New rules requiring UK financial services companies to show that their prices represent fair value to customers will negatively affect life sector profitability, according to Fitch Ratings.
"We expect the rules, introduced as part of the Financial Conduct Authority's (FCA) consumer duty package, to lead some insurers to reduce customer charges to avoid potential findings of overcharging and the reputational damage that could result from them.
"However, the reductions are likely to be modest as firms will be reluctant to materially weaken their profitability, and we do not expect any ratings implications", the ratings agency said.
The Fitch briefing continued: "Insurers have had significant time to prepare for the rules, which took effect on 31 July 2023 after extensive consultation leading to an FCA policy statement and final guidance in July 2022. Firms have an extra year until the regime applies to closed-book businesses that are no longer open to policy sales or renewals.
"The increased regulatory pressure to prove fair value to customers is unlikely to make the UK life market significantly more competitive. The market is not commoditised and most products are not directly comparable between companies, so higher prices are not necessarily an indication of overcharging. However, the need to show fair value to customers while maintaining profitability adds to the pressure for insurers to push ahead with cost-cutting, digitalisation and platform creation.
"The life sector's 1H23 results announcements have already brought news of one company's response. Citing the FCA's consumer duty regulation, St. James's Place UK plc (Insurer Financial Strength Rating: A+/Stable) has introduced a 0.85% cap on its annual product management charges for bond and pension contributions once they have been invested for 10 years. The company said this would lower its net income from funds under management by about 4bp. There is no rating impact.
"Even if there are market-wide reductions in charges, we do not expect a spate of compensation claims from customers arguing that charges were too high in the past, as happened in the Dutch life market in the 2000s due to opaque charges on unit-linked products.
"The FCA has made it clear that the consumer duty regulation will not have a retrospective effect. Moreover, the notion of fair value is subjective, and it is not clear how customers could quantify losses without a directly comparable product as a reference point."
