23
Examination of witnesses
David Geale and Chris Knight.
Q104 The Chair: Welcome to today’s meeting, which is the ninth oral evidence session as part of our inquiry into the regulation of the consumer insurance market. I want to thank Mr Geale and Mr Knight from the FCA for attending.
The session is open to the public. It is broadcast live and is subsequently accessible via the parliamentary website. A verbatim transcript of the evidence will be taken and put on the parliamentary website. Could I ask you, Mr Geale and Mr Knight, to introduce yourselves for the record, and then we will proceed to questions.
David Geale: Good morning. I am executive director for consumers, payments and competition at the Financial Conduct Authority.
Chris Knight: I am the newly appointed director of insurance at the FCA.
The Chair: That is excellent. Could we just start with a bit of background on the FCA’s regulation of the consumer insurance market in terms of how many people are involved in the different activities of regulation, supervision, policy and enforcement? Within that, can you give an estimate of the proportion of the FCA’s resources dedicated to consumer insurance that is, in fact, deployed in relation to travel and home insurance, which are the subjects of this inquiry?
David Geale: Yes, of course. Perhaps if I start, Chris can then talk specifically to his department, because that is where the bulk of the activity will take place. At the FCA, as you will be aware, we carry out a number of activities, including authorisation, supervision, policy and enforcement. We also have a competition team who will periodically carry out things such as market studies. The number of people who work on any one particular topic, including insurance, can vary quite significantly at any point in time. They are, of course, supported by our economists, lawyers and so on, so it will flex.
We have a market study under way into the pure protection market. That is being staffed largely by our competition specialists, working with Chris’s team, but also the lawyers and so on. As with any topic that we work on, we have a core team in the insurance sector. That can be supplemented and will grow or reduce. Things such as authorisations depend on the number of firms coming in through the door.
Enforcement will depend on the amount of activity that we have going on and whether we take enforcement cases. As I am sure you are aware, we have around six enforcement cases currently live related to insurance and the consumer duty, so there is a fair chunk of people there. Chris, would you like to talk about your department in terms of numbers?
Chris Knight: In my team, which is insurance and appointed representatives, we have 130 people. Within the insurance section, it is around 100. We do not wall off a team specifically for home and travel, but the retail general insurance market as a whole is the largest focus of our team. Therefore, since these are very important markets within that, quite a good chunk of our effort is focused on these markets that you are looking at.
The Chair: Of your 100, could you make some kind of guess about what proportion is actively involved in home and travel insurance?
Chris Knight: Around 80% of that 100, so 80 people, are working in the retail general insurance market, and most of those people will, at various times, be doing some work in home and travel.
The Chair: So it is spread out over a lot of individual people.
Chris Knight: That is right. It is different from time to time. We do not have a specific team focused just on home and travel insurance.
David Geale: It may be worth me adding that, in our approach to supervision, there are two aspects to it. First, we have firm-specific supervision. For the very largest firms, or what we call the significant market participants, we will have a dedicated team who will work specifically on those firms. Regardless of what lines of insurance those firms are doing, we will always have somebody doing something with them.
For the smaller firms, we take more of a risk-based approach. We use data to act as trigger points, and we have what we call flexible supervision teams who will go where we think the issues are. That is our firm supervision.
Then we have issue supervision, which will be where we take a particular topic. Where we are doing work on things such as claims handling, we will have a number of people who will do a multi-firm piece of work. They will focus on that topic for a set period of time to do that work. That is why it is sometimes difficult to say how many people are working on one particular line, because they may be doing many things within an individual firm.
The Chair: If we take home and travel insurance, which has been the subject of a super-complaint and something that is widely agreed to produce consumer outcomes that are not ideal, how is it that you do not have people dedicated to working on that? How can you be an effective regulator of those areas that have been clearly identified if you do not have a dedicated resource?
David Geale: I am sorry. We have explained it badly. Clearly, where we have taken on pieces of work as topics in response to the super-complaint, although I would also note that we were doing many of those things before the super-complaint, we will have people dedicated to working on those, so Chris can add to those numbers. We can certainly write to you if it is helpful to have something more specific. Off the top of my head, I cannot remember how many people are working at the moment on the competition study, but our pure protection competition study, for example, has dedicated people working on that in the competition team, as well as economists, lawyers and others.
The Chair: This inquiry is not interested in pure protection.
David Geale: That is understood, but I am using that as an example to say that that is how we do it.
Chris Knight: We currently have eight workstreams of activity following on from the Which? super-complaint and our original work in home and travel insurance in 2025, covering claims and servicing areas, covering the sales process, and picking up on specific points that were raised on contract terms as well. Across my team, there is a large effort and focus on bringing those pieces of work to a conclusion.
The Chair: If I asked you to give the FCA marks out of 10 in terms of being an effective regulator of home and travel insurance, what would be your response?
David Geale: That is a very difficult question to answer. We are certainly not claiming that it is job done, as you can see from the fact that we have taken a number of steps in terms of the work that we are doing. We have done a number of things.
If I take, for example, travel insurance and I look at the issue of people struggling to get insurance where they have specific medical conditions, we have taken some steps already. Working with firms, we require them to refer people to a directory where they cannot provide insurance themselves, and we believe that that has contributed to around 21,000 more policies being sold. There is still further work to be done in that area, and we are doing that. We know what the issues are. We have set out what our priorities will be, but we are not all the way there yet, so it is hard to give a mark out of 10.
The Chair: Is it six out of 10? Is it seven out of 10?
David Geale: I would like to think that, with the ongoing work, we are at the six or seven out of 10 mark, but it is not that we are not focusing on the right things. It takes time to deliver the outcomes, and it is outcomes that we are interested in.
Q105 Baroness Bowles of Berkhamsted: I would like to just go back to the point about the numbers in terms of who is doing it and who is specialising in it. Chris replied in terms of people who are doing it as a result of the super-complaint, but what would be the steady state? What happens to all those people who are going to get quite a lot of expertise in dealing with the super-complaint? Are they going to then disappear and go off and be dealing with the next super-complaint or something else? What is the steady state?
David Geale: We prioritise our work according to where we see the harms, and we go through an annual budgeting and prioritisation process to do that. At various points in time, we may have more people in banking than in insurance, or in insurance than in consumer finance. It depends on where we are and where we prioritise our work at the time.
The insurance team, as Chris says, is around 100 people. I would expect it to be something similar to that as a core insurance team. Many of the people who are working on those specific issues are specialists in insurance and would stay in that area. We are absolutely on the same page in terms of retaining any specialism and any specialist knowledge that we get through particular pieces of work.
What you will see is in areas where we pick up more project-based work. I have mentioned the competition team. Those people will do the work on a particular market study as competition specialists, working with the specialists in Chris’s team, if we are talking about insurance, and with the banking specialists, if we are talking about banking. If there are policy projects to be carried out off the back of that as the remedies, that would be carried out again in the sector, so the knowledge is retained.
That is something that I am very confident of. That is something that we do on a regular basis, but, as I say, it will ebb and flow in terms of what the priorities are. We cannot do everything in every sector all the time.
Q106 Lord Sharkey: Good morning. Some witnesses have told us that, after three years in force, the consumer duty has yet to drive any kind of meaningful or measurable change in the consumer home and travel insurance market. How would you respond to that critique? In particular, would the consumer duty achieve better outcomes without detailed specifications—for example, minimum standards?
David Geale: The consumer duty is an incredibly important tool. It is something that we use on a regular basis. We can point to a number of areas where we have seen positive outcomes as a result of the duty being in force. For example, if we look at the GAP insurance market, we took action under the consumer duty looking at fair value. We have seen savings generated of around £70 million a year for consumers, so we do use it in those areas.
In travel insurance, I mentioned the work that we have done around requiring firms to point people to a directory of specialist insurers where they cannot get cover through the first place they have tried. That has helped contribute to around 21,000 more policies being sold as a result of that.
Right across the piece, we are seeing positive outcomes in terms of the consumer duty, but we also have further work to do. That is why we have a number of enforcement cases in place. We have six focused on insurance and looking at things such as claims handling, information to consumers and so on, but it is proving that that has teeth.
There is a role for prescription. There will always be a role for detailed rules where they are needed for something very specific, but the consumer duty gives more flexibility for firms and for us to achieve the right outcomes, which, as I say, is what we are interested in.
Standardisation can be important in some areas—for example, ensuring that people get the right information in the right way. If we talk about something such as premium financing, having an APR, for example, is something that, if calculated differently, people cannot compare.
If we start going too far with standardising insurance terms, first, that is not something that we, as a regulator, can push. It would be something for Parliament to do. Secondly, what you risk is a hollowing out of policies to get to a particular point that then leaves some people not being served, or a whole series of add-ons that start to come, and it gets more confusing.
As I say, the key thing is that people are able to understand the policies that they are buying, and that they achieve fair value and something that meets their needs.
Chris Knight: We are doing some work that will be helpful, particularly in areas such as storm claims, where a standard approach or standard wording—
Lord Sharkey: “Wear and tear”, for example.
Chris Knight: Yes, “wear and tear”, for example. A standard approach or standard wording would potentially be helpful in improving customers’ understanding. We are working with the ABI and others on that. There are probably other areas where standard wording does not always guarantee a standard interpretation, of course, but it would be helpful. We see that also in some other markets that have slightly more standardisation.
Lord Sharkey: Is all this working fast enough for consumers? It sounds as though a lot of effort and time goes into deliberations about what may be done or corrected, but what about in terms of speed of delivery?
Chris Knight: Where we see harm occurring, we are acting quickly to stop that at source, if you like, and prevent that harm. Some of these other issues and areas that you are talking about are not trivial to resolve. Different people have reasonable different views. In some respects, such as trust in insurance, the UK customer service index has shown that it has gone up by 2% over the last two years. Trust in insurance is now higher than trust in business as a whole, which is a welcome thing to see.
Other areas where we are not yet seeing movement include complaints to FOS. I know that you have FOS coming later, but one would like to see those coming down over time. As David says, we are very much of the view that there is lots more to be done. As the world changes, and as the industry and practice change, we will also need to be constantly on guard to make sure that we keep ahead of events.
David Geale: The other thing that perhaps is not as visible is the work that we do within supervision. Enforcement outcomes tend to be public. They take time to investigate properly. There is a lot of work that goes into that, hence they are not immediate in terms of the outcome that you see. Having said that, we do a lot of work on the supervisory front with firms, some of which is persuasion, where we can raise an issue with the firm and it will sort it voluntarily and quickly.
For example, we have engaged with 241 communications directly to firms. We have had 41 Section 165s, which are data requests, where we have compelled firms to provide us with specific bits of data, so that we get it in the right way to identify problems.
We have introduced 26 voluntary requirements, which is where we ask firms to sign some form of restriction, or force them to do an activity or stop an activity, for example. We have a number of Section 166s, which are the skilled person reports, where we require somebody independent to go in and either look at an issue or carry out an activity if we are not satisfied.
They have resulted in a number of areas of customer redress. We have 11 instances of customer redress, and there are a number of other actions that happen. These are just not as public in terms of what we see, because what we are seeking to do is achieve the right outcome at pace, which is not always an enforcement investigation.
Q107 Lord Hollick: Consumer understanding, or possibly consumer ignorance and befuddlement, have been a persistent issue in this inquiry. What does the FCA do to improve that situation, and what more should it do?
Chris Knight: It is, I agree, a very important issue. Consumer understanding is at the heart of one of the aims of the consumer duty. A lack of understanding shows itself up in a number of ways through insurance in terms of lots of complaints, claims that are rejected, underinsurance and so forth.
When firms see these things happening, the consumer duty requires those firms to ask themselves why that is happening and, particularly, whether that is a problem of understanding—fundamentally, whether customers are acting that way because they do not understand. It then requires them to ask themselves what they can do differently to increase that level of understanding.
We are doing a range of work on that topic. We have been working with around a dozen companies to understand what they do and how they act to improve understanding. We are hoping to bring that into a good and bad practice report as an example. We are doing a lot of work with consumer groups and the ABI, as I mentioned earlier, on how understanding could be improved across the board, particularly in storm claims and other things. It is a really key area of focus and a real outcome that we are looking to drive through our activity.
Lord Hollick: In my own journey through this process, I have found AI to be very helpful in identifying questions that I should ask and issues that I should consider. To what extent does AI sit within the parameter of the work of the FCA? The Mills review suggested that there was a case for bringing it within the curtilage of the review. Where does that stand?
David Geale: It depends in terms of the use of AI and what we are talking about. At the moment, we see firms using AI themselves, mainly in back office applications. That is something that we would consider as part of their systems and controls to make sure that they have the right controls in place in the right areas. Where they use that, we look at the tools that we have under the senior managers regime for accountability, making sure that somebody is accountable for how they use it and the outcomes that are achieved.
Lord Hollick: I was thinking more about the AI companies themselves rather than the use of AI in terms of price comparison websites.
David Geale: I appreciate that. I was trying to give you a general answer. We also have the consumer duty. We do not regulate the AI companies as things stand. Again, that is not within our perimeter. I would agree with you that they can be a useful and helpful tool in terms of helping people with the questions to ask. People should certainly take a step back and think if they are using it as providing some form of recommendation in terms of what is best for them and so on. That is when it starts to get blurry in terms of the fact that they should not be giving specific advice, but at the moment these AI companies are outside of our perimeter.
Q108 Lord Vaux of Harrowden: You do regulate the price comparison websites. You can see AI effectively taking over what the price comparison websites do. You go to ChatGPT and ask it to come up with policies, and you follow through on the back of that. What is the difference between those two things?
David Geale: Essentially, at the moment, by way of business, you can transact through the price comparison websites in terms of them earning something from what you are doing with that. At the moment, you cannot execute through the AI platforms.
As we get into things such as agentic AI, that may well become possible, so there is a question of how that develops going forward, but, as it stands, they are not within our regulatory perimeter. It is something that we need to monitor very closely, but whether to bring those within the perimeter will, again, be a matter for Parliament rather than regulators. We will stay close to it in terms of how regulated firms are using it, but there are risks and benefits to that.
Lord Vaux of Harrowden: It is more than regulated firms. How consumers are using it is equally important, surely.
David Geale: I agree. The important thing is that consumers understand what they are doing, and the limitations of AI. Again, we can put requirements only on regulated firms. We cannot put requirements on AI firms that are not necessarily doing it by way of business, by which I mean by way of regulated business.
Q109 Lord Hollick: I found the AI to be extremely helpful. It was able to say whether this particular policy from this company covered what I should be covering and how it compared with others. It seems to me that the role that it can play is far more far-reaching than you have suggested.
David Geale: Do not get me wrong. I support the use of AI. It can be incredibly helpful for consumers.
Lord Hollick: I am agreeing with you, but I am just asking, given that it is going to increasingly become a tool that people will use to decide between this policy and that policy, whether it is something that you should take a close look at from the point of view of regulation.
David Geale: First, I would say that, despite the benefits, there are risks as well. The AI is not always right, and it does depend on the question that you ask the AI and the answer that you get.
Lord Hollick: Is that not a good reason for you to monitor it?
David Geale: We look at regulated firms’ use of AI. We do not set our own perimeter in terms of saying what we regulate and what we do not. Again, that is a matter for Parliament, not us. The Mills review suggested that this is a question for the Treasury.
Q110 Lord Davies of Brixton: You say that AI firms are outside your regulatory perimeter, but the regulatory perimeter is set by what people do, not whether they happen to apply to you to become regulated. If AI firms are doing something that legislation requires to be regulated, surely you should be regulating them. The mind boggles about the practical implications, but they are outside the regulated perimeter because you have failed to include them.
David Geale: I agree with the first part of your statement. I disagree with the second. On the first part of the statement, if they are doing activity that, under legislation, is required to be regulated, then yes, they should be within that perimeter. They would be required to be authorised and we would regulate them accordingly. As it stands, the activities that we see being carried out are not within the scope of that legislation. Therefore, they are not required to be authorised by us for the activities that they are doing currently.
Lord Davies of Brixton: Do we know what they are doing? I am sure that people are asking them, “What should I invest my money in?” and they are being told. Why is that not regulated?
David Geale: Because it depends on what they are doing. As I say, at the moment, they are not doing that by way of business in terms of earning, for example, from the company that people invest with. They are also not generally providing specific recommendations of, “You should invest in this particular one here”. They are answering questions that people are asking, and giving factual information. I am not disagreeing with you that it could develop in that way, and that is something that, as a society, we have to monitor very closely, but, as things stand and as the legislation is drafted, they are not required to be authorised by the Financial Conduct Authority.
Q111 Baroness Donaghy: Irrespective of whether it is in or out of scope of legislation, do you think that the FCA ought to provide guidance to potential users of AI? It seems to me that, if they are unregulated, and people might just pop in information about their own personal circumstances in order to elicit details about advice on what insurance policy they might take, they might end up revealing a lot of information about themselves, which would then be misused.
Do you not think that there be some guidance about the fact that, first, these are not necessarily regulated, secondly, they are not necessarily reliable, and, thirdly, there might be dangers of giving away private information about yourself? It seems to me that people are diving into this, and there is no one organisation available to protect them from themselves, if you like.
David Geale: The use of AI goes far beyond the reach of financial services, so it is not just a financial services problem. I do agree with you that people need help with where and when to use AI, and what the limitations and risks of using it are. That needs to form an important part of the financial inclusion strategy in terms of giving people that right information.
There is a part for us to play in terms of where people engage with financial services. We have given warnings, for example, about people engaging with finfluencers. When we look at payments, we have given warnings about what you see on social media, and what may or may not be a scam.
This is very much in our thinking, and it was part of some of the things that came up in the Mills review. We are considering what we could do in that space, but we are part of the answer, not the answer in the information for consumers.
Q112 Lord Hill of Oareford: You rightly said that you can only operate within the terms of reference that you are given by legislation. Given the speed with which this is moving, and the potential for developments in AI making the consumer duty that you busily apply largely redundant in terms of its effect on citizens, has the Treasury been asking you what your views are on this issue?
David Geale: I have not spoken to the Treasury about that. Through the review that we commissioned from Sheldon Mills, who was one of our executive directors previously, he spoke to the Treasury, among others. Those discussions have certainly happened, but I have not been party to those specifically myself.
Q113 Baroness Bowles of Berkhamsted: I wanted to ask you about your regulatory priorities report, where it says that you are going to simplify insurance rules in favour of relying on the consumer duty. I am wondering what has driven that and how that is going to improve things. In particular, where are you going to get the information from? You had difficulty getting outcomes data in other instances, so where is the consumer duty information going to come from early enough to make interventions, or is it just that you wait for harm and then act, especially if you do not have so many rules that have fixed points for what has to happen?
David Geale: I will talk generally, and Chris can come in on some of the work that we are doing. Having worked with both prescriptive rules and with more flexibility in terms of the consumer duty, I am a big advocate for the duty giving us more flexibility to focus on outcomes, rather than prescriptive rules that potentially constrain innovation and constrain some of the flexibility that firms have to do things in the right way.
If we take an example of disclosure, we could sit here as a regulator and say, “We think you should disclose this in that particular way”, but different groups of consumers have different needs, and what we really want is firms to think about the products that they are selling, the consumers that they are selling them to and the needs of those people, which they can do more readily with flexibility.
In terms of the data, when we introduced the duty, we were very clear with firms that we expected them to have proper MI packs. We did quite a lot of work with the very largest firms looking at some of their MI packs to make sure that they were collecting the right sort of information.
To give you an example, if somebody introduces a new product, we would expect them to do work and collect data to show whether that product was reaching the right target market and behaving as intended, and what the complaints experience was and how they were dealing with those, so that you can spot problems early on.
Baroness Bowles of Berkhamsted: You said, “So that you can spot problems”. Who is doing the spotting? I get that the firm has to look after what it is doing, but when do you find out?
David Geale: We collect data from firms. We take a number of feeds. We scan social media. We use the stats from the ombudsman. We look at firms’ own data that we collect. For example, if we were seeing an uptick in complaints, that would be a trigger for us to consider whether we need to go and look more deeply. There are those sorts of things that we can look at.
We have carried out specific work on things such as fair value. In terms of premium financing, we went and had a look at what firms were charging, and challenged them to show that there was a reasonable relationship between cost and price. We took action off the back of that, some of which is still ongoing.
With that focus on outcomes and with the data to support those outcomes being delivered, the consumer duty gives us more flexibility to act, and to act more quickly than specific rules. That is not to say that there is not a role for specific rules where necessary, but it is a balance.
Chris Knight: Up until a couple of months ago, I was on the receiving end of regulation, and it is quite helpful for firms at the moment. We have the consumer duty, but we also have some rules around PROD 4, which is around products, general insurance pricing practices, and the ICOBS rules, which govern interactions between insurers and customers.
As the consumer duty settles down and beds in, if you like, there may be less need to have all those prescription rules, but, at the moment, firms are generally trying to do the right thing. They like the reassurance—or at least I did, as I am not speaking for everybody—of those rules in terms of knowing that you are on the right track. For example, we have guided that, if firms are complying with PROD 4, they are generally complying with the products part of the consumer duty. That is important.
Data is a key thing. One important piece of work that we are doing at the moment is looking at the value measures, which are rules that we brought out five years ago. We believe that they have been helpful to a number of commentators, customers and market players, but we are doing a post-implementation review to see where we go next with those measures.
Baroness Bowles of Berkhamsted: I thought that the problem was that you were having difficulty getting the information for the value measures. This is part of the question. It is all a work in progress, and you have sources of information and you hope to pick it up, but does that mean that, ultimately, rules will cease to exist or just never be updated?
Chris Knight: I do not have a crystal ball, but the work on value measures is really important. You have heard from other witnesses on that. We are completing our work to do the post-implementation review of that, and engaging a lot with industry players and consumer groups on where they believe it would be useful to take those rules.
David Geale: Rules will continue to exist, and the consumer duty sits alongside that, but there is benefit in removing some areas of prescription where it is not helpful or potentially drives the wrong outcome. I talk about disclosure as an example. A rigid framework of disclosure does not necessarily lead to information that reaches consumers in the right way, based on the fact that consumers are not a homogenous group. Different people have different needs across different products. Different firms deal with different target markets, and having that flexibility to design that, based on what those consumers need, is really important.
What is important on the back of that is to monitor those outcomes to make sure that that is effective and is driving the right outcomes. There will always be, for example, rules that say that, if you have something such as a credit agreement, you need to have some standardisation around an APR, for example, but more flexibility elsewhere could drive better outcomes. It is a balance.
Q114 Lord Turnbull: It seems to me that we have a long and fragmented chain of command. At the top, we have the companies, the boards, the PLCs and the brand name. They have a management. Then there are underwriters. Then you come down to the people who are the key players in this, which are the claims management companies, many of which are subcontractors.
In issues such as the consumer duty, it is like the rain in my garden. It gets through to the top centimetre, but it is not getting down to the claims management. Do you have direct contact and interaction with them?
A particularly ugly word came up, “declination”—in other words, the rate at which you decline claims, which varies highly between certain product groups. Are you getting down to talk to the claims assessors to make sure that they are following the consumer duty as much as the people at the top of the company?
David Geale: Just to be clear, you said “claims management companies”, but did you mean claims management handling within firms?
Lord Turnbull: Yes, claims management handlers, who review your claim and then make a recommendation as to whether to accept or refuse it.
David Geale: I understand. I will ask Chris to talk about some of the work that we are doing on claims handling in a second. Generally speaking, what we would do is set requirements for firms, and it is for the firms to make sure that they are delivering and measuring those outcomes. We cannot man-mark every individual firm and every individual aspect within them. Firms and their boards have to take responsibility. We expect them to monitor those outcomes and make sure that if, for example, they are seeing poor claims experience, they are dealing with it. We track that through the data that we receive, and we may use that as a trigger for further work.
Claims handling is one of the areas that both we and the Which? super-complaint identified as an area where things were not happening consistently as we would expect, in some cases within firms themselves and in some cases where they outsource claims handling. That is why we are doing a further piece of multi-firm work, which is where we deploy a team of people to go and operate across a number of firms to investigate what is happening in those areas. Chris, did you want to talk a little bit about that and where we are coming out?
Chris Knight: You have covered most of it. We are very clear that a company might delegate this activity, but, ultimately, it remains responsible for it and its outcomes. We have been looking at how claims are handled, and also at arrangements between companies and their outsourcers to understand, for example, remediation works or other incentives that might be in play. Later this year, we will be going out to 300 firms in the sector to understand much better what is being outsourced and to whom, so we can get a much better picture of that. The responsibility for delivering outcomes remains with the company. Whether it is outsourced in detail may be a very positive thing from a customer’s perspective, but the responsibility stays with the company.
Lord Turnbull: Is this indirect supervision going to be good enough, given the concerns that have been expressed?
Chris Knight: We are very keen to maintain the clarity that the responsibility sticks with the company. I would not want the company to think, “The FCA is regulating claims handlers now. Therefore, we do not have to worry about it”. We are really clear that the principle must stand that it is the company’s responsibility.
David Geale: This is where things such as the senior managers and certification regime comes in. Somebody is accountable for the claims handling within a firm. If that is not happening, we can take action against individuals if needed. What we would generally do is follow up on the work that Chris has mentioned. Where we see actions that are needed within firms, we will take those actions. That could range from identifying problems to the firm and seeking assurances from it that it will deal with it, right through to enforcement, with any number of steps that we can take in between.
I agree with you that there is an issue around claims handling. That is something that we have identified. It is an area where there seems to be a higher number of complaints and of referrals to the Financial Ombudsman in terms of dissatisfaction than in other areas of insurance. That is why we are doing this specific piece of work to follow up, but we are very clear that the accountability is with the firm, that we can take action against it, and that individuals within it have to be accountable.
Lord Turnbull: I have one other question, on focus. There are very clear limits to our study. We are working on two areas, and only on claims. If you are drawing up your priorities for consumer harms, do they map with ours? Would you be doing the same things? Are we hunting in the right place?
David Geale: We look at a wide range of data to make sure that we are hunting in the right place. We will always need to prioritise our work. We cannot do everything at once.
Lord Turnbull: The question is whether we are hunting in the right place.
David Geale: No, not necessarily. We take all feeds. We would be very interested in the outcomes of this inquiry. We have looked at the evidence that has been produced so far and will feed that into the work that we do. At the moment, we have identified the areas that we set out in our market reports as the priorities, and that is what we are focusing on now. If something comes along that we think is a higher priority, then we can, of course, consider pivoting, but it is also important to finish the work that we have started, which includes things such as claims handling, which is under way.
Q115 Lord Eatwell: I was interested in your characterisation of the teams associated with larger insurance companies, and then smaller ones. It is a risk-based assessment. If we take those teams, which are associated closely with companies, one of the striking things about the characteristics of the insurance market that we are looking at is that the rate of declination or refusal of claims seems to be fairly consistent year after year within home and travel. Given that, do your teams consider that the rate of declining in claims is part of the business plan of the companies that they are supervising?
David Geale: If you mean whether it is an acceptable cost of business to deliver poor service to customers by turning down claims that would otherwise be justified, then no, we would not allow that.
Lord Eatwell: But is that happening? You must be looking at business plans in detail. You told us earlier that you have teams that are associated with specific companies. Do they see, within that, the rate of refusal as part of the business plan?
Chris Knight: Perhaps I can talk to how it should be being done and then what we would expect to see. When you are looking to design an insurance product, you would start with looking at the claims that you want to pay, or the events that you want to cover. You would want to define those in a way that is clear and not subject to moral hazard, for example, and get your statistical data evidence to back up what the frequency and severity of those claims would be. That is your base cost.
From that perspective, any claim that is made that is not falling within that definition, if you like, is a waste. There should be a natural alignment of interests to ensure that customers understand, because a claim that falls under the definition of the claims that you want to pay is an error from the company’s perspective. What we would look to see is a fundamental desire to understand why customers are mis-claiming and bringing that down over time. It is perhaps the other way around, in terms of what we were expecting to see.
David Geale: We monitor claims acceptance rates. In home, about two‑thirds of claims are accepted. In areas such as motor, it is higher. That is something that is an indicator to us, which, again, is why we are looking at claims handling. We take that across the industry. We also look at it in terms of individual firms. We have identified it as an area to look at across the industry as a whole, hence the firms that Chris said we are looking at.
If we look at GAP insurance, one of the things that drove us to take action there under fair value was the fact that we saw only around 6% of premiums being reflected in claims. We found that firms were struggling to show that there was a reasonable relationship between cost and price. Therefore, the product was not delivering what it was necessarily being sold for, hence we required firms to stop selling for a period.
Lord Eatwell: Can I just go back to a point that you made, which is very striking in the numbers? It is the difference between motor insurance and home and travel insurance. To what do you attribute that difference? Is it associated with the fact that motor insurance is much more highly regulated from the DVLA and the whole legal structure around what you need to be able to put a car on the road, or is it something else? How do you explain this extreme difference?
David Geale: That is partly what we are looking at. Chris mentioned that we are going out to around 300 firms to look at claims handling. I do not have a definitive answer for you for now, but I do not know, Chris, if you want to add something specific.
Chris Knight: Home and travel insurance have some inherently more complex features compared to car insurance, which drive some of the differences and maintain them over time. Within home insurance, for example, storm claims is a particular area where we know that the ratio of claims accepted is 31%, so it is a lot lower. That is a very clear area where there is not understanding, which is why we are working with the ABI and others to see whether there is more clarity that it can bring to all parts of the journey—i.e. the sales process, post the sales process, and throughout the claims process—to support that understanding. It is not like there is no hope to recover those, but they are inherently more complex. That is why getting into more detail to really uncover where there are gaps will have a return to the investment.
Lord Eatwell: Finally, on this theme, do you have a target for reducing the number of claims refused?
Chris Knight: I would like to see the number of claims refused reduce.
Lord Eatwell: It is about the proportion of claims refused.
David Geale: No, we do not have a number that we are working towards.
Lord Eatwell: Should you have a target? How do you measure success?
David Geale: We measure success by looking at whether we think firms are providing fair value and can demonstrate that. We look at the differences in the different types of insurance and what the rates of declination are. I would say that home insurance is not one bucket. You can include within that things such as HomeServe claims, buildings claims and contents claims, and there may be differences.
Lord Eatwell: Why do you not have a target? We would then all know whether you are succeeding.
David Geale: If we start putting a target in, we get to a point where what happens is you may find a hollowing out of policies. You may find a whole range of things that could potentially happen. We are not at the stage of having done the work and seen exactly what the issues are yet. That is the work that we are doing, and we will consider what potential remedies come out of that at the end, but we need to understand the issues first.
Q116 Lord Lilley: We have heard repeatedly, both from the price comparison websites themselves and from users of them, that they would welcome information about outcomes. We have dealt with clarifying the terms of coverage, and the price comparison website is clear about the price, but nobody, ex ante, knows what it is going to be like if they have to make a claim. What is the likelihood of declination? What is the likelihood of just being bored to death and prolonging the whole process?
We have heard that there have been calls for you to insist on the provision of outcome measures. Have you been trying to obtain the provision of outcome measures that would be comparable and then enable consumers to make informed choices? If so, what has been the problem in getting it?
David Geale: As Chris said, we are doing a review into the value measures that we put in place previously. At the time that we introduced those, we were very conscious of the difficulty in terms of what you show that is meaningful for consumers when you look at the differences between products, in terms of how you bring that together in such a way that makes sense. If there is a particular add-on, for example, in one product and not another, and a claim is accepted or declined on that, but it is not a feature of this product, how do you meaningfully make a comparison?
That said, we do hear those calls. We agree with the price comparison websites and others that there is more useful information that can be provided. What is set out is helpful now in terms of price. They are doing reasonably well in terms of some of the features of the insurance, but I agree that whether it is going to do what you want it to do at the end of the day is something that is more difficult to assess. That is something that we are reviewing now. We are looking at what more information can be provided and whether we can make it more consumer-facing in a way that is understood, understandable and meaningful.
Lord Lilley: Is that in terms of outcomes or product specification?
David Geale: It is both. The value measure of whether this is going to do what they want it to do at the end of the day is the thing that most people are interested in and what we are looking into in terms of what we could do as a consumer-facing measure to help with that. We will look at that. I do not have the answers yet. It is complex. We are working with industry and consumer groups on options, and we will consult on those in due course.
Lord Lilley: Do you have a timescale for when that is most likely to bear fruit, which we will be able to see when we look at price comparison websites or ask AI to do it for us?
David Geale: I would expect that to be in next year. That is what we are working towards.
Chris Knight: There is nothing stopping firms already publishing or sharing this information if they have it, or the price comparison websites asking for it. There is no prohibition on doing that.
Lord Lilley: The price comparison websites could ask questions on a standardised form, but the presumption is that there has to be some standardisation, or alternative to it, that would make it meaningful.
Chris Knight: Firms want confidence that they are comparable and that people will stick by the rules.
Q117 Lord Vaux of Harrowden: Philosophically, I do not really understand how the consumer duty can work for price comparison websites, in the sense that, at the end of the day, insurance is a promise to pay up if something goes wrong. The consumer duty must ultimately be aimed at ensuring that the right policy is taken out by the right person and meets their needs. The price comparison websites have no idea whether the policy is going to meet the needs of the consumer, so how can they possibly meet their consumer duty?
David Geale: The consumer duty has a number of aspects to it, and the price comparison website is one part of the journey around, for example, consumer understanding, consumer information and thinking about the people who they are engaging with.
Lord Vaux of Harrowden: The consumer understanding must surely be, ultimately, whether they are going to get paid if it goes wrong. Nothing else really matters in an insurance policy.
David Geale: That is one part of it, but, if you go to a price comparison website looking for a particular policy, and you may have needs that I do not have, you need to understand, in order to buy effectively, whether you are paying for things that you do not need, or whether you are getting the features that you want through the product. If that is your primary interface to go in and compare product offerings, there is a very important role for the consumer duty.
Lord Vaux of Harrowden: I am not saying that there is not an important role for them, and they have been incredibly successful at bringing prices down, making the market more competitive and all the rest of it. I agree, but how, ultimately, can the price comparison website be sure, if it does not have the claims data, that it is providing a service that is meeting the consumer need? That is the bit that, conceptually, I really struggle with here.
David Geale: There are value measures that exist at the moment, but they are not consumer-facing. Firms and industry commentators can see them, but that is what we are looking to refine and improve. Price comparison websites can also talk to the insurers. It is not something that they cannot discuss with these firms when they are listing them on their websites and so on. If they are presenting information to customers, there is an element of them having to do a certain element of due diligence on what they put on their site.
In terms of whether there is a reliable measure of value on price comparison websites at present, there is not, but that is what they are interested in putting on, and something that we have said we will work with them to achieve. I would expect that, under the consumer duty, anything that they put on there is accurate, a fair reflection and something that is presented in a way that consumers can understand. It may apply slightly differently to how it applies to the insurer, but, at the end of the day, they are still an important part of the chain and the duty applies.
Lord Vaux of Harrowden: Is there a role for the FCA in standardising the underlying data?
David Geale: Data in terms of what is provided to us is something that we look at in terms of trying to make that as efficient as possible. In terms of what is presented to consumers, again, it depends. If we are looking at value measures, we will have to potentially get into some standardisation. Otherwise, if each company measures it in a different way, it will not be a meaningful comparison. That is where I say that there is a balance between prescription and outcome. Having said that, it does not necessarily need to be us that does that. If the industry can come to an agreement on one way of doing it that does not need rules, that may be acceptable, provided people follow that.
Q118 Lord Griffiths of Fforestfach: Coming back to this issue of the consumer duty, to what extent is there, at present, a difference in the response that you are getting from the large companies, where there is a lot of discretion and as few rules as possible, as far as I can understand, as opposed to smaller companies? To what extent does that have an impact on the degree of competition?
Insurance is different from banking, but, if you look at the whole history of banking, the banks loved having the equivalent of consumer duty, because they could, in effect, negotiate, in the extreme, in an oligopoly among themselves, as to what was happening, whereas the poor smaller companies, simply because of the manpower required to monitor what is happening there, are really thrown back on very simple rules and may find it much harder, for example, to grow. I just wondered to what extent you are seeing something like this emerge.
David Geale: Our rulebook applies to firms based on activity, not necessarily size as such. That said, with something such as the consumer duty, we do expect proportionality, so we would not expect, for example, the same level of data from a small firm as we would necessarily expect from a large one. If their product line is much simpler, we would expect something different in terms of what they monitor, because it is simpler to do that. It flexes, and the consumer duty allows them to do that.
We also have objectives and powers around competition. You used the example of banking. Areas such as open banking, which will, of course, move into open finance, will be relevant to insurance. We have been very clear that, with things such as the infrastructure that is set up, that cannot be set up for an elite club of the largest banks. It needs to give access to smaller banks and also payment firms and fintechs that may have bright ideas, are run well and can engage. The duty enables us to flex and to be proportionate.
You are right that larger firms have more resources to throw at things, including the consultations that we put out and to engage with those, and we are very mindful of that and seek to engage in different ways. In terms of the things that we do to help them and to explain that, we have run a series of webinars, for example, where it is available to all firms. Small firms can come and join in, and hear from us directly, to try to ease some of that transition of understanding. I would say that we adopt a proportionate approach.
Lord Griffiths of Fforestfach: Since the consumer duty was introduced, have you found that you have to introduce more minimum standards or requirements?
David Geale: No. Our first port of call would be to consider, in terms of what we want to achieve, whether we can use the powers and the rules that we have already, as well as the consumer duty. If we can do that to achieve the aims that we want to achieve, we would not look to introduce new rules. We are very mindful of not introducing new rules if they are not needed.
Q119 Lord Davies of Brixton: The FCA has the secondary competitiveness and growth objective. Has what you have done in terms of supervision and enforcement in that area of interest been influenced by the secondary objective? How do the two mesh together?
David Geale: We are very focused on the competitiveness of the UK. In anything that we look to do, we seek to be proportionate. We work with other jurisdictions and look at the requirements in other jurisdictions. What we want to do is ensure that, through any actions that we take, UK companies are competitive. Equally, we need to focus on the UK market and make sure that we are delivering what is right for the UK.
A classic example of that was not in insurance, but, if we look at how we have developed a regime for or crypto, for example, we have been very mindful of what is going on in the US and in the UK. We have designed what we feel is right for the UK, while keeping very much in mind the UK’s competitiveness position.
Insurance is based on trust. We see a significant number of people who are not taking insurance, particularly travel insurance when you would feel that they really should be for their own protection when going abroad. If we can, through our work, encourage more people to understand and take the cover that they need, that is good for growth as well.
It is a general feature of our work. Again, the principles-based approach to things such as the consumer duty allows us to be more flexible, which in turn gives firms more space to innovate and grow.
Q120 Lord Vaux of Harrowden: Talking about the consumer duty, you have talked about the outcomes and the importance of the outcomes. Could you just say a little bit about how you measure those outcomes? How do you measure success specifically in the home and travel insurance areas?
Chris Knight: We have in a number of areas taken direct action that has had a very specific positive impact on customers. For example, in the premium finance area, an issue arose through the data that we gather on insurance pricing practices. That is something that we have identified, highlighted and worked on with the companies. As a result of that, we believe we have managed to save customers an estimated £157 million on an annual basis. When we make a specific intervention on a specific issue, you can see a specific metric move.
We talked about understanding trust. It is difficult to find a single measure to use on trust, but clearly trust is a hugely important quality to have in the insurance market. For example, the Fairer Finance data shows that trust in the insurance sector has gone up for the last two years. It also shows, interestingly, that people who have made a claim have more trust in their companies than people who have not made a claim. I referred earlier to the customer service index, where we have seen insurance increase and go above the average.
Those are the wider metrics that we would look to to see whether things are working. Clearly, lots of things are changing in the world or the environment in which we are in, but it is a mixture of spotting, preventing and addressing harm, where we can show a direct impact, and wider efforts to improve the level of trust in the industry.
David Geale: We expect firms to collect data based on the customers that they are dealing with and the products that they sell. Where firms introduce a product, we expect them to have a target market. We expect them to monitor who is buying those products. Is it reaching the people that they intended? We expect them to track things such as product performance in terms of whether people keep those products, if it is a longer-term product. We expect them to track complaints. We would look at ombudsman referrals. We would look at ombudsman uphold rates. We would look to carry out bespoke studies into things such as consumer understanding and we may ask firms for their own studies, and indeed we look at independent results.
We expect firms to have quite a wide range of data. It is not just product-specific. It could be things such as call centre times or response times and things.
Lord Vaux of Harrowden: I am conscious of time, but my question was not really on the specifics. It was more about how you know whether the consumer duty is driving positive outcomes or not. That was more the thrust of my question.
David Geale: For us, it comes back to a number of those things that I have just mentioned. If we are seeing high levels of complaints in a sector, that is an indicator that something is not working. We would expect to see complaints come down over time. That is an indicator that the duty is being effective. If we are seeing a high number of ombudsman referrals, that suggests a level of dissatisfaction in terms of the way that firms are handling those complaints. That, again, is an indicator that things may not be working. A positive outcome would be that we see those coming down over time.
Chris has mentioned trust in the sector. It may be difficult to be specific, but you can still monitor trends and you can look at people’s perceptions and the satisfaction level of customers when they do make a claim, for example. These are all the things that can tell us whether the consumer duty is working, as well as things such as sentiment surveys and so on that we can come up with and service quality metrics. We expect firms to collect those and we can look at that data.
Q121 Lord Hill of Oareford: Do we have any data on how the consumer experience in the UK of travel and home insurance compares with other countries? Is there anything that we can learn from how other countries think about regulating these markets?
David Geale: I am not aware of any specific data on performance. We can take that away. The regulatory frameworks, as you know, are very different across the different jurisdictions. We look very closely at what rules are in place in Europe. We look at other jurisdictions such as the US and Australia.
The US, for example, is difficult to look at because it is not necessarily one pattern of regulation. It can be done state by state. We do see pockets. If we take the US, for example, there are some areas where they have standardisation around fire policies, but it is not a national thing. It is across different areas.
It is difficult to answer that definitively, but we look at what is happening in other jurisdictions. If we think there are things that we can learn, we take them.
Q122 Baroness Donaghy: You mentioned, particularly Chris Knight, the issue of trust. It seems to me that there is a high level of mistrust and cynicism, and it is mutual. The customers want to spend as little as possible for the maximum protection and, whatever you say, the insurance companies have to build into their business plan a certain number of refusals. Otherwise, they cannot plan their financial stability for the future. For instance, do you collect data on fraud? We have not mentioned that up to now. What information do we have generally about deliberate fraud as opposed to people complaining because they feel they have been misinformed?
David Geale: I do not have the data to hand. We do look at fraud within companies because we look at their overall governance and controls and we work very closely with law enforcement, for example.
We touched on levels of decline. In many ways, they can be quite difficult to predict. If we look at what has happened even this year, there has been the conflict in the Middle East. Firms will always make a certain assessment of what is going to happen weather-wise, but the climate is changing. There have been some reasonably unprecedented events. It can be very difficult. That will flow through into the insurance market.
Last year in the home market there was a 1% rise in premiums on average. If we look at the things that are happening this year, we have had the conflict in the Middle East, the disruption to jet fuel and so on. Some of that is going to flow through.
It can be very difficult to predict, but, for things such as fraud, firms will have an assessment of the amount of fraud that they expect. We certainly all want fraud to come down and there is more that can be done around data sharing in terms of fraud across financial services. I also look at payments and banking as an area where we think more can be done in that space.
Chris Knight: To the first part of your question, from our Financial Lives survey we see that 68% of people who buy home insurance and 62% of people who buy travel insurance focus primarily on price. On the other hand, only 31% of people believe that they really have enough information to compare between providers. We have been talking about understanding and trust. There is definitely an in there, whether it is through price comparison websites or otherwise, to improve that 31% figure, which will hopefully generate more trust two ways.
Baroness Donaghy: Do you have data on fraud at all? Is there data that is published? The industry seems very bashful about it.
Chris Knight: We work with the Insurance Fraud Bureau, and we get data from its department. For example, the data that we got from it highlighted to us the issue of ghost broking in the motor insurance market. We saw a big increase in potentially fraudulent activity and social media activity. We were then able to act to highlight that as an issue and to go out on social media directly ourselves to address that issue.
Yes, we get data and we build it into the mix, if you like, with all the other data that we have to direct our supervision efforts.
Q123 Lord Smith of Kelvin: You have talked quite a bit about standardisation. You have mentioned the dangers of hollowing out policies and things like that. Has the FCA ever considered a standardisation of policy terminology so that we can promote consumer understanding? What exactly is “wear and tear”? What exactly is “storm damage”? This is not about standard policies but standard definitions of what these things mean.
David Geale: This is a challenge in terms of different firms meaning different things when they look at it. As Chris mentioned, some of the work that we are doing now with the industry is to see whether that is achievable. We are actively looking at it at the present moment in time.
We will not go to the extent of saying, “This is what a standard policy document looks like with all these terms”. I do not think we should do that, but we are actively looking at whether there could be some common definitions so that people can get a good understanding of what, for example, wear and tear and storm claims are and what those terms mean.
The Chair: If the industry does not agree, what would the FCA do about it?
David Geale: First, we are with a coalition of the willing between consumer groups and the industry, but it is always going to be a challenge getting everybody to agree. We will need to consider whether it is something that we need to introduce and whether it would potentially be a specific rule. We would need to consider the merits of that based on those discussions.
If it proves to be incredibly difficult to do that in a way that is meaningful, we would have to take that into account. If we think they just cannot agree, that would be something else. We will see where the work gets to, but I would not rule out that we may consider further action if needed.
The Chair: Thank you both very much for coming this morning. It has been a very informative session. As usual, you have been generous with your answers, so I would like to thank you on behalf of the committee.
