The Financial Conduct Authority (FCA) recently fined Lloyds Bank General Insurance (LGBI), St Andrew’s Insurance Plc, Lloyds Bank Insurance Services Ltd and Halifax General Insurance Services Ltd) companies £90,688,400 for failing to ensure that language contained within millions of home insurance renewals communications between January 2009 and November 2017 was clear, fair and not misleading. The FCA found that LGBI breached Principle 3 and Principle 7 of the FCA’s Principles for Businesses. The fine is the largest levied by the FCA since 2019.
During the period, LGBI sent nearly 9 million renewal communications to home insurance customers which included language to the effect that they were receiving a “competitive price” at renewal, but LGBI failed to substantiate the “competitive price” language. LGBI rewrote its renewal communications and began to remove “competitive price” wording from 2009 onward, but the language remained in a substantial number of renewals communications throughout the relevant period despite opportunities to address it. The FCA stated that this “caused a risk of harm for the majority of LGBI’s home insurance customers who received the communications, because it was likely that the premium quoted to them at renewal would have increased when compared to their prior premium”. The FCA did not, however, impose a requirement to pay redress to those customers who received a renewal letter with the “competitive price” language.
Separately, LGBI informed approximately half a million customers that they would receive a discount based on either their “loyalty”, or otherwise on a promotional basis, where the described discount was not applied and was never intended to apply. This affected approximately 1.2 million renewals. LGBI voluntarily made payments of approximately £13.5 million to customers who received communications that erroneously referred to the application of a discount.
Mere marketing puff?
The case puts beyond doubt that the FCA will not tolerate unsubstantiated puffery in customer communications and financial promotions. The Advertising Standards Authority (ASA) has previously accepted that puffery — hyperbole or exaggerated statements that cannot be objectively verified — may be used in marketing. Even the ASA, however, requires that firms should evidence any claims that are capable of objective substantiation, as opposed to expressions of opinion or mere puffery.
The context of the use of the word “competitive” in this case might arguably be regarded as puff. The standard to which financial services communications and financial promotions will be held by the FCA, however, clearly demands a more literal approach.
Any consumer harm?
LGBI’s actions “risked serious consumer harm” to millions of customers, said Mark Steward, the FCA’s executive director of enforcement and market oversight.
The FCA did not, however, establish whether individual customer behaviour would have been different had the communications in this case been “clear, fair and not misleading”. Indeed, as the relevant policies were on auto-renewal, it might be argued that relatively few customers would have been influenced by the “competitive price” language in the communications.
A case informed by the benefit of hindsight?
There is a sense in which LGBI has been judged, from a position of hindsight, for its new business discounting model — a model which, during the relevant period, was standard across the market. In its General Insurance Pricing Practices Market Study, conducted between 2018 and 2020, the FCA found that, typically, insurance premiums increased each year on renewal as insurers sought to recover any losses they may have incurred by offering an introductory discount. The effect of this was that existing policyholders would likely have paid more at renewal than a new customer presenting an equivalent insurance risk unless they shopped around. This was the insurance industry norm and understood by many customers.
The FCA updated the Insurance Conduct of Business Sourcebook (ICOBs) in 2017 to require enhanced disclosure of customers’ renewal options. Further, under the FCA’s new rules, which come into effect on January 1, 2022, insurers will be required to offer renewing customers a price that is no higher than they would pay as a new customer, so ending this new business discounting model. The FCA is also consulting on a new “consumer duty” which would, among other things, require firms to consider what outcomes consumers should be able to expect from their products and services, and facilitate those outcomes. Arguably, this case has been influenced by the direction the FCA has since taken in its more proactive approach to insurance pricing and consumer protection.
Size of penalty
The relevant period straddled two different regimes for the calculation of the FCA’s financial penalty and represents a useful comparison between the regimes. For the period up to March 2010, the FCA fined LGBI only £1.4 million, but applying the new regime for the period from March 2010 to November 2017 — which calculated the fine as a function of relevant revenue generated from related home insurance renewals — resulted in a significantly higher fine for that period of around £89 million (even accounting for the longer period).
This was higher even though the FCA determined that the seriousness was “Level 3” (on a scale of 1-5); that the fine should be reduced at Step 2 by 25% for LGBI’s significant cooperation and remedial work; and by 30% at Step 5 as a settlement discount.
This article was first published on Thomson Reuters Regulatory Intelligence on 14/7/21