UK life insurers may pass more interest to customers to avoid being “named and shamed”: Fitch

Some UK life insurers are likely to pass on more of their earned interest to customers in order to protect their reputations, a move that may oppose consumer duty rules introduced in July 2023 which keep driving changes, according to a recent report by Fitch Ratings.

“We believe insurers will consider the extra costs negligible compared with the risk of being named and shamed by the regulator,” analysts stated.

Back in December, the Financial Conduct Authority (FCA) wrote to investment platforms and self-invested personal pension (SIPP) operators, several of which are life insurance companies.

The FCA warned them 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,” Fitch Ratings highlighted.

As requested by the Authority, firms have until the end of January to explain how their approach represents fair value to customers, or set out how they will change it. Any changes must be implemented by the end of February.

Analysts noted: “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 include discouraging customers from long-term allocations of cash in platform accounts, which according to Fitch, appears tenuous.

The Agency’s analysts also do not expect companies to keep this position 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,” they stated.

To avoid potential findings of overcharging and the reputational damage, may lead to further reductions in customer charges. As well as driving insurers to pay more interest on cash balances.

The report has found that at least one insurer, St James’s Place, has reduced customer charges in response to the rules and noted that more companies may follow.

Nevertheless, analysts expect modest reductions and do not expect any rating implications.

Fitch concluded that, despite the dent to profitability due to the consumer duty rules, the UK life sector outlook for 2024 is improving.

The post UK life insurers may pass more interest to customers to avoid being “named and shamed”: Fitch appeared first on ReinsuranceNe.ws.