Context
Insurance firms may not be ready to implement the new ‘fair value’ product governance rules according to a review published by the Financial Conduct Authority (FCA). As part of its ongoing work in relation to fair value the FCA has published its findings in relation to a review which looked at how firms designed, sold and reviewed their products to ensure they met the needs of their customers.
Alongside the publication of this review the FCA has also issued a Dear CEO letter – Product Value: expectations of general insurance (‘GI’) firms – which was sent out to firms on 25th August 2021 and appears to have been aimed at insurers and intermediaries. This appears not to have been published by the FCA on its website.
The FCA has also published a Portfolio Letter – FCA Supervisory strategy for Personal and Commercial lines insurers – which was issued at the end of April this year, and appears to have been published alongside the review.
Key points to note
The review
The findings show that, whilst some firms are making good progress in meeting the FCA’s existing rules and guidance on product governance and value, there are many firms who are not fully meeting the FCA’s standards. Given these findings the FCA’s view is that it is likely that many firms will be unprepared to meet new enhanced rules on product governance which come into force on 1st October 2021. Although the FCA accepts that some firms are meeting expectations, it is concerned that some firms may not be ready for the implementation of the new enhanced rules on product governance. The FCA has commented that, where firms are not consistently meeting existing requirements and expectations, this risks harm through poor value products or products being sold to the wrong customers. The FCA stated that these firms have significant work to do urgently to be able to comply with the enhanced product governance rules, and that firms that fail to do that work risk regulatory action.
There were weaknesses found within the review which were grouped broadly under:
- Insufficient focus on customers, outcomes and product value, including when considering value in the context of Covid-19
- Shortcomings in governance and oversight of products and their value
As an example, it was not always clear that firms have adequate processes to assess whether intermediary remuneration (such as how much a broker is paid) bears a reasonable relationship to the costs or workload to distribute the product.
The areas of concern identified were:
- Insufficient focus on customers, outcomes and product value
- Value and oversight of remuneration
- Product benefits and coverage
- Governance and oversight
- Firms’ approach to regulatory change
- Covid-19 product review approach and methodology
- Action taken to prevent or mitigate Covid-19 related harms
Several examples are included in the report detailing some of the findings.
The ABI’s response to the report can be viewed here. In its response the ABI expressed its view that the FCA acknowledges that most insurance products maintained their core utility and value during what has been an exceptionally challenging period for both customers and firms, and that the FCA also recognises evidence of good customer value including through premium refunds, extension of cover, individual customer support and the industry’s charitable donations through the ABI’s Covid-19 Support Fund.
The Dear CEO Letter
This outlined several areas of concern for the FCA as identified in the published review:
- a lack of customer centricity in many firms’ approaches to product governance
- inadequate consideration by firms of the value customers receive from their products or services
- some insurance intermediaries had not understood they were undertaking the role of manufacturer in the distribution chain or the additional requirements applying to this activity; and
- some distributors (such as insurance intermediaries) may be receiving remuneration which bears no reasonable relationship to the costs or workload to distribute the product
The Portfolio Letter
This letter was issued on 28th April this year, setting out the FCA’s Supervisory strategy, and was addressed to the Boards of Directors at personal and commercial lines insurers. It set out what the FCA sees as the main causes of customer harm in the personal and commercial lines markets, with a series of expectations also set out for each:
- Poor pricing practices that lead to consumers paying excessive prices for product
- Consumers purchase products which are not fair value
- Consumers experience poor service due to ineffective oversight of the value chain
- Business interruption claims payments are not made in a timely manner and in line with the BI Insurance test case judgment
- Firms’ operational resilience does not prevent the loss or misuse of consumer data or results in consumers not having access to key services
These identified themes are similar to those outlined in the findings of the report and that are set out in the Dear CEO Letter outlined above.
Next actions
For the FCA
The FCA is likely to do further work on fair value to assess the extent to which firms are complying with relevant rules, including product governance rules, and meeting its expectations as set out in PS21/5.
For firms
Firms should consider the findings of this review and how they apply to their own activities. This will help identify where there are gaps or weaknesses in their current approach and also to consider actions they may need to take prior to the enhanced product governance rules coming into effect on 1st October 2021.
We are in the process of issuing a series of bulletins in relation to the FCA’s GI Pricing Practices work.