Customer Duty - are you ready for the potential value impact?
Customer Duty is only part of the regulatory and compliance landscape
Much has been written about Customer Duty, the new principle outlined by the FCA a few months ago. Its impact on the industry, the potential margin impact and the increasing cost of regulatory compliance are significant.
The profile of insurance broking leadership is ageing and many want to retire and realise value for the years of hard work. Regulatory challenges are increasing work stress and pressure, some would say exponentially and this adds to the drive for an exit.
Customer Duty is the latest in a series of significant regulatory interventions, many have not kept pace and the FCA is sending out ever more 'Dear CEO' letters to the industry leaders often berating them for not becoming compliant in the timescales set out. These include, for example:
Pricing reforms - making sure that the renewing customer is not charged more than the firm will offer to new customers.
Product reviews - demonstrating that what is offered to customers delivers fair value.
Commission and Fee disclosures as part of IDD
Fair treatment of vulnerable customers
in addition, it is possible that there will be an intervention in relation to Premium Finance offerings. With some still charging APRs in the high 40%, it is hardly a surprise.
How does this impact value?
There are two key value-impacting issues:
Commission and fee margin - without a fully documented and justified approach to commission and fees, it is impossible to be compliant. There is no issue about charging for work done including admin and broking fees but it has to be justified and agreed upon with customers. If this has not been done, at renewal this issue, coupled with pricing reform and product value issues could result in a significant impact on income. For example, a discount offered to attract a new business customer has to be maintained for up to 10 years.
Cost of compliance - box-ticking compliance is no longer sufficient. The FCA requires data-led justification for a firm's compliance evidence and many smaller firms simply do not have the capability to undertake the analysis required. Broking systems do not help with many not offering sufficient analytics capability to deliver the output needed.
What is sometimes forgotten is that much of the legislation applies to SME customers often where the best margin is made today.
Some thoughts and help.
Get specialist help so that you know the extent of any issues but be very careful. There are many 'advisors' out there offering specialist regulatory and compliance help. Make sure they are fully up to speed - historic experience does not necessarily make one a specialist.
Make sure your Board/Exec. is well-versed in the current legislation - don't just rely on your compliance person or external 'expert'. Ignorance is no excuse.
Stand back from the day-to-day and ask yourself if you had to face the Press to justify what you do for customers, could you?
Review your Governance How do you take your decisions around customers? What is documented? How do you really know how your staff treat customers?
Culture and Climate when all is said and done, the real challenge is does your business demonstrate a customer-centric culture? What would your front line say? What do your customers say? Have you created the right environment for staff to thrive whilst doing the right thing for customers?
Incentives so often I have seen poorly constructed incentives driving the wrong behaviours. Nobody today would implement a commission-only sales force and hope to be compliant, but many incentive schemes do not work, drive poor outcomes, reward the best at gaming the system and cause significant damage to the culture.
As ever, none of this is easy and if you would like some help, please reach out