The Financial Conduct Authority (FCA) is contacting firms operating in the insurance market whose business models “may be creating heightened risks of conflicts of interest”.
The regulator also warned it was “monitoring developments in this area” and could issue spot checks to firms by making ad hoc data requests.
Furthermore, it reminded the sector it was not afraid to take action having done so previously when it fined previously Axa-owned Bluefin more than £4m in 2017.
However, it’s emphasis on communicating and disclosing conflicts of interest to customers appears in contrast to its proposals to remove these requirements, although the FCA has disputed this.
‘Expect review of business models’
As part of the action targeting conflicts of interest, the FCA has issued an overview of its expectations for firms in these circumstances.
The regulator said it will act “where we identify poor governance, weak controls or evidence of customer harm”.
“If your firm operates with vertically integrated or closely connected arrangements, we expect you to review your business models, governance arrangements, systems and controls and conflict management frameworks,” it added.
It highlighted that firm must managing their conflicts of interest, including identifying, preventing or managing conflicts appropriately.
Conflicts must also not become embedded within customer journeys or commercial incentives and firms must show their controls support good customer outcomes.
The regulator put a strong emphasis on firms being able to show evidence of effective controls, including conflict of interest management such as placement decisions, panel design and product recommendations.
“You should assess the risks before making changes that may increase conflicts of interest or complexity, such as new ownership structures, investment arrangements, debt financing or intragroup arrangements,” the FCA said.
Disclosure to customers
Customer communications and disclosures were also a focus for the regulator which urged firms to review customer-facing communications and disclosures “to ensure they are clear, fair and not misleading and support customer understanding”.
It added that customers should be able to understand the firm’s role in the manufacture and distribution of products and any commercial links that may affect their decision-making.
Firms which present themselves as independent or acting in a particular capacity, must make sure this accurately reflects how they operate.
“Don’t rely on disclosure alone to manage conflicts of interest. Giving customers information doesn’t remove the need for effective governance, systems and controls,” it added.
It is notable however, that as Health & Protection revealed in its CP26/22 Simplifying insurance rules consultation paper published last month, the FCA proposed stripping away several declaration requirements managing conflicts of interests between insurers and intermediary firms.
This includes where an insurer or its parent company has a direct or indirect holding representing 10% or more of the voting rights or capital in the firm – or vice versa.
Health & Protection understands the FCA believes the changes to disclosure rules and the focus on conflict of interest are consistent with each other.
The FCA told Health & Protection: “We want to see insurers getting the right outcomes for consumers. Removing prescriptive or duplicative requirements gives them greater flexibility.
“But they still need to identify and manage conflicts of interest – disclosure may have a role to play but is only part of the picture.”
‘Creating heightened risks of conflicts of interest’
FCA director of insurance Chris Knight revealed the action about conflicts of interest through ownership and financing structures affecting firms’ business models and potential customer outcomes.
“We’ve written directly to some firms where we think their business models may be creating heightened risks of conflicts of interest,” Knight said.
“But we’re also making our expectations clear to the whole market – because this isn’t an issue isolated to a handful of instances.
“We are monitoring developments in this area, so you may receive ad hoc data requests. You should be able to show us how your arrangements deliver good outcomes for customers.
“Where business models are overly complex or difficult to supervise, we expect you to think seriously about simplifying them.”
He added that any material changes to business models that affect conflicts of interest should be notified to the FCA promptly.
“Our position is clear: Where we see firms acting in ways that could harm consumers, obscure accountability or undermine trust, we will act, starting with supervisory engagement, and with enforcement if needed,” he continued.
“Getting this right will help give customers that extra peace of mind that insurance products are working for them.”
The FCA did not tell Health & Protection how many firms it had contacted with its concerns.