The introduction of the consumer duty requirements by the Financial Conduct Authority in 2023 marks a significant shift in the regulatory landscape for the UK financial services sector.
These changes aim to ensure firms act in the best interests of their customers, enhancing standards of care and protection.
While the primary focus is on improving consumer outcomes, the ripple effects extend to various aspects of business operations, including professional indemnity insurance.
The consumer duty framework is built around four key outcomes:
- ensuring products and services meet the needs of target markets;
- guaranteeing fair value in pricing;
- providing clear information to help consumers make informed decisions; and
- offering responsive customer support.
These heightened standards mean firms could face an increased risk of claims from consumers who believe their interests have not been adequately protected.
Consequently, there may be more frequent and potentially higher-value claims against firms.
As a result, insurers might adjust PII premiums to reflect the heightened risk environment, leading to increased premiums for firms.
Additionally, insurance providers could adopt stricter underwriting criteria, scrutinising firms' compliance with the new standards.
Firms with robust compliance frameworks and a track record of delivering good consumer outcomes may benefit from more favourable terms, while those falling short might face higher premiums or coverage limitations.
Insurers might also introduce new exclusions or limitations in PII policies to mitigate their own risk exposure, including specific exclusions related to breaches of the consumer duty requirements.
To manage the potential effects on PII, financial services firms should enhance their compliance efforts, invest in staff training on the new requirements, and regularly review and update internal policies and procedures.
Proactively engaging with your PI broker and insurer to discuss the implications of the new consumer duty requirements can also help in negotiating better coverage and premiums.
Current market conditions, characterised by a generally favourable economic environment, have so far masked the potential effects of higher premiums and more penalising conditions.
However, this could pose a significant issue in the future if market conditions worsen. Firms must remain vigilant and proactive in addressing these regulatory changes to mitigate long-term risks.
The consumer duty requirements present both challenges and opportunities for UK financial services firms.
By staying ahead of regulatory changes, enhancing compliance efforts, and maintaining strong relationships with insurers, firms can navigate this evolving landscape effectively, ensuring they are well-prepared for any future shifts in market conditions.
Richard McGrath is a director at Onyx Insurance
