The primary duty of an insurance broker is to ascertain the insurance needs of a particular client and then advise and procure adequate insurance coverage to meet those requirements.
Levels of sophistication and understanding of insurance matters vary enormously among policyholders and a broker needs to ensure that their advice reflects this. Of particular relevance to personal line brokers, but also those dealing with small commercial clients such as smes and clubs, is how to deal with vulnerable clients.
Following two consultations, on February 23, 2021, the FCA released its long-awaited Final Guide on the Fair Treatment of Vulnerable Customers. The guide will be of particular interest to insurance FCA regulated brokers and their professional indemnity insurers.
The guide intends to complement existing FCA principles (as well as the provisions of the Insurance Conduct of Business Sourcebook (ICOBS)) and aims directly to try to improve the service vulnerable customers receive from FCA regulated entities.
Who is a vulnerable customer?
The FCA considers a vulnerable customer to be a person who: “because of their personal circumstances, is particularly susceptible to harm, particularly when a company fails to act with adequate levels of assistance.”
In other words, vulnerability must be viewed as a spectrum of risk and there are numerous reasons why an individual could fall under the classification of a vulnerable customer. These could include poor health, cognitive impairment, life events such as new caring responsibilities, poor resilience to cope with financial or emotional shocks, or poor ability (such as poor literacy or numeracy).
What is FCA?
Prior to 1 April 2013, financial services regulation in the UK was handled by the Financial Services Authority (FSA). In the wake of the financial crisis of 200708, the UK government decided to restructure financial regulation, ultimately leading to the abolition of the Financial Services Authority. The Financial Services Authority (FSA) has been replaced by two new organizations, the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA), which is part of the Bank of England.
The Prudential Regulator is responsible for the prudential regulation and supervision of banks, real estate companies, credit unions, insurers and other major investment firms. The Financial Conduct Authority has a different mandate and is primarily concerned with regulating companies that provide financial services. Any organization that provides banking and other financial services will need to be regulated by both organizations.
Under the new regulatory agreement, the provision of retail foreign exchange services is managed by the Financial Conduct Authority. The organization is also responsible for regulating other trading products, including cfds (contracts for difference) and financial spread betting. In addition to regulating the provision of the aforementioned trading products, the Financial Conduct Authority is responsible for regulating a wide range of different financial products.
Disclaimer: The FCA regularly publishes warnings relating to the business of unregulated companies. This helps protect consumers from doing business with unregulated companies and is an important part of consumer protection. You can find notices related to unregulated companies here.
What does the FCA expect?
In general terms, the Finalized Guide clarifies that, in order to improve outcomes for vulnerable customers, all FCA regulated companies (including insurance brokers) should act to:
- Understanding the needs of their target market / customer base;
- Make sure all staff have the right skills and abilities to recognize and respond to the needs of vulnerable customers;
- Respond to customer needs during product design, flexible customer service delivery and communications; And
- Monitor and assess whether they are meeting and responding to customer needs with vulnerable characteristics and make improvements where they are not.
- Brokers can expect to be asked in due course to demonstrate how their business model, actions taken and their general knowledge ensure fair treatment of all clients; including vulnerable customers. They should then document the steps taken, review those measures periodically, and ensure that the approach is approved top-down, so that ensuring fair treatment of vulnerable customers becomes part of the company’s culture.
Not only does non-compliance with the Guidelines lead to an FCA enforcement action, it can also lead to an expert ignoring complaints to insurers if firms do not find them. The Guide can also be referred to it by FOS if you are considering complaints about the insurance broker.
While the implications of the Guide will be more widely understood in the insurance sector, it is clear that these principles can apply equally to insurance line trading; in particular, if the CFD broker is working with a company manager it may have some form of instability or if the executives are not very experienced in insurance matters.
The Guide will be especially useful in situations where the seller is dealing with a less demanding client, or he may have limited understanding of insurance issues in general. In this situation, the Guide makes it clear that the seller is expected to do more; in terms of (i) identifying the client’s instability, (ii) identifying the client’s insurance requirements and requirements and (iii) taking the time to accurately define the insurance coverage and in particular any policy concerns.
With regard to the effectiveness of the Guidelines on professional complaints of negligence, it has been clearly established that the broker should tailor his advice to the individual needs; response to customer toughness. In all likelihood, the plaintiffs seek to rely on the principles set out in the Guide to support allegations of negligence on the part of the broker if the plaintiff falls into a disadvantage.
For further assistance and guidance on this matter, please do not hesitate to contact Marcus Campbell or Mark Cawthorne using the form below. Both Marcus and Mark are part of DAC Beachcroft’s professional insurance broker service and specialize in preventing E&O complaints from insurers.