New rules requiring UK financial services companies to demonstrate that their prices represent fair value to customers will negatively affect profitability in the life sector.
Fitch Ratings says it expects rules introduced as part of the Financial Conduct Authority’s (FCA) consumer duty package, which will lead some insurers to reduce customer bills to avoid potential findings of overcharging. , as well as the reputational damage that may result from it.
However, it is important to note that the reductions are likely to be moderate because companies will be reluctant to weaken their profits, with Fitch noting that it does not expect any rating implications.
Insurers will have more time to prepare for the rules, which come into force on 31 July 2023 after extensive consultation that led to an FCA policy statement and final guidance in July 2022.
At the same time, companies also have an additional year until the regime applies to closed-book businesses that are no longer open to selling policies or renewals.
Fitch stressed that increased “regulatory pressure” to prove fair value to customers is unlikely to make the UK life market “much 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 increases the pressure for insurers to continue cost reduction, digitalization and platform creation.
The results of the life sector from H123 have already brought news of a 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 annual product management fees for bond and pension contributions once they have been invested for 10 years.
The company stated that it will lower its net income from funds under management by about 4bp. However, Fitch noted no impact on the rating.
Fitch concluded by suggesting that although there have been market-wide reductions in charges, it does not expect a spate of compensation claims from customers who argue that charges are too high in the past. , as happened in the Dutch life market in the 2000s because of the opaque. charge for unit-related products.
The FCA is very clear that consumer duty regulation has no retrospective effect.
