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Consumer duty and claims handling – beware of sludge practices

10 May 2023. Published by Jonathan Charwat, Senior Associate

The Consumer Duty is a new regulatory framework developed by the Financial Conduct Authority (FCA) aimed at creating a higher standard of consumer protection in the retail markets. The FCA expects the Consumer Duty to be a significant shift for the market in terms of its expectations on firms and in this blog we consider this shift in the context of insurance claims handling.

The Consumer Support outcome

The new Consumer Support outcome requires firms to provide support to meet the needs of customers throughout the lifecycle of a product or service. The new rules and guidance give detail on the expectations of firms for this outcome and include useful examples of good and bad practice.

The sale and distribution of an insurance product has been subject to prescriptive and regularly updated regulation for many years under the Insurance Conduct of Business Sourcebook (ICOBS) and therefore some of the updates in the Consumer Duty relating to insurance selling and distribution are complementary to existing rules.

In contrast, the administration and claims handling of insurance has been subject to much less detailed regulation - the main source of the rules is set out in ICOBS 8.1.1 and this has not been updated since 2008. Therefore, the Consumer Support Outcome represents a significant rule change for insurance claims handling.

The FCA's key standard or metric for the Consumer Support outcome seems to be that it should be at least as easy to make a claim and obtain support on an insurance product as it is to take out the insurance product in the first place. The FCA speaks of getting rid of unnecessary and harmful barriers and friction (which it refers to as 'sludge' and 'sludge practices') which unreasonably restrict a customer or prevents a customer from taking certain actions.

These sludge practices can be intentional (driven by commercial incentives to deter customers to do things such as make a claim or complaint) or unintentional (which could be caused by firms failing to have the right systems and control in place or monitoring practices). The FCA guidance gives an example of a potential sludge practice being a claims handling process requiring customers to provide hard copies of all evidence and not adequately considering requests from customers to waive this requirement.

Monitoring and data

A key focus of the Consumer Duty rules is to proactively ensure compliance. In the past, firms may have taken a possibly more reactive approach to judge the compliance and suitability of a product. For example, by monitoring and resolving complaints and making changes to the product or services where complaints are justified/demonstrate the need for change.

Under the Consumer Duty, firms may need to do more to monitor customer outcomes and prevent foreseeable harm from happening. Existing data metrics such as complaints and claims rates should continue to be used but new (for some) management information may need to be used too such as considering query rates (indicating a possible lack of understanding of a product), mid-term adjustment rates (indicating a possible lack of product suitability for the target market), and actively seeking feedback from customers throughout the life-cycle of a product.

In a claims handling context, firms may begin seeking more feedback from customers during the various stages of a claim such as enquiring whether the customer feels able to process the claim through the available channels/medium or needs additional support.

Firms may also look to further utilise existing data and MI sets. For example, considering communications and responses from customers such as requests from customers to waive certain evidentiary requirements as given in the example of a potential sludge practice above.

Look out for a further blog from us next week on the consumer duty's guidance on customers with vulnerable characteristics and protected characteristics which will also consider management information.

Final thoughts

Our experience of the insurance market's claims handling arrangements is that in general they are already aimed at providing good outcomes to customers. On this basis, for some firms, the new consumer duty rules could be viewed as codifying existing market practice and providing helpful guidance and structure for some improvements to meet the expectations under the Consumer Duty. These firms should focus on reviewing and updating their processes, policies, and systems and evidencing their compliance.

However, for those in the market which have been operating at lower levels of compliance in terms of post-sale support of customers, the new Consumer Duty could represent a more significant regulatory change.