The Financial Conduct Authority (FCA) is requiring insurers and intermediaries to take remedial actions including ordering them to withdraw products where it has material concerns about providing fair value.
The regulator said it was considering the most appropriate supervisory and regulatory actions to “urgently” address insurers and brokers not demonstrating how they are providing fair value to customers or that they are delivering good outcomes.
This follows findings of a thematic review published today and first revealed in May, in which the regulator warned that it will be requiring some firms to take remedial actions to address these issues supported by attestations from senior management and using its skilled person review tool, where appropriate.
It added that where it has more material concerns about product value, it is intervening including getting firms to withdraw products from the market.
The regulator also committed to ensuring that firms and their senior managers are held accountable for these failings and remediate the harm, including providing any customer redress necessary.
And it added that while it is currently providing feedback to the firms involved in its review, it will intervene as necessary to address the issues and risks in those firms who are not meeting their regulatory obligations, using the full range of its regulatory tools.
It also committed to engaging further with both the general insurance and pure protection sectors including relevant trade bodies, to ensure its expectations are understood and acted upon urgently.
The regulator’s warning follows publication of its Product Oversight and Governance thematic review – General Insurance and Pure Protection (PROD 1.4 and PROD 4) which highlights a number of issues among both manufacturers and distributors.
Issues for manufacturers
Some of the issues highlighted among manufacturers include that many firms were not fully meeting the requirements under PROD 4 and could not ensure evidence that their products are delivering fair value.
The review also found many product manufacturers did not appear to have implemented effective product governance frameworks compliant with PROD 4 – meaning they were unable to adequately evidence how and why they concluded that their products offered fair value and gave their customers good outcomes.
This included being unable to show that:
- there was robust challenge when considering the value of their products,
- they made clear judgments supported by appropriate evidence in their product reviews and the fair value assessments (FVAs),
- they had appropriate management information (MI) and analysis to support decision-making,
- they had proactively identified products with value problems and acted to address them.
But the FCA also identified shortcomings in the quality of the FVAs undertaken by many firms. These included firms:
- not adequately considering the total price paid, including the impact of remuneration on the overall value of the product,
- not having sufficient MI to monitor distributors’ remuneration and ensure that it was consistent with providing fair value to their customers,
- not having sufficient, good quality MI to assess value, or appropriate metrics to identify fair value problems,
- being unable to demonstrate how they assessed whether the product was delivering fair value to all customers, including vulnerable or outlier groups of customers,
- not identifying value problems even where these were apparent.
The FCA added that target market statements were often too high level and lacked granularity and if firms did not adequately define the target market, there was a real risk that the product was then sold to customers outside this group who were unlikely to get fair value or achieve good outcomes from the product.
Where several parties were involved in manufacture, the regulator found many firms did not understand or meet their responsibilities under PROD 4.2.
Many manufacturers were found to have not appropriately considered their distribution arrangements or choice of distributors, given the product and target market and many were also not providing appropriate and timely information to their distributors.
Examples of better compliance
Where the regulator saw manufacturers doing a better job of meeting PROD 4 requirements, some of the key drivers identified were:
- robust product approval processes overseen by the board and where senior managers provided real challenge,
- the business being fully involved in FVAs that reached clear, well-evidenced conclusions and identified any problems,
- appropriate monitoring, including the use of high-quality MI, to ensure the product continued to provide fair value, customers were getting good outcomes and to identify any potential problems,
- prompt escalation and action where problems were identified, including changing or withdrawing products,
- timely sharing of appropriate product information with distributors.
Consequently, the FCA told manufacturers to focus on these key drivers as they work to improve their product governance and oversight to ensure they meet their PROD 4 obligations.
“We believe manufacturers who appropriately incorporate these elements will be better able to assess and evidence their products provide fair value and will enhance the outcomes their customers receive,” it said.
Issues for distributors
When it came to distributors, the report found some have made much more limited progress in understanding and meeting their responsibilities under PROD 4.3.
The regulator added it found shortcomings in many firms including:
- a lack of clarity around the governance structures and processes with limited or no clear responsibility, rationale, or evidence for key decisions, including any actions taken when they identified value problems,
- product distribution arrangements without enough detail and failure to adequately consider key areas like distribution strategy, target market, remuneration and the product’s intended value,
- a lack of effective processes to get appropriate information from the manufacturer to allow them to understand the target market, distribution strategy and the product’s intended value,
- not having a distribution strategy which met the requirements of PROD 4.3 and was appropriately aligned to the manufacturer’s distribution strategy for the product,
- insufficient MI and analysis to assess their remuneration, its relationship with their costs and the benefits and services they provide and its impact on product value, and a lack of evidence of any such assessment and its outcome.
The FCA told distributors that they must understand the target market and ensure that the product is distributed in line with it.
It added that while in most cases, the target market statement distributors used was aligned to the manufacturer’s statement, it saw some cases where the statement used by the distributor differed materially.
For example, it was less granular than the manufacturer’s or less clear in identifying customers for whom the product is not expected to provide fair value. The FCA said this raised concerns about the product being sold to customers outside the target market and the resulting risk of harm.
But the FCA also said many distributors appeared to be failing to adequately and consistently meet their obligations under PROD 4.3, adding it was particularly concerned that many distributors did not get sufficient information from the product manufacturers or fully understand the distribution strategies in place.
It said most distributors also did not appear to have fully understood their responsibilities to consider their remuneration, its interaction with the services and benefits they provide and its impact on the product’s value.
The regulator warned this created real risks, including firms using inappropriate distribution strategies and distributing the product to customers outside of the target market.
Firms may also be getting levels of remuneration which adversely impact the product’s value and do not bear a reasonable relation to the services and benefits they provide.
Examples of better compliance among distributors
The regulator also highlighted some of the key drivers of distributors doing a better job of meeting PROD 4 requirements.
These include:
- Robust governance processes around product distribution arrangements with appropriate business input and senior management oversight and challenge. This, it said, delivers clear, well-evidenced outputs that allowed the firm to identify and address value problems,
- Effective processes and mechanisms to get information from and share information with manufacturers,
- Producing complete and sufficiently detailed product distribution arrangements, including distribution strategy, target market, remuneration and the product’s intended value,
- Having appropriate MI and robust analysis of the firm’s own costs and the benefits and services to customers so as to allow the firm to assess and evidence if their remuneration is reasonable and its impact on the product’s intended value.
The FCA called on distributors to focus on these key drivers as they work to improve their governance and oversight of their product distribution arrangements to ensure they meet their PROD 4 obligations.
“We believe distributors who appropriately incorporate these elements will be better able to assess and evidence that their product distribution arrangements and remuneration are consistent with delivering fair value to customers,” it said.
Further action
In light of the report’s findings the FCA said it is currently considering the most appropriate supervisory and regulatory actions it can take to urgently address these issues.
It said it is requiring firms to take remedial actions supported by attestations from senior management and using its skilled person review tool, where appropriate.
Where it has more material concerns about product value, the regulator revealed it is intervening including getting firms to withdraw products from the market.
Where it identifies significant harm to customers, the regulator said it will ensure that firms and their senior managers are held accountable for these failings and remediate the harm, including providing any customer redress necessary.
“We expect all firms involved in the manufacture and distribution of general insurance (GI) and pure protection (PP) products to urgently consider the contents of this report, assessing whether and to what extent these issues apply to their manufacturing and distribution activities,” the FCA said.
“Where they identify shortcomings in their product governance arrangements, we expect them to act promptly to remediate including providing redress to customers where harm has been identified.
“We are currently providing feedback to the firms involved in our review. We will intervene as necessary to address the issues and risks in those firms who are not meeting their regulatory obligations, using the full range of our regulatory tools.
“We have set out our expectations for firms within this report and we will also engage further with the GI and PP sectors, including relevant trade bodies, to ensure that these are understood and acted upon urgently.
“Firms (supported by relevant trade bodies) need to do much more to work together and ensure they share information, as required by the rules.
“Firms who still fail to fully meet their obligations in this area, and who cannot demonstrate that they are delivering fair value consistently, can expect us to intervene using the full range of our regulatory tools.”
Ensuring customers get fair value
Matt Brewis, director of insurance at the FCA, said: “Insurers need to make sure their customers are getting fair value. Progress is being made, but we are still seeing too many examples of insurers and brokers lacking the right information, governance, or oversight to ensure their customers get consistently good outcomes.
“All insurance firms should take note of our findings and make improvements where appropriate.
“We’ll continue to take action where we see poor value so consumers can have confidence when buying insurance products.”