Clifford Chance

In July 2023, the FCA published its draft Rule Review Framework (the "Framework"), which outlines how the FCA plans to monitor and review the rules in its Handbook. The Framework describes the types of reviews that the FCA may undertake as well as the actions it may take if a rule is not performing as intended.

The Framework signals a shift by the FCA towards a data-driven, outcome-oriented approach to review, consistent with the FCA's Business Plan and recent legislative reforms. The Framework also means that insurers can expect the FCA to take a more proactive approach to reviewing its rules and to be more likely to act if a rule is found to be ineffective. Insurers should therefore engage with the FCA on rule reviews and provide feedback on the impact of its rules on their businesses and customers.

Insurers should also note that the Framework is currently in the draft phase, and the consultation period concluded on 15 September 2023. The FCA is presently reviewing the responses it has received, and insurers still have the opportunity to express their viewpoints by reaching out to the FCA via email at: forregulatoryframeworkpolicy@fca.org.uk.

What is the rationale for the framework?

The FCA already reviews its rules through supervisory work, such as Market Studies and Thematic Reviews. However, the new Framework proposes a more rule-centric approach to review. This shift is due to the Financial Services and Markets Act 2023 ("FSMA 2023"), which now imposes a new obligation on the FCA to evaluate its rules on a continual basis. Although this obligation excludes guidance, waivers, modifications, and other materials, the FCA intends to review these components concurrently with rules to ensure their proper functioning.

The FCA's new Framework is part of its commitment to promoting competition and positive change, as articulated in its 2023/2024 Business Plan. This commitment is closely linked to the FCA's recently established secondary objective, which is to facilitate the international competitiveness of the UK economy and foster its long-term growth.

How will rules be reviewed?

The Framework categorises reviews into three main types:

1. Evidence Assessment: This review assesses whether a rule which has already been implemented achieves its intended outcomes by collecting and analysing relevant supporting data as evidence. It is to be used when there is evidence that a rule is not meeting its short to medium-term outcomes and/or there is a risk that its ultimate outcomes will not be met, or when changes in circumstances affect its efficacy. The results of the assessment are typically for internal review and not published.

For insurers, this type of review is especially relevant because it can assess how FCA rules impact policyholders, both specific, such as those related to pricing, disclosure, or claims handling, as well as more general, like the Consumer Duty. If following the evidence assessment, the FCA feels it would benefit from additional data and stakeholder engagement, it may proceed to a post-implementation review.

2. Post-Implementation Review: This review is similar to the evidence assessment as it also evaluates whether an FCA rule or policy intervention has achieved its intended outcomes, as well as identifying any implementation issues and assessing market compliance. It is to be used when there is evidence that a rule is underperforming, but goes further than the evidence assessment as the FCA requires further data and/or stakeholder engagement to determine the appropriate course of action to remedy performance. The results of post-implementation review are published by the FCA.

For insurers, this review can help identify unintended consequences of rules and the need for adjustments. For example, the FCA may conduct a post-implementation review of rules related to its Consumer Duty or rules on general insurance pricing to assess their impact on policyholders and insurers. It also provides a forum for insurers to provide feedback to the FCA on how the rule can be adjusted to achieve its intended outcomes.

3. Ex-Post Impact Review: This review quantifies the impact of an FCA intervention and attributes it to actions taken by the FCA, seeking to establish a causal chain. It is to be used during the development of a rule or policy and may be deployed when considering high-profile or large-scale reform (for example, when developing a rule addressing significant harm in the market). The FCA have committed to undertake at least one ex-post impact review a year, and will publish its findings.

While potentially less directly relevant to insurers on a day-to-day basis, this review will be vital for assessing the impact of FCA rules on the UK insurance industry and the broader economy.

The decision to review also depends on whether the rule was implemented before or after the Framework came into force. For newly implemented rules, the FCA will adopt a data-driven approach to assess their progress. Existing rules will undergo a review if there is evidence of issues or concerns of their operation within the market. Evidence assessment and post-implementation review will be relevant for rules that are in force, whereas ex-post impact review will target rules whilst they are under development.

What happens if a rule isn't effective?

Remedies available to the FCA if a rule isn't performing as intended after a review include changing, varying, or revoking the rule; implementing further monitoring; conducting an additional, more detailed review; and issuing clarification and/or guidance.

The FCA increasingly employs guidance to help firms understand and comply with rules, particularly when firms face difficulties in interpreting the rules. For example, the FCA recently issued guidance on the Consumer Duty which outlines the FCA's expectations for how firms should treat their customers. While guidance is not binding on firms and does not establish the minimum standard of conduct required for compliance with the FCA's rules, it is essential for firms to comply with the rule and act in line with any corresponding guidance.

Insurers should be aware that the FCA is likely to be more proactive in reviewing its rules under the Framework. If the FCA finds that a rule is not working as intended, it may implement any of the remedies listed above, including issuing guidance. Insurers should, therefore, monitor the FCA website for guidance and be prepared to provide evidence to the FCA regarding the impact of its rules on their businesses and customers.

Looking forward

The Framework represents a shift towards a more data-driven and outcome-focused approach to monitoring and reviewing its rules. This approach is also much broader than the FCA's Market Studies and Thematic Reviews, which are generally more focused on a specific theme or problematic area identified by the FCA.

One of the FCA's immediate priorities for review is the Consumer Duty, which requires firms, including insurers, to "act to deliver good outcomes for retail consumers". The FCA will monitor whether this outcome is met, and this may lead to fewer prescriptive rules in the future where the Duty applies. Already, the FCA has issued additional guidance to assist firms in implementing the Consumer Duty, raising questions about the FCA's focus on reviewing guidance if it issues fewer rules in the future.

How can insurers prepare for the framework?

Insurers can prepare for the Framework by taking several key steps. Firstly, insurers should maintain their complaints data and have robust data-driven systems capable of collecting and analysing information regarding the impact of their businesses on policyholders and the broader insurance industry. This data is indispensable for demonstrating compliance with FCA rules and ensuring positive outcomes for policyholders.

Furthermore, insurers should actively engage with the FCA during rule reviews, providing feedback on how the FCA's rules influence their operations and customer interactions. This feedback will play a pivotal role in assisting the FCA in drafting effective rules that foster competition and encourage positive transformations within the insurance sector. Collaborating with other insurers and industry associations is also vital for developing a collective understanding of the FCA's requirements and creating industry best practices for compliance. This collaborative effort ensures that insurers not only meet but exceed the FCA's expectations, but also deliver for their policyholders.

In addition to these proactive steps, insurers can leverage the data they collect in several ways, such as identifying trends in customer complaints and claims to address underlying issues promptly. Monitoring customer satisfaction levels through data analysis can help pinpoint areas for improvement in customer service, while assessing the impact of their products and services on policyholders ensures fair pricing and value for money. Through these measures, insurers demonstrate their commitment to delivering positive outcomes for their customers and readiness for the upcoming Framework.