The Financial Conduct Authority (FCA) says it forced providers to cut remuneration and extend cover after finding that protection and general insurers are not meeting its product value rules.
The regulator warned it was prepared to go as far as requiring firms to withdraw products from sale if they failed to meet its current requirements or those being introduced on 1 October.
And it added it was not always clear firms had adequate processes to assess whether adviser remuneration bore a reasonable relationship to the costs or workload to distribute the product.
The warnings came after its review of insurers and intermediaries in the sector found examples of insufficient focus on customers, outcomes and product value, including when considering the context of Covid-19, and shortcomings in governance and oversight of products.
Long-standing product concerns
The regulator noted that many firms had made material progress in the area, but there were many where shortcomings remained which was concerning given the potential for consumer harm.
This included some firms identifying products launched before October 2018 that were providing questionable value to customers, but not formally reviewing and mitigating the identified and potentially continuing consumer harms.
“In some cases, arising from this review and other product value related supervisory work, we have intervened to ensure firms take action to amend products and improve the value they deliver to customers, including, through reductions in remuneration and the provision of additional cover or benefits,” the FCA said.
“This can involve requiring firms to withdraw products from sale while these amendments are made, or to pay refunds or redress, where we see harm arising.
“We will consider all appropriate regulatory action where firms fail to meet their regulatory obligations, both for their historic product governance arrangements or under the new requirements from 1 October 2021,” it added.
Insufficient focus on customers, outcomes and product value
The regulator’s review found that some firms could evidence a clear customer and value focus in their product governance activities.
But it noted that overall there was still a lack of evidence of customer centricity in many firms, with few able to show they had adequately and consistently focused on the needs of their customers in their approach to product governance.
And management information used and challenged was predominantly focused on underwriting performance, and therefore profitability, rather than product value and customer outcomes.
Intermediary commission
Broker commission appeared to be a major focus and the FCA said it saw evidence of firms reassessing commission levels as part of new product governance processes, and on some products, this remuneration had reduced by 25% or more.
There were also examples of firms introducing new caps on commission levels or setting thresholds at which higher commissions needed to be referred internally to relevant management for approval. “However, in some cases we did not see consistent evidence that firms had properly assessed products in light of commission levels to ensure they provided value,” it continued.
“Despite the actions taken by some firms… we still found examples of products launched before October 2018 with particularly low loss ratios and/or commission levels which bear no reasonable relationship to the cost of the benefits or services provided by the firm.
“This risked providing poor value to customers,” it added.
Governance and oversight
The FCA also highlighted risks around governance and oversight approaches at firms.
It noted the firms sampled had appointed or were appointing senior managers to oversee products.
However, while many firms had implemented appropriate governance and oversight of product development and review other firms had not.
Issued raised included:
- An absence of evidence of challenge or senior input to product decisions.
- Committees that sat outside the core business units often sat too infrequently or matters were brought by the business too late in the process. There was evidence these committees ratified product actions already implemented by frontline underwriters, rather than being involved at a stage where they could exert greater influence.
- Conversely, lack of focus in frontline business unit committees meant some appeared to put much greater emphasis on increasing production or delivering new distribution opportunities, rather than considering the appropriateness of those products and distribution strategies.
- In some cases where there was a co-manufacturing arrangement or the delegation of authority to a third party, unilateral actions were sometimes taken by one party, without others in the chain with shared responsibility being consulted.
It also raised concerns about the way some firms approached regulatory change.
And where the impacts of Covid-19 were concerned, some firms only started their product reviews before the FCA issued guidance due to unforeseen claims arising, rather than taking a customer-focused approach and assessing whether product value was materially affected by the pandemic.
‘Worrying firms are not ready’
Overall, the FCA noted too many firms were not fully meeting its standards and in addition, many were likely to be unprepared to meet new enhanced rules on product governance, coming into force on 1 October.
Sheldon Mills, executive director for supervision, policy and competition at the FCA, (pictured) said: “We know some firms are doing the right thing but with the deadline for implementing our enhanced rules less than two months away, it’s worrying that some firms may not be ready.
“Where firms are not consistently meeting existing requirements and expectations, it risks harm through poor value products or products being sold to the wrong customers.
“These firms have significant work to do urgently to be able to comply with the enhanced product governance rules. Firms that fail to do that work risk regulatory action.”