Relying too much on standardisation in insurance regulation risks under-serving consumers, according to David Geale, executive director of consumers, payments and competition at the Financial Conduct Authority.
Speaking in a meeting held by the Financial Services Regulation Committee today (September 2), Geale was asked about the effectiveness of the authority’s consumer duty initiative that was introduced in 2023.
“The consumer duty is a very important tool that we use on a regular basis. We can point to a number of areas where we have seen a number of positive outcomes as a result of the duty being enforced,” he explained.
As an example, Geale pointed out that the FCA took action in the gap insurance market under the duty and, as a result, has seen savings generated at around £70mn a year for consumers.
Despite these positive outcomes, Geale acknowledged that the duty is not perfect, stating “we’ve also got further work to do”.
“That’s why we’ve got a number of enforcement cases in place. We have six referring to insurance, so it’s clear that’s got teeth,” he added.
To address the difficulties in the duty, Geale highlighted that there is a role for prescription as “there will always be a role for detailed rules where they’re needed for something specific”.
Additionally, Geale discussed the role that standardisation could play in improving outcomes in some areas, pointing out that it could be used to ensure people get the right information in the right way.
However, he cautioned that, if the regulator were to go too far in standardising insurance terms, it could risk hollowing out policies to get to a particular point and leaving some people unserved.
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“I think the key thing is that people understand the policies that they are buying, that they achieve fair value and that they meet their needs,” he emphasised.
Similarly, FCA director of insurance Chris Knight stated that, while standardisation is being used in some sectors of the insurance market, “standard wording doesn’t always guarantee standard interpretation”.
Comprehension
Later in the meeting, Knight was asked about how the regulator was seeking to address a lack of consumer understanding, which he described as being at the heart of the aims of the consumer duty.
“A lack of understanding shows itself up in a number of ways through insurance. False complaints, claims that are rejected, underinsurance,” he stated.
“When firms see these things happening, the duty requires firms to ask themselves why they are happening and if that is an understanding problem.
“Then they must ask themselves what they can do differently to increase that understanding. It’s a really key area of focus and an outcome we’re keen to drive.”
tom.dunstan@ft.com
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