New rules that are requiring for UK financial services companies to show that their prices represent fair value to customers negatively affect life sector profitability.
Fitch Ratings says that it expects the rules introduced as part of the Financial Conduct Authority’s (FCA) consumer duty package, to lead some insurers to reduce customer charges to avoid potential findings of overcharging, as well as the reputational damage that could result from them.
But, it is important to note that the reductions are likely to be modest as firms will be reluctant to significantly weaken their profitability, with Fitch noting that it does not expect any ratings implications.
Insurers have had a considerable amount of time to prepare for the rules, which took effect on 31 July 2023 after extensive consultation leading to an FCA policy statement and final guidance in July 2022.
At the same time, firms have also had an extra year until the regime applies to closed-book businesses that are no longer open to policy sales or renewals.
Fitch highlighted that the increased “regulatory pressure” to prove fair value to customers is unlikely to make the UK life market “significantly more competitive.”
Fitch said: “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-cutting, digitalisation and platform creation.”
The life sector’s results from H123 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 stated that this would lower its net income from funds under management by about 4bp. However, Fitch noted that there is no rating impact.
Fitch concludes by suggesting that even if there are market-wide reductions in charges, it does not expect 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.
The FCA has been very clear that the consumer duty regulation will not have a retrospective effect.
