The rules and principles which apply 

As well as those rules within ICOBS which directly relate to sales and after sales disclosures and processes. ICOBS 2 also deals with a number of ‘general matters’ including financial promotions, inducements, supporting customers in financial difficulty and record keeping requirements.

In addition to these general matters, firms are reminded that the wider FCA rules and guidance and in particular the impact of the Consumer Duty will impact whether sales, communications and support processes are designed to deliver good outcomes for retail customers.

Customer best interest rule

The customer best interest rule at ICOBS 2.5.-1 is a wide reaching rule which simply states that a firm must act honestly, fairly and professionally in accordance with the best interests of its customer.

It is important to note that this rule applies to every type of customer a firm deals with encompassing consumer, commercial customers and larger commercial customers and is not restricted to only those customers who arrange the policy, it also includes other policyholders who will benefit from the contract and policy stakeholders (see Section B.2 for further information on customer categorisation).

Therefore,  even when the rules in ICOBS do not apply to a particular customer or risk, a firm must always be able to demonstrate that it has acted honestly, fairly and professionally in its dealings with customers and other persons who may have rights or benefits under the contract of insurance, including being able to demonstrate that they meet the Principles for Business in all of the dealings with clients and other associated parties.

How this may affect firms

The FCA has always placed considerable importance on firms taking into account Principle 6 (customers’ interests) and Principle 7 (clear, fair and not misleading) for all customers throughout the whole sales and post sales process. This has been further strengthened with the introduction of the customers’ best interests rule (ICOBS 2.5-1R). with further emphasis placed on  delivering good outcomes for consumers under Principle 12 (Consumer Duty).

ICOBS comprises both rules and guidance and firms should note as part of their greater reliance on Principles, a number of the FCA requirements are now covered largely by Principles rather than detailed rules, ICOBS is not just about customer disclosures but also about considering what is ethical, appropriate and proportionate in terms of a firm’s approach and the systems and controls it puts in place,  examples of those wider considerations are set out below:

Inducements

Guidance in ICOBS 2.3.1 describes an inducement as a benefit offered to a firm, or any person acting on its behalf, with a view to that firm, or that person, adopting a particular course of action.  This can include, but is not limited to, cash, cash equivalents, commission, goods, hospitality or training programmes. Guidance in ICOBS 2.5.6 reminds firms that where they offer incentives to third parties they should consider whether doing so conflicts with their obligation under the customer best interest rule.

There are no other specific rules in ICOBS covering inducements; instead the FCA relies upon Principle 8 and SYSC 10 which require firms to manage conflicts of interest.  The inappropriate use of inducements is, though, likely to be contrary to the requirements of the customers’ best interest’s rule..

A firm which offers or accepts inducements should also consider whether doing so conflicts with its obligations under the Principle 1 and 6  (conducting business with integrity and paying due regard to customer interests and treating them fairly).

Section B.19 covers inducements and firms should bear in mind that the responsibility to manage inducements and other conflicts of interest fairly is not restricted to a particular type of customer and applies equally to wholesale and retail intermediaries. Additional information on conflicts of interest is outlined in Section A.18.

Remuneration

ICOBS 2.5.4 reminds firms that they must ensure that that the way in which the firm is remunerated and the way in which it remunerates or assesses the performance of its employees must not conflict with the customer’s best interests rule.

In particular, an insurance distributor must not make any arrangements by way of remuneration, sales target or otherwise that could provide an incentive to itself or its employees to recommend a particular contract of insurance when it is not consistent with the interests of all the customers of the policy (which for example  includes leaseholders under a multi occupancy building insurance policy)  or where a different insurance contract can be offered which would better meet the customer’s needs. Further information on remuneration arrangements can be found in Section A.18.1.1.

Excessive charges

There are no rules in ICOBS relating to excessive charges; instead the Regulator is relying on Principle 6 (Customers’ Interests) and Principle 12 (Acting to deliver good outcomes for retail customers). With firms needing to consider how they justify that their fees are fair, proportionate and transparent. Section B.4.1.3 covers fees in more detail.

The Consumer Duty  also requires firms to ensure that the products and services they provide offer fair value to the customer. A key consideration in this is whether fees, charges and remuneration structures through the insurance chain impact fair value. All firms within the distribution chain should be able to demonstrate that their fee and remuneration structures are fair and proportionate considering the work undertaken by the firm and the end outcome for the customer. Excessive fees, charges or commission income can result in the overall price of a product not providing fair value when considering this against the overall benefits a customer receives, such arrangements would be contrary to the Consumer Duty.

Record keeping

While there is guidance in ICOBS regarding record keeping, there are no specific rules; instead the FCA is relying on Principle 3, which requires a firm to organise and control its affairs responsibly and effectively, and the high level rules in SYSC 9 which require firms to keep orderly records sufficient to allow the FCA to monitor the firm’s compliance.

Section B.17 covers record keeping.

 Financial promotions and Communications

The rules in ICOBS 2.2 cover all communications with all customers – this includes financial promotions.  The basic rule is the same as Principle 7 which requires communications with all customers to be ‘clear, fair and not misleading’ with a caveat that marketing communications are always clearly identifiable as such (ICOBS 2.2.2A). However, specific additional rules and guidance apply to the approval of financial promotions (ICOBS 2.2.3), Pricing claims (ICOBS 2.2.4) and e-commerce communications;  Chapter I covers customer communications and financial promotions in greater detail.

Consumer Duty

The Consumer Duty makes specific provisions for good customer outcomes in relation to the way in which firms communicate with and support their customers throughout the product lifecycle. The requirements of ICOBS provide the basis for the nature and type of information that should be disclosed to a customer.  However, firms should also consider:

• how this information is presented to aide consumer understanding; and
• when the information is provided to ensure that customers are able to make informed decisions prior to purchasing a product or service.

The Consumer Support outcome of the Consumer Duty is also concerned with the support channels used and how effective they are in ensuring that customers:

• can fully utilise the products and services they purchase; and
• face no unreasonable barriers to make changes to their policy, cancel, claim or complain.

There is therefore a close link between the requirements of ICOBS and how a firm delivers those requirements under the Consumer Duty.  More information on delivering good customer outcomes in the product lifecycle can be found in Section H.4.3.

The application of the consumer duty follows sectoral sourcebooks and so where ICOBS applies then typically so does the consumer duty – so consumers and commercial customers are in scope, the Consumer Duty however does not cut across the SME watershed and so does not directly apply to larger commercial customers, there is however, still an overarching requirement for firms to ensure  the fair treatment of larger commercial customers under the FCA’s Principles for Business.

Vulnerable Customers

As part of delivering good outcomes for retail customers, it is vital that firms consider customer vulnerability throughout the customer journey, Customer vulnerability is covered in further detail in Section H.5 including examples of best practice in this area. How a firm adapts its approach and provides flexible support to customers in vulnerable circumstances throughout its sales and aftersales processes is key to ensuring that vulnerable customers receive outcomes which are as good as for other customers.

In our opinion firms should take an inclusive approach to customer vulnerability which is driven less by rules and application criteria and more about responding supportively to an individual customers circumstances.

Customers in Financial Difficulty

The FCA have also published guidance for general insurance brokers at ICOBS 2.7 specifically in relation to supporting customers in financial difficulty. This guidance applies to consumers and commercial customers alike but ICOBS 2.7.3G excludes larger commercial customers and the commercial customers of specialist risk contracts from the scope of the guidance, in these circumstances firms continue to be subject to FCA rules (including the Principles) in relation to that business, and will need to continue to consider what those rules may require of those firms in their particular circumstances.

Broadly for customers in scope, the guidance sets out how firms can go about identifying financial difficulty including signposting of support available and how firms should respond to deliver good outcomes in these circumstances including the support options firms should consider. We explain this guidance in more detail in Section H.5.4.4.