Some UK life insurers are likely to pass on more of the interest they earn on customer cash balances to protect their reputations as customer fairness regulation introduced last year continues to drive changes, Fitch Ratings said in a briefing report on 17 January.
"We believe insurers will consider the extra costs negligible compared with the risk of being named and shamed by the regulator", the ratings agency said.
The Financial Conduct Authority (FCA) wrote to investment platforms and self-invested personal pension (SIPP) operators in December, several of which are life insurance companies. It warned that retaining a high proportion of the interest earned on customer cash balances may contravene consumer duty rules introduced in July 2023, and asked firms to review their approach.
The FCA asked firms to explain how their approach represents fair value to customers, or set out how they will change it, by the end of January. Any changes must be implemented by the end of February. It is becoming increasingly clear that the consumer duty rules have potentially serious reputational consequences for any firms found to be in breach.
As interest rates have risen, many companies have taken all or part of the increase on customer cash balances as profit rather than passing it on to customers. In an FCA survey last year of 42 investment platforms and SIPP operators, 30 firms retained at least some of the interest they earned on customer cash balances – about half on average.
"Some of the justifications for this, such as to discourage long-term allocations of cash in platform accounts, appear tenuous, and we do not expect companies to maintain their stance without making at least some improvement to how much interest they pass on to customers.
"The cost of passing on more, or indeed all, of the interest would be immaterial for the firms’ ratings. However, the reputational fallout for any company publicly named for underpaying customers could be credit negative as a damaged franchise may result in lower volumes of new business and the loss of existing business."
Fitch further said: "The consumer duty rules, as well as driving insurers to pay more interest on cash balances, may lead to further reductions in customer charges to avoid potential findings of overcharging and the reputational damage that could result. At least one insurer, St James’s Place, has reduced customer charges in response to the rules and more companies may follow. However, we generally expect reductions to be modest and do not expect any rating implications."
The UK life sector outlook for 2024 is improving despite the dent to profitability due to the consumer duty rules, it concluded.
