As no one tires of saying, these are extraordinary times. Governments have responded with speed and decisiveness to the pandemic, and so has the FCA. The FCA has announced a series of initiatives, proposed measures and guidance for insurance firms and policyholders. Few will argue with the regulator's objectives, but the demands on firms will be considerable. In this briefing we consider the key questions insurance firms might have and how they might address the challenges ahead.
On 1 May 2020, the FCA announced its intention to issue guidance in relation to coronavirus and customers in temporary financial difficulty. The proposed guidance directs insurance firms '…to consider actions to support customers who may be in financial distress as a result of Coronavirus..' It then sets out examples of the form that support might take. The guidance builds on Principle 6 (which requires firms to pay due regard to the interests of their customers and treat them fairly) and ICOBS 2.5.-1R (which requires firms to act honestly, fairly and professionally in accordance with the bests interests of their customer). It sets out the FCA's expectations in these most difficult of times.
The FCA's guidance cannot safely be ignored. As the FCA explains, the guidance is potentially relevant to enforcement cases it might bring. We see a case in point of what is often called 'soft law'. The guidance does not create new legal obligations, it is not binding on firms, and nor does it have evidential effect. Firms are not required to follow guidance to comply with a regulatory requirement and they will not be liable to discipline simply because they have failed to do so. There is no presumption that departing from guidance indicates that a particular rule has been breached. However, guidance operates to shift the onus onto firms, and any departure from it requires a clear documented rationale if a firm is to escape criticism.
KEY QUESTIONS TO CONSIDER
- How urgent is this? Is immediate action needed?
It is hard to see how this could have been progressed with more haste. Comments on the guidance had to be submitted by Tuesday 5th May. If confirmed, it will come into force on or before 13 May 2020.
- Who is the guidance directed at?
Insurers and insurance intermediaries but also premium finance lenders and premium finance brokers.
One of the features of insurance (the vulnerabilities of which the FCA is acutely aware) is the length of the distribution chain, which may involve an insurer, a broker, perhaps a sub-broker and then appointed representatives. All involved in the chain will need to communicate with each other and coordinate their efforts. They will also need to agree how the adverse financial consequences will be shared. Sometimes this will be provided for in a delegated underwriting agreement, binder distribution agreement or appointed representative agreement. Often it won't be.
- What are the impacted classes of insurance business?
The guidance applies to all non-investment insurance products, i.e. general insurance and protection policies. We would not be surprised, however, if the FCA follows up with guidance to the life industry.
- What types of customers does this apply to?
The guidance applies only in relation to natural persons and small business customers. A small business is one with an annual turnover of less than £6.5 million and which either employs less than 50 persons or has a balance sheet total of less than £5 million.
- What events trigger the application of the guidance?
The clearest trigger will be contact from a customer because they: (1) are having difficulty making payments; (2) wish to reduce cover; or (3) have made enquiries about their insurance cover in light of coronavirus. In such circumstances, firms should not simply rely on the terms of the insurance contract. They are required to consider their dealings with the customer in light of the fact that he/she appears to be in financial distress as a result of coronavirus and consider what they might do in those circumstances to ensure they treat the customer fairly.
- What practical measures might the FCA be getting at?
The obvious measure is deferring a payment obligation. There may be a premium finance arrangement in place, with the customer paying by instalments. But often the provision of credit to purchase insurance is an exempt credit agreement, or no credit may actually be involved in cases where the customer is paying for (say) a month of cover in exchange for monthly premium payments ('pay as you go').
The crux of it is that firms should consider providing financial accommodation. This may mean agreeing to suspend or waive a customer's payment obligation.
- On what terms might payment be deferred?
Payment deferral’ means an arrangement whereby a firm permits a customer that pays in instalments to make no payments for a specified period, without being treated as in arrears, and without the firm exercising the right to cancel the insurance policy unilaterally as a result of the deferral.
Where a customer wants a payment deferral, the FCA says that the firm should grant it unless the firm determines (acting reasonably) that it is obviously not in the customer’s interests to do so. It also says that the payment deferral period, which can be rolling, should be granted for a minimum of 1 month and up to 3 months.
Importantly, the FCA says that there is no expectation that the firm make enquiries of each customer to determine whether the circumstances surrounding a request for a payment deferral are connected with coronavirus. Effectively, if the customer asks, the firm will in the vast majority of cases need to defer.
- Is there anything novel about this?
Firms providing premium finance services will be subject to the Consumer Credit sourcebook (CONC) which contains obligations to treat customers in default or arrears difficulties with forbearance and due consideration. What is novel is that the FCA's proposed guidance extends that approach to insurance purchases that do not involve premium finance. In these cases, the FCA is asking the firm to re-write the insurance contract because of events that neither the firm nor the customer will be likely to have foreseen. This might strike some firms as a radical departure from the doctrine of freedom of contract, and in some respects it is. However, it is also clear that this is the FCA's clear direction of travel.
- Is it simply a question of waiting for a customer to ask for support because of coronavirus?
No. A firm should act where it: (1) has a reasonable basis for knowing; (2) has identified; or (3) should reasonably have identified that there are customers who are suffering financial distress, even where those customers have not contacted the firm. The example given is where a customer has missed a regular payment.
Importantly, we do not believe that the guidance places an obligation to enquire about customers' circumstances, but there may be exceptions. For example, a firm might offer extended warranty insurance to individuals and it may be aware that an appeal of such a product is that it mitigates the risk of having to pay a substantial unplanned amount to repair a cable TV appliance or boiler. The firm may know that many of its customers have restricted means, and indeed may be vulnerable. In such a case the firm might decide that a proactive approach is appropriate.
- Does this only apply to customers who pay by instalments, and so have future payment obligations?
Apparently not. As the FCA has said: 'For customers who have paid up front, this could result in a partial refund of the premium.' This could place firms in a real difficulty, as they are expected to return a part of a premium paid without any loss of cover. It may be that firms will take some persuading that this can be a justified approach. It is difficult not to draw the conclusion that the FCA is asking insurers to provide general funding for those financially disadvantaged by COVID-19, even where the link to an obligation to pay for insurance is at best tenuous.
- Are firms supposed to encourage customer approaches?
Essentially, yes. Firms should identify in their communications, including on their websites and apps, the different solutions available to customers, and encourage them to make contact if they are experiencing temporary financial difficulty as a result of coronavirus. The FCA says that they should make it as easy to contact them as possible, and consider the needs of vulnerable consumers (for example, those needing to communicate through channels other than telephone) to ensure all consumers that need help can access it.
- What other measures should firms be taking?
Under the guidance, firms should consider the following:
- Re-assessing the risk profile of the consumer. The FCA gives as an example some motor insurance customers who, due to lockdown and travel restrictions, might not be using their vehicle at all or might no longer be using it for business purposes. Such customers might be offered lower premiums.
- Considering whether there are other products the firm can offer which would better meet the customer’s needs, and revising the cover accordingly. It might be that a customer has revised his/her demands and needs as a consequence of coronavirus.
- Where consumers determine that it is in their interest to cancel their policy, firms should waive any cancellation fees where the firm needs to do so to ensure it is treating its customers fairly. In addition, firms should consider fair treatment of consumers when assessing new premiums for consumers who cancel and then subsequently return to the insurer.
- In addition to waiving cancellation fees, firms should waive any fees associated with adjusting a qualifying customer’s policy in line with the assessments outlined above.
- Does this have any impact on firms' capital position?
Individual assessments will need to be made, although the FCA's expectation will probably be that no firms should suffer inordinate financial stress as a result of complying with its guidance. Bear in mind that under threshold conditions firms must have resources appropriate in relation to their regulated activities, and this includes non-financial resources such as sufficiently skilled staff. For many firms the problems are likely to be responding to customers' requests in a manner that is fair and consistent while the pandemic is placing enormous pressures on existing internal control arrangements and operational infrastructure.