The Financial Conduct Authority (FCA) has told insurers and other providers that it expects them to tell advisers and distributors how their commission affects the value of the product for consumers.
The communication from manufacturers needs to be made as part of the process of complying with fair value rules so intermediaries can complete their own assessments, the FCA said.
The demand came as part of the regulator’s scathing rebuke to the industry over its slow response to complying with the fair value rules announced last year, which must be fully implemented by 30 September.
A forbearance approach has also been applied by the FCA to “prevent significant harm being caused to customers through the withdrawal of products at the end of September”.
Value assessment tailored to distributor
In a feedback letter sent to all general insurance and pure protection firms seen by Health & Protection, the regulator outlined some of its key concerns about compliance with the rules.
In particular it criticised plans by some product manufacturers to only share with intermediaries generic web-based overviews of whether their products provided fair value, rather than providing a “value assessment tailored to the distribution arrangements the manufacturer has for the product”.
The FCA noted a generic approach increases the risk that distributors are not given sufficient information to enable them to understand the outcome of the manufacturer’s value assessment and:
- whether the distributors own activities are correctly reflected in the manufacturer’s value
- assessment; and
- the impact the distribution arrangements have on the overall value of the insurance product to the customer.
As a result, the FCA said: “We expect a manufacturer’s value assessment which is being shared with a distributor, to be sufficiently detailed to enable the distributor to identify the impact that the distribution arrangements (including any remuneration it, or another person in the distribution chain to which it belongs, receives) has on the overall value of the insurance product to the customer.”
In a letter sent to distributors late last month alongside the feedback, the FCA emphasised that advisers had responsibility for ensuring their fees and services were not preventing a product providing fair value.
“If a distributor identifies that a product is not providing fair value and this has been caused by the distributor’s distribution arrangements, including its remuneration arrangements, the distributor must take appropriate remedial and mitigating action under PROD 4.3.11AR, which may include, where appropriate, redress,” the FCA said.
Distributor remuneration including commission has been a hot topic in the industry over the last 18 months with loaded premiums, which see customers paying more for a product to ensure a higher commission to the adviser, at the centre of the debate.
The FCA did not explicitly ban the practice of loaded premiums in its Consumer Duty last month, but said it “will be doing work over the next year to look at these issues as they come up.”
Earlier this week, St James’s Place divisional director Tony Müdd argued that although there was not an explicit ban of loaded premiums, examples given by the FCA suggest it effectively has been banned.
Consumer Duty rules say all distributors are required to ensure their charges for distributing products or services represent fair value.