Isabel Clarke

The Financial Conduct Authority (“FCA”) has been focusing on the fair treatment of customers for a number of years. Many will recall the FCA fining Carphone Warehouse over £29 million in 2019 due to the mis-selling of insurance to consumers. This is just one of the fines the FCA has handed out to insurance companies, and is representative of an issue highlighted in the Thematic Review 19/2 of General Insurance Distribution Chain (“TR19/2”). This article will focus on the key points raised in the TR 19/2 and follow up Final Guidance 19/5 document, (“FG19/5”) the ‘ explaining what it is that General Insurers should be doing to ensure compliance with the FCA regulations and expectations. The underlying concepts are not new to the recent publications by the FCA, however there are certain areas that have more focus than before,  such as product value.

For Insurance Manufacturers,  the FCA has set out a number of expectations in the guidance document, which are summarised below. The core theme to the guidance is product value, and the responsibility of insurance manufacturers and distributors to ensure the cost to the customer is a fair representation of the service and quality of product. This should be done through a review of the company Product Oversight and Approval Procedures, with the customer experience central throughout.

• Manufacturers should consider the value of products to the customer through product approval and review processes. The Insurance Manufacturer should be able to demonstrate this has taken place through formal Product Oversight Procedures, including consideration of the objectives, interests and characteristics of the target market. This also includes the costs and charges of the product itself. This includes the above target market consideration in addition to the distribution chain impacts on the overall value, such as the involvement of specialist brokers.
• Manufacturers should not delegate the FCA expectations to a third party. The manufacturer is responsible for oversight of distributors’ regulatory compliance on their behalf, although they are not responsible for distributors’ activities.
• The FCA provides guidance on the Product Design Process, included the utilisation of internally and externally sourced information on the product, the difference between risk price and end premium paid and poor value product reviews. These processes should be implemented into the Manufacturers formal procedures.

The key for Insurance Manufacturers outlined in this guidance, is to ensure the final premium price paid and product value should have a relationship with, and be indicative of, the cost of services provided by those parties involved in the distribution chain. Reviews that result in low product value should be followed by processes for correction, or ultimately product withdrawal from the market.

The FCA Thematic Review and Guidance also provide information for Insurance Product Distributors. This focuses more on the remuneration of firms and the conflict of payments with the customer’s best interests, a core incentive of the FCA. These are summarised as follows:

• Insurance Distributors should ensure the remuneration they receive for their insurance distribution activity, such as fees and charges, does not conflict with their duty to comply with the customer’s best interest rule. This is particularly important given the distributors often receive a net rate from the manufacturer, and is able to set their own remuneration through determining the final selling price themselves.
• As with Insurance Manufacturers, the FCA expects Insurance Distributors to have ongoing review and monitoring of the offered products, demonstrating awareness of customers’ demands and thorough analysis of claims and complaints.

As above, although the Manufacturer is not responsible for the activities of the Distributor, the relationship should be transparent and engaging. This includes the responsibility of the Distributor to review and analyse their remuneration levels, and inform the product manufacturer of any identification of customer harm through their own Product Oversight and Review Processes.

The general outcome of the FCA TR19/2 and FG19/5 documents is the product value directive. It is clear that the FCA expects Insurance Manufacturers, Intermediaries and Distributors to be in continual review of the customer outcome and value added by their products. The underlying principle is to implement a quality Product Oversight and Governance process, ensuring the customer receives the best quality and fairly priced product. For those insurance companies that have not yet implemented a stringent procedure in this area, now is definitely the time to do so with such an increased focus by the regulators.

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