Largest penalty imposed by the FCA in the past two years - what actions do banks and insurers need to take?
The FCA recently published a Final Notice along with a penalty of £90,688,400 for Lloyds Banking Group’s insurance division (LBGI). This was the largest penalty imposed by the Financial Conduct Authority (FCA) in the past two years.
The action was due to a failure to ensure that the language in home insurance renewal communications was clear, fair and not misleading.
Seeing FCA action in this area is not wholly unexpected. There has been increased focus on renewal practices with the renewal disclosure rules introduced in 2017 and the new general insurance pricing rules published in May 2021.
What was the problem?
- LBGI sent renewal communications to home insurance customers between 2009 and 2017 advising they were receiving a ‘competitive price’ at renewal.
- LBGI did not take steps to check this information was accurate and policies were renewed in approximately 87% of these cases.
- LBGI informed some customers that they would receive a discount which was not applied.
The FCA concluded that there was a risk of serious consumer harm as it was likely renewal premiums had increased compared to previous years. The renewal prices were also likely to be higher than offers quoted to new customers or those switching provider.
What action do banks and insurers need to take?
Clearly communications play a key role in helping customers to understand products and services and make informed decisions.
The FCA expects all firms to embed a culture where the importance of effective customer communication is recognised and prioritised. Firms should frequently assess if they are complying with FCA obligations relating to customer communications.
To do this banks and insurers should:
- treat standard communications in the same way as financial promotions and ensure claims about the product or price can be factually evidenced – a renewal notice, as in the case of LBGI, is essentially marketing the product for the upcoming year;
- avoid using subjective language that cannot be proven in customer communications;
- avoid excessive use of financial and legal language that stops consumers from engaging with information;
- review active customer communications to confirm information is still valid and accurate – as customer communications are developed and updated incrementally over time, additions to existing communications and changing regulatory requirements mean previously approved communications may not meet current expectations;
- implement appropriate risk management systems to organise and control communication with customers effectively;
- ensure there are robust processes for the approval and testing of customer communications and compliance teams are involved in providing an independent review.
Whilst LBGI received this penalty, the fine gives an indication for the banking and insurance sectors of the FCA’s interest in insurance communications. The FCA notes that the group has since taken steps to improve their renewal communications and associated systems and controls.
LBGI voluntarily compensated customers who received communications about a discount where this was not applied and the FCA took this into consideration when calculating the penalty.
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