New proof of fair value to consumer rules could affect UK Life

It is believed that a new set of new rules, requiring UK Financial Services companies to show that their prices represent fair value to customers, might have a negative impact on Life sector profitability.

The rules, introduced as part of the Financial Conduct Authority’s (FCA) consumer duty package, could result in some insurers reducing customer charges to avoid potential findings of overcharging, which could in turn lead to reputational damage and fallout. However, the reductions are likely to be modest as firms will be reluctant to weaken their overall profitability.

Insurers have had a significant amount of time to prepare for the rules, which took effect on July 31, 2023 after extensive consultation leading to an FCA policy statement and final guidance in July 2022. Firms have an extra year until the regime applies to closed-book businesses that are no longer open to policy sales or renewals.

Adam Jones, one of our insurance recruitment experts in the Actuarial team, said,

"The increased regulatory pressure to prove fair value to customers is unlikely to make the UK Life market significantly more competitive. This is because the market is not commoditised and most products are not directly comparable between companies, so higher prices are not necessarily an indication of overcharging.

"However, the need to show fair value to customers while maintaining profitability adds to the pressure for insurers to push ahead with cost savings, digital transformation, and platform creation."

The life sector’s 1H23 results announcements have already brought news of one company’s response. Citing the FCA’s consumer duty regulation, St. James’s Place UK plc (Insurer Financial Strength Rating: A+/Stable) has introduced a 0.85% cap on its annual product management charges for bond and pension contributions once they have been invested for 10 years. The company said this would lower its net income from funds under management by about 4bp and there is no rating impact.

Even if there are market-wide reductions in charges, a spate of compensation claims from customers arguing that charges were too high in the past, as happened in the Dutch life market in the 2000s due to opaque charges on unit-linked products, is not expected to occur. The FCA has made it clear that the consumer duty regulation will not have a retrospective effect and, moreover, the notion of fair value is subjective. This means that at this point, it is not clear how customers could quantify losses without a directly comparable product as a reference point.

What remains to be seen is how these regulatory changes play out in the real world.

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