FCA introduces rule to protect customers from insurance ‘loyalty penalty’

Under the new rules, insurers will be required to offer renewing customers a price that is no higher than they would pay as a new customer. Although the FCA said the rules would likely mean that firms would no longer offer “unsustainably” low-priced deals, it estimated the measures could save consumers £4.2 billion over 10 years.

The rule change follows a market study carried out last year into insurance pricing. In a policy statement (217 page / 1.92MB PDF) announcing the package, the FCA said there was general support for the pricing remedy, but respondents to its consultation had asked for more information about how the rules would operate in practice. As a result, the FCA included more guidance and detail on areas such as the treatment of incentives in the final rules.

The remedies package also includes measures to make it easier for consumers to cancel automatic policy renewals, requires insurance firms to do more to consider how they offer fair value to their customers, and requires home and motor insurance firms to report data to the FCA.

Insurance law expert Iain Sawers of Pinsent Masons, the law firm behind Out-Law, said: “This is a full package of measures that has relevance beyond just home and motor insurance. All general and protection insurers and intermediaries will be affected and should be working to understand how the measures will apply to their businesses.

“In what will be challenging implementation periods, these will require significant changes to firms’ pricing, product governance and reporting processes, and to their customer journeys and distribution agreements,” Sawers said.

Competition law expert Angelique Bret of Pinsent Masons, said: “The FCA’s remedies package is a significant milestone in ongoing efforts by UK regulators to tackle so-called loyalty penalties, and address their perceived detrimental impact on competition and consumers.

“Loyalty penalties, which can involve ‘price walking’ practices, and associated conduct such as certain auto-renewal arrangements, have been an area of focus since 2018 when the Competition and Markets Authority [CMA] received a super-complaint concerning business practices in mobile, broadband, savings accounts, mortgages, and household insurance sector,” Bret said.

“Since then, sector regulators have undertaken work to better understand and address loyalty-penalty concerns in their respective areas of competence; the FCA’s newly announced measures are a culmination of its work involving home and motor insurance products, whilst Ofcom has carried out projects to achieve improved business practices and fairness for consumers of mobile and broadband services and the CMA is conducting two investigations targeting auto-renewals in the anti-virus software and online console video gaming sectors,” Bret said.

Bret said the FCA rules followed increased calls in recent years to strengthen UK consumer law enforcement, to facilitate regulatory action against loyalty penalties and other practices seen as unfair or harmful to consumers. Earlier this year an independent report from John Penrose MP recommended that restrictions on price discrimination and loyalty penalties should be extended beyond the financial services sector to be a general consumer protection regulation across the entire economy.

Rules changes to pricing, auto-renewal and data reporting come into effect on 1 January 2022. Other rules on systems and controls, product governance and premium finance take effect from the end of September 2021.