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Coronavirus –draft FCA guidance for the Insurance industry – customers in temporary financial difficulty and product value - UK

  • United Kingdom
  • Coronavirus - Insurance issues
  • Financial services disputes and investigations
  • Insurance and reinsurance
  • Litigation and dispute management
  • Financial institutions - Insurance market

04-05-2020

On 1 May, the FCA issued two sets of draft guidance which will be important reading for all firms involved in insurance arrangements and particularly insurers, intermediaries and premium finance lenders.

As it considers that the delay involved in consulting formally would be prejudicial to the interests of consumers, the FCA has provided a very short timeframe for consideration and response, notably:

The latest guidance follows the FCA making clear its expectations of general insurance firms in relation to their treatment of consumers during the coronavirus (Covid-19) pandemic and a recent Dear CEO letter (see our earlier briefing).

Coronavirus and customers in temporary financial difficulty

Emphasising the importance of this guidance, the FCA states that it  is potentially relevant to enforcement cases and the FCA may take it into account when considering whether it could reasonably have been understood or predicted at the time that the conduct in question fell below the standards required by Principle 6.

Application

The guidance relates to ‘qualifying customers’, i.e. those who have general insurance or pure protection policies, who may be experiencing temporary financial difficulty or are reasonably expecting to experience temporary financial difficulty as a result of coronavirus.  It is not intended to have relevance in other circumstances (e.g. existing forbearance rules will apply for customers in financial difficulty pre-dating coronavirus).

The FCA is seeking to prompt firms to help qualifying customers, where possible, to:

  • minimise the impact of temporary financial distress; and
  • ensure that customers continue to have insurance that meets their demands and needs.

All regulated firms operating in insurance and premium finance markets need to consider the guidance, which applies to:

  • insurers
  • insurance intermediaries (including appointed representatives)
  • premium finance lenders that provide credit to fund the payment of insurance premiums in instalments
  • premium finance brokers that carry on regulated activities relating to credit granted for the purposes of financing insurance premiums in instalments
  • debt collectors; and
  • other firms that may be involved in insurance arrangements and/or in relation to the provision of premium finance.

The FCA recognises that the extent to which the guidance is relevant to the firm will depend on its role and relationship with the customer, and firms will therefore need to work with other relevant firms in the distribution chain.

When and how firms should act

Firms should consider actions to support customers on both a pro-active and re-active basis.  This might include taking action to support customers:

  • where a customer contacts the firm because they are having difficulty making repayments, wish to reduce cover (whether having paid in-full or on a monthly basis) or have made enquiries about their insurance cover in the light of coronavirus
  • where the firm has reasonable basis for knowing, or has identified (or should reasonably have identified) that there are customers who are suffering financial distress (e.g. those who have missed payments during the crisis period), even where those customers have not contacted the firm.

The guidance sets out steps a firm could to take to deliver fair outcomes for qualifying customers and enable them to understand their options. These include:

  • Reassessment of customer risk profile.  The FCA highlights that some customers’ risk profiles may have changed due to coronavirus.  For example, motor insurance customers might not be using their vehicle at all, or no longer using it for business purposes, and therefore could potentially be offered materially lower premiums.
  • Considering whether other products might better meet the customer’s needs – if this is the case, cover should be revised. For example, add on cover such as legal expenses insurance may no longer be required, or cover may not be needed for a certain period of time. Any fees to effect adjustments to cover should be waived.
  • Working with customers to avoid the need for cancellation of necessary cover – firms should consider payment deferrals and, where the customer elects to cancel their policy, waiving cancellation fees. Firms should also consider fair treatment in assessing new premiums for customers who cancel and then later return.

The FCA anticipates that these actions could result in a reduction in monthly premiums or a partial refund of premium for customers that have paid up front. The FCA considers that any increase in premium resulting from a reassessment is very unlikely to meet its expectations. Changes can be implemented on either a short-term or a longer-term basis. For shorter-term adjustments, firms need to take reasonable steps to ensure that the customer’s situation is reassessed when the temporary period comes to an end, to avoid the risk of underinsurance.

Firms should clearly communicate the different solutions available, including on their websites and apps, and encourage customers to make contact if they are experiencing temporary financial difficulty due to coronavirus. The FCA expects firms to make it as easy as possible for customers to make contact, and consider the communication needs of vulnerable customers, to ensure that customers can access help easily.

Interest rates and payment deferrals

For firms providing premium finance, if amendments to the insurance cover do not alleviate the customer’s temporary payment difficulties, then firms should consider reviewing any interest rates associated with the instalments. In particular, firms should consider whether those rates are consistent with the obligation to treat customers fairly in the light of the ‘exceptional circumstances’ resulting from coronavirus. If after possibly reducing interest rates, customers are still facing temporary payment difficulties, firms should consider granting a payment deferral, unless it is obviously not in the customer’s interests to do so.

‘Payment deferral’ means an arrangement under which a firm permits a customer that pays their insurance premium in instalments (whether the payments are due under a regulated credit agreement, an exempt credit agreement or pay-as-you-go arrangements) to make no payments under their particular arrangements for a specified period, without being considered to be in arrears, and without the authorised party exercising the right to cancel the insurance policy unilaterally because of the payment deferral.

The FCA expects that the payment deferral period, which can be rolling, should be granted for a minimum of one month and up to three months. Customers should be able to request a payment deferral at any point after the guidance comes into force for a period of three months. Where a customer wishes to receive a payment deferral, the firm should grant it unless the firm determines (acting reasonably) that it is obviously not in the customer’s interests to do so.

  • firms should also note the following points
  • firms are not expected to make enquiries with each customer to check if the circumstances surrounding the request for a payment deferral are connected with coronavirus
  • no fees or charges should be levied when granting a payment deferral under the guidance
  • where a payment deferral has been granted in accordance with the guidance, the FCA would not expect any party, such as a broker or debt collector acting under recourse arrangements, to seek payment until after the end of the deferral period
  • customers should receive adequate information to understand the implications of the payment deferral
  • during the deferral period, firms should engage with their customers to understand the likelihood of them being able to resume payments at the end of the period
  • interest charges may continue to accrue during the deferral period, but firms should not seek payment of these until the deferral has ended
  • where a customer is unable to resume payments at the end of the deferral period, the firm should work with the customer to resolve these difficulties in advance of payments being missed
  • firms should consider the need to reduce the possibility of a customer suffering adverse consequences as a result of accepting a payment deferral or a different solution where a deferral has been deemed not to be in the customer’s interests; and
  • in accordance with the Coronavirus Data Reporting Guidance published by the Credit Reference Agencies in consultation with SCOR, firms should not report a worsening arrears status on a customer’s credit file during the payment deferral period, although where additional forbearance is required, e.g. in the form of waived interest and charges, this should be reflected in the usual manner.

If a firm concludes that a payment deferral is not appropriate, it should without unreasonable delay offer other ways to provide temporary relief to the customer. This could potentially include accepting reduced payments or rescheduling the term, waiving missed or late fees, or permitting a customer to amend their repayment date without any cost.

Next steps

As noted above, the guidance is expected to come into force on 13 May 2020. This gives firms a very limited window to assess and decide what they need to do to meet the FCA’s expectations, before implementing the necessary changes.

When considering what steps to take in light of these measures, firms should document clearly the rationale for any decisions taken, to ensure that firms and Senior Managers are able to demonstrate that they have given due consideration to the guidance and taken reasonable steps to comply with their regulatory obligations, particularly in respect of Principle 6. This is particularly important in view of the FCA’s warning about the potential relevance of the guidance in an enforcement context and the regulator’s continued focus on senior management accountability. In these unprecedented times, taking the right steps now is critical to avoid any future difficulties. 

Product value and Coronavirus

This guidance highlights what firms should be doing to identify any material issues that affect the value of their products and their ability to deliver good customer outcomes during the coronavirus pandemic. The FCA makes clear that the expectations in this guidance apply to all customers, not just those in financial difficulties as a result of coronavirus.

The FCA does not anticipate that product-level pricing adjustments alone will address all customer financial difficulties. Therefore, for qualifying customers, firms should also consider the guidance on coronavirus and customers in temporary financial difficulty discussed above.

Application

This guidance applies to all firms carrying on regulated activities relating to general insurance and protection policies, and in particular firms who have manufactured these products. The guidance is relevant to all insurance products, regardless of the customer type (i.e. retail or commercial), but does not apply to the review of re-insurance contracts.

When and how firms should act

The FCA emphasises that customers should expect value from the products they buy, and this is particularly important in the current period of economic uncertainty resulting from coronavirus.

The FCA expects manufacturers and product providers to consider whether and how coronavirus may have materially affected the value of their insurance products and whether the firm or the product itself can still offer a benefit. For example: some firms will be unable to provide contractual benefits, e.g. boiler servicing; or the underlying insured event may no longer happen, e.g. businesses such as restaurants, bars and hairdressers which are unable to open no longer require public liability insurance.

The guidance is not intended to create an expectation that firms should assess the value of policies at a product level as a result of coronavirus where claims are still possible but the likelihood of claims may have changed, e.g. owing to a reduction in car usage. However, firms should already be regularly reviewing the insurance products they offer, taking into account any event that could materially affect the potential risk to the identified target market. Product manufacturers should be considering whether a product, including its costs and charges, remains compatible with the needs, objectives, interests and characteristics of the target market.

The guidance does not set out any specific actions that firms should take. The FCA expects firms to be able to demonstrate how they have met their obligations at a product level and treated their customers fairly. Therefore, if there are factors which have led to a material change in the value of a product for customers, the FCA expects firms to consider the value of the product where customers contact them, or where a firm contacts the customer, regarding missed payments. 

Where firms identify something that could materially affect the value of the product, they should consider the appropriate action to take. This could include: delivering benefits in a different way; providing alternative, comparable benefits; reducing premiums for the duration of the change in value; or partial refunds of premiums already paid.

The FCA states that where firms are providing refunds or partial refunds at a product level as a result of coronavirus which do not involve changes to the product itself, it is unlikely that firms would need to treat this as a mid-term adjustment for the purposes of renewal disclosure rules under ICOBS 6.5 or any other ICOBS rules on mid-term adjustments. If firms have concerns about this, they should engage with the FCA.

The FCA proposes that firms need to have completed a review of their product lines, in accordance with the guidance, and to have decided on any resulting action(s) by no later than six months from the finalisation of the guidance.

Useful links

Coronavirus and customers in temporary financial difficulty: draft guidance for insurance and premium finance firms

Product value and coronavirus: draft guidance for insurance firms

Dear CEO letter

FCA expectations of general insurers

FCA coronavirus (Covid-19) hub