Welcome to the UKGI weekly regulation update service for Aviva ABC brokers

Context

The FCA has published a draft Terms of Reference, which is open for ‘comment’ (not consultation) until 18^th November 2024, for a Market Study into “whether people who borrow to pay for motor and home insurance are receiving fair, competitive deals.”  This will be a piece of competition and fair value work founded in concerns about rising prices, and will be “a package of work” alongside the launch of the Government motor insurance taskforce.  The FCA sates that it is launching this market study because:

• premium finance is an important product for many customers;
• it has been concerned about premium finance for some time;
• it is concerned that premium finance may not represent fair value for some customers and that competition may not be functioning effectively; and
• rising premium prices may be making the situation worse.

Key points to note and next actions

• In its press release the FCA states that it sees an “…average yearly rate on the amount of money borrowed ranging between 20 to 30%…”.  If anything, firms may wish to remind the FCA about the difference between an interest rate and an APR.  The 20 to 30% figures are more likely to be APRs than interest rates.
• The FCA states that over 20 million people are estimated to pay for their insurance using premium finance, and the FCA makes a link to (fairly obvious) research which shows that 79% of adults in financial difficulty have used the product (adults in financial difficulty are much less likely to be able to afford insurance premiums in one amount than those not in financial difficulty).
• The FCA will review:
  • whether the products represent fair value;
  • how well customers are made aware of their financing options;
  • the role of commission; and
  • other potential barriers to effective competition.
• The FCA has previously written to the insurance industry (PDF) regarding premium finance products with high APRs but low credit risk. 

Context

The FCA has published an October 2024 interim update to the Regulatory Initiatives Grid (RIG), updating its RIG web page, posting a new interactive web page about the interim update, and publishing a spreadsheet format detailed update.  Following the announcement of the General Election on 4^th July 2024, and due to the re-planning required because of the change of government, the eighth edition of the Grid was delayed.

The Financial Services Regulatory Initiatives Forum acknowledges that the Grid is a valuable tool for stakeholders. As the Forum is unable to publish a complete Grid this year, an interim update has been made available. The Grid will return to its usual format in 2025.

Key points to note and next actions

This update covers known regulatory initiatives impacting firms from October 2024 to March 2025.  Some items of note are:

• The FCA intends to publish a Policy Statement on ‘Tackling Non-Financial Misconduct in the Financial Sector’ around year-end 2024, to be followed by FCA and PRA Policy Statements on the remaining D&I proposals in 2025.
• Incident and Outsourcing and Third-Party Reporting: Consultation Paper – Q4 2024 – the purpose of this policy would be to introduce clarity regarding the information firms should submit when operational incidents occur. It will also collect certain information on firms’ outsourcing and third-party arrangements in order to manage the risks they may present to the PRA/FCA’s objectives, including resilience, concentration and competition risks.
• Review of firms’ treatment of customers in vulnerable circumstances – Q1 2025 – the FCA is assessing firms’ approaches to the treatment of customers in vulnerable circumstances to explore how firms are meeting expectations of the FCA’s 2021 Guidance for firms.
• Proposed Revised Enforcement Guide – Q4 2024 – the FCA consulted on a revised Enforcement Guide and (as confirmed by the FCA in September 2024) will publish further information in Q4 2024, including case studies. The FCA aims to reach a decision on these proposals, in light of that further engagement, in Q1 2025.

Context

Although aimed primarily at the financial advice sector, this speech and a supporting blog contain commentary relevant across financial services sectors. The speech was delivered by Nick Hulme, Head of Department, advisers, wealth and pensions, consumer investments, at the Consumer Duty Alliance – Future Strategy for Personal Finance Professionals event in Birmingham.  Hulme also wrote the blog, published on 16^th October.

Key points to note and next actions

• The FCA continues to focus on good client outcomes, taking a less prescriptive and more outcomes-based approach to regulation.
• The FCA wants to give firms (from sole traders right up to the networks and nationals) the flexibility to innovate in service of their clients that fits their size and client base more easily.
• The strategy has three strands including reducing and prevent serious harm, and testing and monitoring under the Consumer Duty.
• Value in ongoing advice is considered.
• The FCA’s recent commentary / reminder about consolidations and the FCA’s expectations / requirements in the event of changes of ownership and control were echoed.
• Testing and monitoring of firms under Consumer Duty will continue.

Context

The FCA has published a speech delivered by Jessica Rusu, FCA Chief Data, Information and Intelligence Officer, at the FCAs Innovation 10th anniversary event.  It has also published a supporting web page (referencing its Innovation Services web page) and an FCA Innovation Services 10 year anniversary report which provides an overview of the firms the FCA has supported alongside case studies on a sector-by-sector basis.

Innovation plays a vital role in growth and competitiveness of UK financial services and the FCA endeavours to ensure beneficial innovation can flourish while maintaining its commitment to safeguarding consumers and the stability of the financial system. The FCA is creating the right environment for firms to flourish and grow, and for the UK to remain a great place to be an innovator.

Key points to note and next actions

The FCA launched ‘Project Innovate’ in 2014 in a world first, and its approach has been copied around the world.  During the 10 years:

• The FCA received over 2,500 applications and supported almost 1,000 firms. 
• 25 firms have accessed the Digital Sandbox, developing proof of concepts using data related to fraud, the Financial Services Register and open finance.
• An independent study found that Sandbox firms are 50% more likely to raise funding than their peers and, on average, raise 15% more in investment.

For general insurance, the report highlights that:

• There have been 190 applications relating to insurance. The volume of applications received varied over the years, reaching peaks in 2016 and 2019
• The FCA has supported applicants from around the world including the US and China, though most are from London (55%) and the rest of the UK (32%). As with other sectors, most have been small firms.
• The FCA accepted: 52% of applications for support in total; around 20% were approved for testing in the Regulatory Sandbox and around 78% for Innovation Pathways.

A case study for insurance set out that Laka (previously Insure A Thing) developed an alternative insurance business model for bike insurance with innovative and capped pricing linked directly to the claims experience in the previous month.  The firm came to the FCA with a specific regulatory question around whether they would be a Managing General Agent (MGA) or would sit within consumer finance. The FCA supported the firm with an informal steer to help them identify the applicable regulated activities, which enabled them to apply for a restricted authorisation and obtain greater regulatory certainty ahead of Regulatory Sandbox testing.  The firm is now authorised without restrictions and delivering their proposition on a larger scale.

Context

The FCA has announced that it welcomes HM Treasury’s Consultation about the proposed regulation of the ‘buy now pay later’ credit sector.  The Consultation responds to the 2021 Woolard Review which recommended that BNPL be brought into regulation (which the FCA supported), and also responds to feedback HM Treasury received to its previous consultation that ran between February and April 2023.

Key points to note and next actions

• The FCA will consult on proposed Rules and an approach to authorising BNPL firms shortly after the legislation is finalised.
• The FCA intends to put in place a temporary permissions regime (similar to how the introduction of Consumer Credit regulation was handled)
• The legislation will likely involve Consumer Credit Act reform, and an amendment to the use of the ‘number of repayments’ exempt agreements exemption.
• The proposals will impact third-party finance arrangements (so not arrangements where the seller of the goods and services is also the lender), but will specifically exclude agreements financing contracts of insurance, registered social landlords, and employer/employee lending.

Context

FOS has published guidance for consumers on how to avoid problems with Wedding Insurance and how it can help in the event of unfair treatment.  Four examples of cases FOS has seen and resolved are shared.

Key points to note and next actions

Firms should consider the top tips shared by the FOS in their dealings with customers, by ensuring relevant information is shared with them and clarified where necessary. While the guidance is focused on Wedding Insurance, there are elements that can be applied to all insurance policies.

FOS top tips:

• Explain what is covered – ensure customers are aware of the key elements of cover, such as cancellation, supplier failure and public liability.
• Highlight key exclusions – some policies may not cover inability to travel to the wedding venue for reasons other than weather, destination nuptials, or pre-existing health conditions.
• Ensure a full understanding of the direct and indirect suppliers for the wedding – Confirm to customers which suppliers are covered by the policy and those that are not covered.  If the supplier is paid by a wedding planner, those costs might not be covered.
• Ensure adequate cover for all overall costs – ensure the total amount of cover matches the overall cost of the wedding, from venue hire and catering to attire and photography.
• Where possible, encourage customers to purchase the policy early – many couples mistakenly think they can wait until closer to the big day to take out insurance. This puts them at risk of unexpected events such as the venue closing down.
• Explain the customers’ responsibility to try to recover costs – as insurers expect people to mitigate their losses where possible, they will need to show they have tried and failed to recover costs before the insurer is likely to step in.