The Financial Conduct Authority (FCA) has slammed general insurance and pure protection manufacturers and distributors for failing to get to grips with its final rules on insurance pricing and enhanced product governance.
The regulator said it needed to act to prevent “significant harm” after it found a third of manufacturers had scheduled a significant proportion of their product reviews including fair value assessments in Q3 2022.
In the letter seen by Health & Protection, FCA director of insurance Matt Brewis said the regulator “was disappointed that a material proportion of the market appears to have failed to adequately consider the applicability and the impact of the rules on both the manufacture and distribution of their products”.
“We consider that this reflects poorly on firms’ change management capability and leadership. We also would have expected more effective cooperation between manufacturers and distributors.”
Brewis warned the regulator will take this matter into account in its wider supervision of insurance markets and will take strong action where it considers that firms have not appropriately considered the rules or the best interests of customers.
Three months forbearance
The FCA warned that it “foresees potential for market disruption and customer harm, as we anticipate that value assessments may not be completed in time for distributors to be compliant with the new requirements and to be able to continue distributing products from 1 October 2022”.
Consequently, the regulator said it must now act and is introducing three months’ forbearance to prevent “significant harm” being caused to customers through the withdrawal of products from distribution due to distributors not being in a position to comply with their obligations in full by 30 September.
The FCA added in certain circumstances distributors will be able to continue distributing existing non-investment insurance products without needing to understand the manufacturer’s value assessment and whether there are customers for whom the product is not expected to provide fair value until 1 January 2023.
The circumstances where this would apply are:
- The distributor has identified the impact the distribution arrangements have on the value of the product by 30 September and has completed any identified remedial action as a result of its assessment.
- The distributor has complied with any requests from the manufacturer for information specified in PROD 4.3.10BR.
- The distributor is able to demonstrate that they received the manufacturer’s value assessment too late for them to be reasonably expected to meet their obligations by 30 September 2022.
Policy Statement 21/5
On 1 October 2021 the FCA introduced the rules to strengthen product governance, with the aim of ensuring that customers receive fair value from their general insurance and pure protection products.
In addition to new requirements for manufacturers, distributors were also required to assess their own impact on the value of products and to have understood the outcome of the manufacturer’s value assessment.
For existing non-investment insurance products, distributors were allowed until 30 September 2022 to update their distribution arrangements to ensure these requirements are met.
In May 2021 the regulator published Policy Statement 21/5 (updated in PS 21/11) setting out final rules on insurance pricing and the enhanced product governance. These were designed to improve competition and ensure firms offer fair value products to consumers.
And in August 2021 it conducted a market survey which assessed firms’ readiness to comply with the final rules.
This was followed up by a multi-firm-review (MFR), starting with a survey of firms in February 2022 to assess whether:
- Firms that manufacture insurance products were undertaking the necessary work to comply with rules and guidance in relation to product governance and oversight under PROD 4.2;
- and putting in place product approval processes that identified whether their products provide fair value to consumers and will continue to do so for a reasonably foreseeable period in line with PROD 4.2, PROD 4.3 taking into consideration distributors’ obligations (which came into effect on 1 October 2021) and PROD 4.5 (which came into effect on 1 January 2021).
Late scheduling of product reviews
But among its key findings the regulator found a third of manufacturers had scheduled a significant proportion of their product reviews including the fair value assessments in Q3 2022.
This meant that many manufacturers may have been leaving it too late and therefore would not have adequate time to make any required changes to their products and their distribution to ensure fair value in order to prevent the risk of harm to consumers.
The FCA also found over a third of the manufacturers in the survey told them they had not undertaken the value assessment as required under PROD 4.5 and so were unable to indicate they were in compliance with those rules.
