Our findings on how smaller mutual life insurers meet Consumer Duty requirements and deliver good customer outcomes, sharing good practice and our expectations.
1. Summary
The Consumer Duty (the Duty)[1] sets high and clear standards of protection for retail customers across financial services. It requires firms to deliver good outcomes in terms of product and services, price and value, consumer understanding, and consumer support. Firms that offer non-investment insurance products are also subject to the fair value rules under PROD 4. In our life insurance portfolio letter: insurance market priorities 2023-2025[2] we said that we wanted to understand how smaller firms, including many small mutuals, are meeting the Duty requirements and delivering good customer outcomes in a sustainable way.
Mutual organisations provide market diversity, improving customer choice and market integrity. It is important the sector remains strong and continues to provide consumers with well-designed and good value products.
The FCA and PRA have responded to a request from the Government to report on the mutuals landscape by publishing the Mutuals Landscape Report[3] jointly with the PRA alongside our Mutual Registering Authority Report[4]. This is part of its initiative to unlock the potential of the sector to support inclusive growth across the UK. There is no ‘right size’ for a mutual, and we welcome a market with firms of a variety of sizes. We want regulation to be proportionate and work for smaller as well as larger firms.
Our review found:
- Target Market Statements - Firms had a strong focus on understanding their customers. However, most had broad statements to describe their target markets, and some were also unclear on who their products would not be suitable for.
- Fair value assessments – Firms had strong metrics to measure value. However, most were limited in their conclusions. They often relied on one benefit, such as the ease of purchasing the product, rather than considering the overall quality of the product and related services.
- Fair treatment of with-profit policyholders – Some firms had a strong understanding of the outcomes being delivered to with-profits customers. However, in general, firms did not have a clear rationale for how their proposed new business strategy complied with COBS 20.2. and that operating practices were fair to the interests of with-profits policyholders.
- Financial operating models – All firms emphasised the importance of placing customers at the heart of their organisation. However, they were inconsistent in assessing their future viability. Some assessments were also conducted in ways that would not support timely decision making on strategic direction.
We have given the firms we reviewed individual feedback. We have seen firms taking action to improve outcomes, but some have more work to do. We have engaged with them where improvements are needed.
2. Who this applies to
Our findings are relevant to all mutual organisations and life insurers.
3. What we did
We looked at how 13 smaller mutual life insurers are meeting their obligations under the Duty and the Product Intervention and Governance Sourcebook (PROD) rules. Where relevant, we also looked at whether firms were treating with-profits customers fairly under aspects of our Conduct of Business Sourcebook (COBS) rules COBS20.[5] We selected firms that sold protection and/or saving products and which we identified as having assets of under £1bn.
We looked at firms’ information including:
- Their latest business plan.
- For firms operating with-profits funds, their assessment of how their business plan complies with COBS20 requirements.
- An analysis of changes to their Own Funds (simply defined as the portion of a firm’s total capital available to cover their regulatory capital requirements, after they have accounted for liabilities expected to be paid to policyholders) and commentary for the previous 3 financial years ending 31 December 2023.
- The Duty fair value assessments for all open book products.
- Terms and conditions for all open book products.
- A firms Own Risk and Solvency Assessment (ORSA).
We did not look at Closed Book products. However, firms should consider our wider findings and whether they might apply to their Closed Book products.
4. Our findings
4.1. Identifying target markets
What we expect
Under PROD 4 Product governance[6] firms must identify a target market with enough granularity and detail to make sure their products meet the needs, characteristics and objectives of those customers. If firms do not clearly define their target market, it would be difficult to show how they are providing fair value.
When identifying the target market for pure protection (non-investment insurance), firms must also clearly identify groups of customers for whom the product would not provide the intended level of value. Regularly reviewing products using effective outcome monitoring metrics makes sure products remain consistent with the target market. It also helps firms identify groups of customers who might not get fair value.
Good practice
Some firms had a strong focus on understanding their customers and providing products that would meet their needs and the characteristics of their target market. Examples included:
- Conducting market research to best understand their target market’s need for a particular product and their purpose for buying it.
- Strong identification of the target market and, importantly, those customers who would be unlikely to receive fair value from the product.
- Tailoring products to a specialist target market, such as specific professions or jobs.
- Considering the best way to distribute products, taking customers’ circumstances into account.
- If products had been sold via a distributor, having after sales support to check that customers understood the purchased product. This supports firms’ monitoring obligations and can also help them understand whether a product was likely to fulfil a customer's needs.
Where firms had invested in understanding their customers and had a clear and thorough target market statement, it was much easier to understand the value a product offered a customer group. Firms that have clear target market statements (together with the other requirements in PROD 4 and other relevant elements of the Duty) are more likely to offer fair value to their customers.
Areas for improvement
Firms recognised that customer outcomes should be central to everything they do. They said this is fundamental to their strategies and success. But most were unable to show a clear understanding of the needs and characteristics of their target markets - which is key to achieving good outcomes.
For example, most firms had broad statements describing their target markets. But these statements did not clearly identify and describe their customers and offered little clarity on who their products would not be suitable for.
4.2. Fair value of products
What we expect
Under the Duty’s price and value outcome we want customers to receive fair value. Value is wider than the cost and financial benefits to a customer. It may be appropriate for firms to include both comparative price and non-financial benefits when considering value, but it is the overall product value that should be evidenced in fair value assessments. Firms should be able to show that the overall costs the customer are likely to pay are reasonable relative to the benefits received.
Protection products
Many firms in this sector sell protection products. Either pure protection contracts[7], such as guaranteed over 50s and income protection, or Holloway sickness policies[8] (a long-term insurance contract that has an additional investment benefit). Firms that sell protection products should also be aware of our market study into the distribution of pure protection products to retail consumers[9].
Good practice
Firms use MI to show how non-financial services linked to a product were being used by customers. Those that used these insights, along with the assessment of financial benefits, provided clearer assessments of value for customers.
Areas for improvement
Firms offer non-financial benefits to customers. For example, access to online GP services or services that support customers who are preparing to return to work after a period of illness. Non-financial services can be beneficial to customers, and they should be included in Duty value assessments if they are part of fair value considerations. However, firms were not always clear about how these non-financial benefits added value for the customer. Nor were they clear how their costs related to the total price.
Some firms relied on comparing prices and benchmarking, which was not always effective due to the uniqueness of the product features. This may help a firm understand if its product is a price outlier but does not, on its own, help it understand whether that product provides fair value.
Some value assessments did not have appropriate MI to monitor whether customers were getting fair value. This was also a theme in our thematic review of general insurance and pure protection product governance (TR24/2)[10]. We reminded firms of their obligations to comply with existing fair value rules in PROD 4. Complying with these rules would satisfy the price and value outcome of the Duty. But firms in this situation should also consider additional Duty requirements, such as the cross-cutting rules.
4.3. Savings products
Several firms in the review sold investment and savings policies such as Tax-Exempt Savings Plans, ISAs, endowments and whole of life investment bonds. It is important that savings products allow customers to accumulate funds and help them achieve their financial goals.
Good practice
Firms that measured fair value well had clearly defined metrics. The metrics included forward-looking MI covering everything that made up the product’s premium. There were also minimum thresholds identifying when a product wouldn’t provide fair value.
Areas for improvement
Some savings products have a charging structure that means customers pay higher charges in the early years. These charges reduce, as a percentage of assets, over time as their assets build up. This charging structure reduces the initial acquisition strain on a mutual and the impact of early exits on the fund. If these costs were initially borne by a society, they may limit the volumes of business that can be sold. Firms need to show that products with this type of charging structure continue to offer fair value.
In other cases, high expenses are passed on to customer groups through higher charges. This may impact the fair value of the product, as it is more difficult for customers to accumulate funds and achieve their financial goals. Firms must consider whether product charges reflect the services provided. Firms should only allow appropriate levels of expenses to be assumed and passed on to customers.
Most fair value assessments were limited in their conclusions. They often relied on one benefit, such as the ease of purchasing the product, rather than considering the overall quality of the product and related services, as well as the likely return to policyholders. We expect firms to consider the costs and benefits of the product, and to include reasonable evidence of other benefits, in their assessments. Firms should monitor and regularly review the outcomes their customers are experiencing in practice. Prompt action should be taken if value assessments show consumers are at risk of not receiving fair value. The actions should be specific, and their success should be monitored.
4.4. Fair treatment of with-profits customers
What we expect
Some mutuals operate a with-profits fund, into which both non-profits and with-profits insurance business is written. In this case, firms must consider the requirements in COBS20.2[11] (treating with-profits policyholders fairly) when formulating their business plan and the sale of new (both non-profit and with-profits) business.
Good practice
Firms that considered the implications of volumes of with-profits vs non-profit business alongside profitability and sales were some of the better assessments. They also provided a better understanding of the outcomes for with-profit customers.
Areas for improvement
In general, firms did not provide a clear rationale for how their business strategy complied with COBS20.2 It was not clear how any potential conflicts of interest between different policyholder groups and members were being managed effectively. Nor was it clear that operating practices were fair to the interests of with-profits policyholders.
The key limitations in assessments were:
- Firms did not clearly show why the volume of new with-profits business being sold was consistent with maintaining fair outcomes for both existing and new with-profits policyholders.
- Where firms were selling non-profits business into their with-profits fund they did not outline why this was consistent with the fair treatment of with-profits policyholders.
- Where firms were selling low volumes of with-profits policies and comparatively high volumes of non-profits policies they did not consider the risk this introduced for with-profits policyholders (where they would absorb losses). There was also limited consideration of this risk where the run-off of with-profits business is faster than the run-off of non-profits business.
We have heard from industry, and particularly mutual insurers, about challenges in implementing certain aspects of the approach to with-profit funds set out in COBS 20. We will engage with industry on COBS 20 as part of our planned work in 2026 on broader opportunities and potential regulatory barriers in the Life and Pensions market.
4.5. Financial operating models
What we expect
Firms must make customers’ interests central to their culture and purpose. We expect firms to be proactive and act in customer’s longer-term interests.
Firms should also have robust operational resilience and sound business models that avoid causing harm to customers. Firms must consider scenarios leading to potential non-viability. We expect them to have detailed wind-down plans that would support an orderly wind-down to minimise customer harm.
We have engaged with, and are supportive of, recent work by the Law Commission reviewing friendly society legislation. We will engage in any future discussions on changes to the transfer process. In the meantime, we remind firms that, where mutuals undertake a transfer of engagement, we will consider each transfer on a case-by-case basis.
Good practice
Firms emphasised the importance of customers being at the heart of their organisation and made it clear that customer-centricity is fundamental to their business strategies and success.
Areas for improvement
Firms were inconsistent in assessing their future viability. Nor were most of these assessments conducted in ways that would support timely decision making on strategic direction.
Examples included firms with a large number of Child Trust Fund holders who may withdraw their money in the next few years following their 18th birthdays. This could rapidly deplete the assets under management and reduce the firm’s size and customer base. We saw little detail from some firms on the impact these withdrawals would have.
Other examples included expenses that were consistently higher than expected and business plans indicating an increase in expected future expenses per policy, or as a percentage of assets. Although increases to expenses were anticipated and could be explained, we saw little consideration of the potential implications.
4.6. Goneaway customers
Although we did not explore this area directly, we found different levels of understanding within firms of the group of customers they had lost contact with (goneaway customers). Being able to contact customers is important to make sure they are receiving the support they need and have an up-to-date understanding of the performance or features of their products.
Not having a clear view of this group can also lead to difficulties in reserving for estimated future liabilities to pay policyholders (and determining any distributable surplus) in with-profits funds.
As outlined in our Dear CEO letter of 16 May 2024[12], we expect firms to take reasonable steps to identify and reconnect with these customers.
5. Next steps
We will continue to monitor how firms are demonstrating the higher standards the Duty expects. This includes on price and value. Our recent multi-firm review – Findings from the insurance multi-firm review of outcomes monitoring under the Consumer Duty[13] - outlines the work we will do to assess how firms are monitoring that they meet the Duty’s requirements.
We will also continue to engage with industry to reduce regulatory friction and support innovation and growth as part of our planned work on broader opportunities in the Life and Pensions market.