Welcome to the UKGI weekly regulation update service for Aviva ABC brokers

Context

The PRA and the FCA have announced the publication of the FCA’s awaited Consultation Paper setting out ‘Phase 2’ of the reforms to the Senior Managers and Certification Regime (SM&CR).  The Consultation runs to 429 pages, of which 350 pages are the proposed Handbook text amendments.

The regulators propose to streamline the regime while maintaining high standards of individual accountability and conduct.  The proposals build on the first phase of reforms set out in Policy Statement PS26/6, and on legislative changes proposed by the Government in the Financial Services and Markets (FSM) Bill 2026.

Key points to note and next actions

There is significant detail in the Consultation in relation to the proposals In brief, the proposals include:

• Reducing senior manager roles and streamlining those requiring FCA approval by removing certain SMFs and making other roles notified, including Chief Actuaries and Chairs of Risk and Audit Committees.  (Firms will instead notify regulators of these appointments directly, gaining speed and flexibility while remaining responsible for ensuring candidates are fit and proper).
• Streamlining the SMF application process.
• Streamlining the Prescribed Responsibilities.
• Reducing the number of firms subject to the Enhanced regime thresholds.
• Refocusing Statements of Responsibilities and Management Responsibilities Maps and reducing the frequency of submissions.
• Removing the Certification Regime in its entirety.  This will remove the associated administrative requirements for around 139,000 individuals below senior manager level to be subject to annual certification checks and to appear on the Financial Services Register.
• Retiring the Directory of Certified and Assessed persons.
• Simplifying Conduct Rule training and breach reporting thresholds.

A summary of all the key changes the FCA is proposing is set out in Table 1, paragraphs 1.7 to 1.8 of the Consultation.  Many of the proposed changes may not impact Core SM&CR firms.

The FCA is asking for all CP responses to be made using the online survey tool, and the Consultation closes on 22^nd January 2027.  The FCA will publish final rules in H1 2027 and implement them around six months later, in H2 2027.

Context

The FCA has published an article by Alison Walters, FCA Director of Consumer Finance, in which she highlights questions firms can use to challenge their approach to assessing and monitoring fair value.  The article seeks to highlight, three years into the Consumer Duty, what the FCA has learned.

Key points to note and next actions

• Fair value is a simple yet important principle at the heart of the Consumer Duty: the price customers pay should be reasonable, relative to the benefits they get. But applying that principle in practice requires judgement. 
• The FCA is seeing clear differences between firms that have embedded fair value into their approach and those that still need to strengthen their assessments, evidence and monitoring.
• The FCA recently reviewed how firms across the consumer finance market assess, evidence and monitor fair value (see above). We also carried out focused work on fees and charges across a range of credit products, and supervisory work on consumer hire and third-party ownership agreements for home energy infrastructure.
• Many firms are getting it right, building fair value into how they design, price and monitor their products. Others are missing things that, in hindsight, could have been avoidable. Where firms fell short, a recurring issue was the evidence supporting their conclusions.
• A common feature of stronger approaches was that firms supported their conclusions with evidence rather than relying on assumptions.
• This does not need to always require complex modelling or new data. Smaller firms may be able to draw on information they already hold, including complaints, arrears, customer feedback and product usage.
• As UKGI has long believed, the key thing is to ‘show your workings out’ – evidence how you got to the point you arrived at: what your evidence shows, how it supports your conclusion, what you’d do if it didn’t.

The article asks:

• Does your evidence actually tell you something, or just describe your product?
• Are you assessing fair value for different customer groups?
• If customers can’t picture the real cost, does the price even matter?

Questions firms can use to challenge their approach to assessing and monitoring fair value are:

• Does your evidence tell you something meaningful about customer outcomes, or does it simply describe your product?
• Does your target market behave as one group once you look closely?
• Can customers understand the total price they might pay and the financial commitment they are entering into?

Context

The FCA has published findings from its consumer finance supervisory work, highlighting good practice and areas for improvement in how firms assess, evidence and monitor fair value.  Although drawn from the FCA’s supervisory work in consumer finance, these examples will be of interest to firms in other sectors when assessing, evidencing and monitoring fair value, in addition to consumer finance firms subject to the Consumer Duty.

Key points to note and next actions

The FCA reminds firms that the examples do not create new requirements or prescribe specific actions.  Firms should apply judgement and take an appropriate and proportionate approach for their business, products and customers. 

The FCA found examples of firms taking structured and proportionate approaches to assessing fair value, but also identified recurring areas where firms could improve their assessments, evidence and monitoring.

The findings are grouped under seven key themes:

• Structure and evidence supporting fair value assessment
• Assessing total price, costs and benefits
• Assessing fair value for different customer groups
• Monitoring fair value and customer outcomes
• Using benchmarking to assess fair value
• Communicating fees and chargesC
• ontrols to reduce the risk of causing foreseeable harm from fees and charge

Headline examples of good practice included:

• considering the full range of financial and non-financial costs (for example, consumers’ time and effort), alongside the benefits customers could reasonably expect to receive;
• supporting their fair value conclusions with relevant management information (MI) and evidence of customer outcomes;
• assessing outcomes for different groups of customers, including customers with characteristics of vulnerability;
• monitoring customer outcomes to identify and address potential fair value concerns and taking appropriate action where necessary;
• communicating fees and charges clearly and prominently, and using testing and monitoring to assess whether customers understood them; and
• using controls such as grace periods, limits on repeat or cumulative charges, and fee waivers or refunds to reduce the risk of causing foreseeable harm.

Headline areas for improvement were that some firms:

• did not fully account for fees and charges when assessing the expected total price customers might pay  
• did not clearly explain how their fair value conclusions were supported by the evidence available or how the price paid by customers compared with the benefits they could reasonably expect to receive
• relied heavily on assumptions, narrative statements or MI that lacked sufficient detail or supporting evidence
• gave limited consideration to non-financial costs (such as consumers’ time and effort), how value might change over time or outcomes for different customer groups, including customers with characteristics of vulnerability
• did not communicate fees and charges clearly, prominently or at the right time to support informed customer decision-making
• did not adequately monitor repeat or cumulative charges or assess their impact on customer outcomes
• could not demonstrate that their controls were appropriately designed, operating effectively or reducing the risk of causing foreseeable harm, particularly for customers experiencing financial difficulty

Context

The FCA is consulting on proposed changes to its Financial Crime Guide.  Fighting financial crime is a priority in the FCA’s 5-year strategy.  The FCA wants the Guide to continue to help firms understand FCA expectations, and to assess and strengthen their financial crime systems and controls so they are effective and proportionate to their risks.

Key points to note and next actions

The FCA has proposed changes in the following areas:

• Fraud
• Cryptoassets
• Financial and trade sanctions
• Proliferation financing
• Data security
• Financial crime system and controls
• Money laundering and terrorist financing
• Consequential changes

The CP also looks at how the FCA could change the way it gets feedback on the Guide in the future. This could include holding a series of in-person or online Q&A sessions or publishing targeted, standalone guidance without prior consultation, where it is not required. This guidance would then be consolidated within the Financial Crime Guide at a future date.

Specific proposed changes are set out in Chapter 2 of the Consultation, and include updates to the Fraud Chapter (Chapter 4 of the Guide):

• Anti-fraud controls and complaint handing in firms (with a focus on APP fraud).
• Proceeds of fraud – detecting and preventing money mules.
• Firms’ use of the National Fraud Database (NFD) and money mule account detection tools.
• Combating romance fraud – prevention, detection and supporting victims.

The FCA also includes commentary on and plans to share examples of good and poor practice for, onboarding., monitoring, and reporting.

The FCA is proposing updates to Chapter 7 of the Guide to set out its expectations and examples of good and poor practice. In particular, the FCA proposes to cover trade alongside financial sanctions, reflecting developments in the UK’s sanctions framework including the establishment of OTSI.  Paragraph 2.19 in the Consultation sets out the FCA’s specific proposed guidance in this regard.

The FCA is also proposing amends to the guidance in relation to proliferation financing, data security, financial crime systems and controls, money laundering and terrorist financing, and other consequential changes.

The FCA welcomes feedback all stakeholders on the proposed changes via the response form on its website, or by emailing: cp26-38@fca.org.uk. The deadline for responding is 24^th December 2026. The FCA will consider all responses and publish feedback on this CP, along with the final amended text of the Guide, in a Policy Statement.  Feedback will also inform future updates to the Guide.

Context

The FSRC, chaired by The Baroness Noakes DBE, launched an inquiry in May 2026 into the regulation of consumer home and travel insurance, with a focus on the Financial Conduct Authority’s approach.  The FSRC has now published its final report on the FCA’s regulation of home and travel insurance.  The key messages are that there is ‘more for the FCA to do’, that the FCA and industry accelerate their work to improve consumer understanding of home and travel insurance products, and that the FCA must create clear timescales for its proposed work in relation to home and travel insurance.

Key points to note and next actions

The Committee’s report includes findings that:

• Home and travel insurance products have low claims acceptance rates relative to other retail insurance products. They are inherently complex and consumer understanding remains low, despite the FCA’s Consumer Duty requiring firms to support it.
• Price comparison websites have driven intense price-led competition in the UK market. This has helped consumers find affordable products, but has led to a focus on price rather than overall product value.
• There is a lack of readily available and comparable data on elements of product value other than price, especially claims outcomes. This inhibits consumers from comparing products and prevents price comparison websites from comparing product value effectively.
• The effects of poor consumer understanding often become clear only when a claim is made. Products purchased on price rather than levels of cover, and a lack of understanding about what is and is not covered, both contribute to persistently high rates of declined claims.
• Claims experiences can vary significantly. The FCA has acknowledged the need for further work on claims-handling practices that carry a higher risk of consumer harm, including outsourced claims handling and cash settlements.
• There are concerns about the growing use of AI by consumers to research home and travel insurance, which is not regulated by the FCA.
• The Consumer Duty has not yet translated into improvements for consumers.
• Clear expectations and robust outcomes data are key to the success of the Consumer Duty.
• The FCA has a number of actions in train but the timetables for completion are not clear, so it it should produce a roadmap of what it is doing.

The report recommends that:

• The industry and the FCA must accelerate their work to improve consumer understanding of home and travel insurance products, particularly what is and is not covered by policies.
• The FCA must outline how it will address poor claims-handling practices.
• The FCA should consider what it can do to make consumers aware of the potential problems of relying on AI when making insurance purchasing decisions.
• In the absence of the industry agreeing on comparable metrics, the FCA should step in to ensure that comparable outcomes data is widely available. The FCA should also develop how it measures the impact of the Consumer Duty, in order to realise its potential to improve consumer outcomes.
• The FCA is pursuing many of the issues outlined, but the timetables for completion are unclear. The FCA should produce a roadmap with clear timescales for delivery.

Context

The FCA and Bank of England conducted a fourth survey of artificial intelligence and machine learning in UK Financial Services. The survey highlights the growing use of AI and machine learning in the UK Financial Services market which should encourage firms to review how suppliers deploy AI tools when delivering services to them.

Key points to note and next actions

• Third-party AI systems reliance is increasing: External providers supply 39% of AI systems (up from 33% in 2024), and they accounted for more than half of the high-materiality AI systems in operation (53%, up from 35% in 2024).
• Supplier dependence creates risks: Some systems are difficult to replace, which creates concerns around information security, operational resilience, transparency and negotiating contractual protections with providers.
• AI adoption is widespread: 86% of UK financial services firms use AI across functions including operations, IT, risk, compliance, marketing, HR and legal (up from 75% in 2024). Operations and IT accounted for approximately 31% of all reported AI systems. Most tools used are generative AI.
• AI agents are growing, but autonomy remains limited: 80% of firms already use agents and another 14% plan to introduce them within a year. They mainly support decision-making and fewer than 10% expect agents to take specified higher-impact actions within the next 12 months.
• Governance needs to demonstrate control: Boards and senior management need visibility of where AI operates, what it influences, its data and supplier dependencies, accountability and whether outcomes meet expectations. 
• Oversight must cover future changes: Firms need effective oversight and contractual provisions for advance notification and information about significant model changes that could introduce new risks.

Context

The FCA CBAP, one of the independent Panels that provide advice and guidance to the FCA, has published its 11^th September advice to the FCA in relation to the cost benefit analysis within the new ‘SM&CR Phase 2’ Consultation.

Key points to note and next actions

The Panel’s main recommendations were:

• Analyse the proposals’ expected impact on overall social welfare, rather than on direct compliance costs alone.
• Use SM&CR as a case study for systematic evaluation of regulatory outcomes.
• Clarify the relationship between the FCA’s proposals and analysis and the wider government reform agenda.

The advice note contains CBA Panel commentary on:

• the market;
• ‘Problem and rationale for intervention’;
• proposed intervention and alternative options;
• assessment of costs and benefits;
• risk and uncertainty;
• wider economic impacts; and
• monitoring and evaluation.

Context

The ABI has published a guest blog on using AI to build and evidence suitable and sustainable business models (from Tristan Garnons-Williams of IBM Promontory), explains that AI discussions are fast developing globally. For the insurance sector, the debate is not about whether AI will shape the future of businesses, but how to use it now and prepare for the future without weakening the foundations of firms’ business models. AI can assist with improving the efficiency and effectiveness of an increasing number of tasks but alongside the benefits, firms must be confident their use of AI remains commercially viable, operationally resilient, properly governed, and consistent with good customer outcomes.

Key points to note and next actions

• AI adoption is a strategic priority for insurers, not simply a technology project. Inaction and uncontrolled adoption carry risks to competitiveness, service quality and business-model sustainability.
• AI should be assessed at three levels: individual use cases, the enterprise-wide operating model, and wider ecosystems (platforms, data, infrastructure and third parties).
• Boards remain accountable for strategy, governance, resilience and customer outcomes. Protect policyholder trust by aligning AI plans with operational resilience, third-party risk management, data governance and talent.
• Link AI investment to clear objectives, risk appetite and measurable benefits. Evidence effective oversight, including where AI is used, its value, risks, dependencies, controls and required skills. Ensure that AI-driven decisions can be explained, challenged and corrected, particularly in pricing, claims and customer engagement.
• Success means sustainable value and demonstrable control—not simply adopting AI fastest.