions need to be considered in light of experience. A three year cycle is appropriate. Inflation increases need to be reviewed to see if they are fair. Fixed charges under Terms and Conditions also need considering.
The firm’s closed-book customers are able to move from products that are no longer meeting their needs in a fair and reasonable manner. Two slightly different sub-outcomes are mentioned here:
- Exit and paid up costs should not be excessive and are not driving poor customer outcomes. Firms need to assess whether exit charges and paid up charges are fair. The FCA notes the Unfair Terms in Consumer Contract Regulations and suggests that firms may wish to backdate it before 1/7/1995. Does the charge allow the policy to meet the needs of the target market especially after the pension reforms have occurred. Firms need to make sure charges were made clear to customers at outset.
- Target ranges for with-profits payouts appear reasonable and firms meet these ranges. The FCA quote an acceptable range of 80% to 120% of asset shares (but also states 80% to 125% would be acceptable). The range should be such that the firm can meet in moderate investment conditions but part from if investment conditions are extreme. 90% should be within the range and monitoring should be carried out of the outliers – why are they outside and does this point to problems on data? Commentary on outliers, and consideration of redress is required. The firm should check claims regularly (quarterly is specified) on actual claims and an analysis of outliers and excluded policies (may include whole of life policies). Surrender value bases should be reviewed every time bonuses are declared to ensure that it remains fit for purpose. There needs to be a policy around surrender basis reviews and include customer outcomes into the review.
What does this all mean?
We believe that firms of all sizes need to carry out a major project in 2017 to make sure this FG is being complied with. We believe the firm should consider existing business of open lines of business as well as closed business. Areas where firms may possibly need to carry out changes are:
- Policy reviews. Not only new business needs to be considered. Note that very old policies may provide problems if sales literature no longer exists. What is the reasonable customer expectation?
- Historic mortality and expense charges need to be considered as well as current charges.
- A “voice for the customer” needs to be appointed. The role is similar to the with-profits committee for with-profits business.
- Contact needs to be established with customers or attempted for gone aways. The range of possible approaches mentioned is not meant to be exhaustive. Maybe approaching a skilled external expert (private detective for example) could be useful? Do you need someone in your customer service team doing this as their only job? Or a team?
- Regular communication with clients. You need to change bonus and valuation information provided. Customer testing is probably required.
- Review target ranges and surrender values. Do they meet the requirements? What are the outliers? Plenty of work is required. You should note that this applies to all insurers irrespective of size.