Clare Bolingford FMA Director of Banking and Insurance, spoke at the FSC's: "Outlook for the insurance sector - Building a sustainable and trusted life and health insurance sector." Webinar on April 05, 2022
Tēnā koutou katoa. I’d like to thank the FSC for the invitation to speak today and for the opportunity take part in what’s shaping up to be a very insightful panel discussion.
I did have quite a hard time working out what to speak on today, mostly because there is just so much going on that could be covered.
I know that the insurance industry is facing some testing times, and part of the challenge is the current volume of regulatory change.
But we share same goal of supporting customers’ financial wellbeing and I want to focus today on what we can do to put customers front and centre, both now and in the future.
Global trends in conduct regulation
But before I turn to the NZ market, I thought I would highlight a few themes emerging in conduct regulation in other jurisdictions. In particular, a greater focus on the outcomes experienced by customers and investors.
Some of you may have heard our new Chief Executive Samantha speaking a couple of weeks ago on this topic, highlighting that governments and the public are now more likely to expect financial regulators to give greater emphasis to issues of equity and fairness.
NZ is not alone in experiencing significant shifts in market and customer behaviours and at the FMA we look to learn from best practice and lessons from other jurisdictions.
In November last year ASIC’s Commissioner Sean Hughes said that “at the heart of all ASIC’s regulatory endeavours lies a resolute focus to ensure good consumer outcomes”.
And the UK FCA’s latest consultation on a new consumer duty sets out clearly that firms should “act to deliver good outcomes for retail clients”.
While the legal basis and some of the language differs, there is a strong consistency with the CoFI principle of treating customers fairly. And importantly, the intention of shifting to a mindset focusing on customer outcomes rather than compliance with specific rules.
So what does that actually mean? And for who? A good start is to exercise an empathetic focus on the customer.
This means viewing things from their perspective. That can be during design and distribution planning and should be in any and all post-sale interactions. It means thinking about the customer experience through the lifecycle of the product.
It also means everyone in the business thinking like this; from the Board and Executive through to front-line teams and everyone in between.
It is categorically not just the job of the conduct team, or the risk management team or the compliance team. I really can’t emphasise this enough.
And it means asking questions like does the customer need this product? Am I helping them to make an informed decision? Do they understand what they are getting?
As Samantha put it: it means people get the financial products and services they need, when they need them, and they do what people reasonably expect them to do.
Focussing on outcomes provides an opportunity to shape regulatory changes in ways that work for both your business and your customers.
But if you don’t grasp that opportunity, governments do have a tendency to reach for more prescriptive tools. Because if the principles we expect firms to apply are clear, but there is no evidence of changing the practices that cause poor outcomes, eventually rules may be required to protect customers. And those generally have less flexibility and proportionality around how they need to be complied with.
The FMA will be refreshing its previous conduct guide, published in 2017, to support a continued focus on delivering fair outcomes for customers and to set out our expectations around key conduct principles. It’s important that this is aligned with CoFI legislation, so it makes sense for both our current and future licensed firms.
NZ Insurance outlook
So to the NZ insurance market. The health and economic environments are obviously having impacts both on insurance firms and their customers. Covid-19 is now well and truly here in NZ and the impacts are being felt in the labour market and in supply chains.
Many people will be encountering financial stress over the coming year with high inflation, rising interest rates and the unknowns of long covid.
The trend towards further digitisation has continued to accelerate since the first lockdown two years ago. And there is significant consolidation occurring in the market, in particular with banks divesting their insurance business.
The FMA and RBNZ continue to engage with the market regularly to understand these impacts and now also to understand any risks arising from the Ukraine/Russia conflict. We need to hear what stresses and issues you have and are here to help with relief if it is needed.
This is a prime opportunity to demonstrate value to your client base, and not use Covid-19 as an easy excuse to ignore client needs or take focus away from good conduct practices.
With all of these shifts, what we want to see is that changes are made with customers not only in mind but at the forefront of firm’s strategies.
I’d like to congratulate the industry on the efforts it has made throughout the pandemic for customers. We have seen some really good practice from firms, particularly in the latest stage of this pandemic, where BCP plans are being formulated swiftly and rolled out to ensure that customer service remains a priority despite staffing challenges.
But we are also still finding, too often, that when we ask firms how they have considered customer impacts or outcomes when changes are made, the response has not been thought through – which suggests it is actually an after-thought.
We do expect firms to be thinking about the customer up front when any changes are made, communicating clearly to customers and, importantly, thinking innovatively about how to mitigate any adverse impacts that the change could have.
So, for example, when a firm states that a digitisation project would offer positive outcomes for customers, we’re disappointed when they can’t actually articulate to us what those are in practice.
This is concerning given we know some customers, particularly those in vulnerable circumstances, may struggle to access or use digital services. If thought isn’t given at the start to how support or alternative services can be provided, this can often result in poor outcomes.
It is not only important for senior leadership of firms to have customers at the top of their agenda, but also Boards.
We want to see Boards proactively thinking about what they need to understand and assure themselves that customers are treated fairly. We want to see them constructively challenging management on what information is provided to them on culture, conduct and customer outcomes.
The FMA is again teaming up with the RBNZ to review governance as part of our major cross sector thematic this year and will be looking to identify and promote effective board practices as well as areas for improvement.
In the meantime, firms have been continuing to provide the FMA and the RBNZ with updates on their Culture and Conduct progress and action plans every six months.
We can see that positive progress towards completing action plans has been made, with some firms having completed all actions. It is good to see the investment that has been given by the industry to tackle the issues raised in the original reviews and build good foundations for the future CoFI regime.
However, there is still more to be done. We continue to receive ongoing disclosures of client harm, such as over-charging of premiums or benefits not being applied correctly.
Our message is still the same when harm has occurred; make sure you put the client at the centre of everything you do; engage with us early; and stop any harm immediately.
As I said earlier, I am very aware there is an intense level of regulatory reform impacting insurers and the wider industry, not only as part of the FMA’s remit, but across government.
I’d first like to say that we are firmly committed to improving the coordination between the Council of Financial Regulators, to not only understand the impact of these changes but to identify where our work could be phased in a more achievable way.
Some progress has been made here, but there is much more to be done. That’s both on the timing of consultations but also the operational impact of the change and ongoing regimes.
I’m delighted that we have now established the CoFR Insurance Forum, with the FSC as a member, to provide a space to have further debate on key topics and to support CoFR in understanding the impact of change.
I remain very grateful to the FSC for their continued, constructive engagement and feedback as we work through these changes.
So, firstly on the changes to the financial advice regime. We continue to receive a steady stream of full financial advice licence applications and are planning further guidance.
I’m just going to make a quick plug here for the FMA crew working through these: if you are struggling with your full FAP application please do reach out to the FA supervision or licencing team. They have held one on one sessions for class 3 applicants and are available to help.
Secondly, on the Climate Related Disclosures regime, we are working closely with CoFR colleagues and others involved in the regime implementation.
We’ve set out our proposed approach timeframe on our website and you can also find out how all of the CoFR climate change activities fit together in the RBNZ Climate Change report, published last year.
Onto the current consultation on changes to insurance law. The policy intent here is again in line with the overall outcomes I mentioned earlier: to increase customer confidence, empowering them to access and buy the products they need.
It is also to avoid situations where customers have gone to make a claim in a time of need and discovered they are not covered because they didn’t understand, remember or even were aware at the time of taking the policy that they needed to disclose a particular condition – even if it is unrelated to the claim itself.
We appreciate the reforms have the potential to create lot of mahi for insurers but have been heartened to see many insurers have already embarked on this journey. We have seen good examples of introducing plain english in communication and policy documents which support customer understanding.
It will be really important to retain this customer focus and think carefully about the likely types of customers and their needs and abilities when tailoring your documents.
Think holistically about how documents help customers understand policy features. Ask yourself questions like:
Have we tested consumer understanding of our policies? And I mean here with some actual customers, not with just with lawyers or staff.
What do current queries and complaints about terms tell us about how customers understand, or don’t understand, our policies?
How do we identify customers who may have difficulty understanding a policy document and what support could we put in place?
Are there new technologies we can use to aid and check customers’ understanding?
These will serve you better than spending a lot of time on internal policy tomes and box-ticking compliance exercises.
And finally to my favourite topic of regulatory change, CoFI. Not that I’m allowed to have favourites, but I do feel that where the legislation is landing does provide a real opportunity for an improved focus on outcomes.
As a reminder, insurers will need to comply with the principle to treat consumers fairly. While this isn’t an enforceable duty, it will be implemented through the requirement to establish, maintain and implement a “fair conduct programme”.
The regime intends to cover the whole relationship with a customer rather than just focusing on the point of sale.
So what does treating customers fairly look like in this regime? It means paying due regard to consumers’ interests, so as I said earlier putting the customer at the forefront of your strategy.
It will mean firms will need to have a whole of company strategy about how they think about the customer. It means moving away from a legalistic approach to compliance with rules to a focus on good conduct risk management to deliver fair treatment.
It means actually checking how products are performing for customers rather than assuming they work because it fits with the commercial strategy.
It means communicating clearly and regularly with customers and acting quickly if something goes wrong.
But how does that work when an insurance provider is not the only part of the customer experience?
I’d like to finish by talking about the role and importance of intermediaries. And our plans for providing guidance to support insurers and their intermediaries to achieve good customer outcomes.
I believe intermediaries are vitally important for giving customers access to financial products and services. Intermediated distribution channels exist to serve diverse market needs and customers can get improved outcomes through great quality advice.
But it is clear to us that the market dynamic between providers and intermediaries does not always facilitate fair treatment.
To achieve the right outcomes, it is important there is a sense of shared responsibility for the customer between a provider and any intermediary.
Shared means both have the customer at the heart of their respective businesses and, should work together, as partners, to ensure that customers are treated fairly.
Shared does not mean compromising the commercially and legally independent relationship between providers and intermediaries.
We have already heard that some providers may have moved ahead of the final policy in a way that potentially over complies with what the legislation will say and could create unnecessary burdens for intermediaries, and the providers themselves.
For example in the banking sector, we have heard that financial advisers are being told to undertake audits at a cost to the adviser. And as there is no standardisation to the nature of the audits, firms may have to undertake several for different banks they partner with.
While audits may or may not be the right tool in this example, we absolutely want to avoid unintended and unnecessary consequences, especially if they add cost and burden to the industry without obvious benefit to the customer.
As the final policy on intermediaries has taken some time to land, not least due to the valuable feedback been provided and acted upon during the consultation stages, we are aware industry is keen for clarity on the obligations under the COFI Bill.
Guidance is likely to be helpful on the intersection of CoFI and FAP licenced intermediaries and what the FMA expects in practice from all parties.
The FMA intends to publish guidance to clarify expectations. But first we want to collaborate with you in developing this to make sure it achieves the desired objective and doesn’t create those unintended consequences.
We plan to facilitate forums, starting next month, to get both providers and intermediaries in the same room to arrive at an industry led solution to how fair customer outcomes can be achieved within the bounds of commercial realities.
So in conclusion, while there is a lot happening in the insurance sector, we have a real opportunity here to deliver regulation that’s proportionate for industry and supports you in delivering the overarching principle of treating customers fairly.
What we expect as the environment changes is that you are focusing on the impact on customers and continuing to service and support them well.
This will take leadership: from boards, executives and those right across your business who bring the customer perspective into their work. It will take investment in systems and in your people.
But with a relentless focus on the customer in everything you do, this industry will build confidence in its services, be sustainable and continue to support the financial wellbeing of New Zealanders long into the future.