The Financial Conduct Authority (FCA) has published a report setting out its findings from its thematic review of the fair treatment of long-standing customers in life insurance.
Who should read this?
Findings will primarily be of interest to life insurers who have closed-books. However, some of the FCA’s expectations in the draft non-Handbook guidance may be relevant to any firm that deals with customers who are of a long-standing nature. Consumer groups and trade bodies will also be interested in the themes explored in this report.
The thematic review
The FCA’s thematic review assessed the treatment of closed-book customers against four high-level customer outcomes:
- Does the firm’s strategy and governance framework result in the fair treatment of closed-book customers;
- Do the firm’s closed-book customers receive clear and timely communications about policy features at regular intervals and key points in the product lifecycle that enable them to make informed decisions;
- Does the firm give adequate consideration to, and take proper account of, fund performance and policy values in a way that ensures it treats its closed-book customers fairly and proportionately; and
- Are the firm’s closed-book customers able to move from products that are no longer meeting their needs in a fair and reasonable manner.
The review did not assess how individual policies were originally sold but focused on how customers are being treated now.
A total of eleven firms were included in the thematic review. The eleven firms varied in size, type and business model with the aim of capturing a representative picture of the sector as a whole. Included in the eleven firms were firms closed to new business, consolidators and firms that are still writing new business but also had closed-books within their business.
The FCA found a mixed picture with most of the eleven firms demonstrating good practice in one or more areas and poor practice in other areas.
One of the purposes of the FCA’s review was to gain an understanding of the levels of exit and paid-up charges being incurred by long-standing customers, and firms’ behaviour in applying those charges. They found that even where customers are aware of these charges, the impact these charges can have on the returns customers receive can be significant and they may present barriers to customers shopping around.
The FCA also assessed the communications firms provided to long-standing customers. As part of this assessment, the regulator sampled a number of documents sent to customers who had requested either to surrender or transfer their policies.
Six of the eleven firms who took part in the thematic review provided them with documents where exit or paid-up charges applied. In those six firms, the majority of policies reviewed did not include such charges. However, where charges were applied, our findings indicate that the six firms may have failed to inform customers of these charges at the time they were incurred (i.e. when the policy was exited or converted to paid-up or were charged on an ongoing basis for some paid-up policies).
The FCA is concerned that as a result, some customers may potentially have been unaware that they would have to pay such a charge or that they have paid or are paying such a charge.
It is not possible at this stage of the regulators work to draw any final conclusions on the reasons for such practices; whether customers have suffered detriment as a result; or how widespread these practices were in these firms or in the wider market.
These findings have driven the FCA’s decision to undertake further work in relation to this matter.
Download the thematic review: TR16/2: Fair treatment of long-standing customers in the life insurance sector