On 10 April 2010, the Financial Conduct Authority (FCA) published a press release in respect of work undertaken to ensure that customers of general insurance (GI) products are getting value for money. The FCA will continue to undertake diagnostic work on product value in GI distribution chains and will expect firms to meet its expectations for product value.
The press release is published alongside the report on the thematic review recently undertaken on general insurance distribution chains (General insurance distribution chain (TR19/2), a ‘Dear CEO’ letter setting out the FCA’s expectations of general insurance firms and a consultation on guidance for firms that manufacture and distribute insurance products (GC19/2: General insurance distribution chain: proposed guidance for insurance product manufacturers and distributors).
The FCA believes that, regardless of previous work undertaken in respect of GI distribution chains, many firms “have not responded appropriately and are not sufficiently focused on customer outcomes, including the value of the products and services their customers receive”.
Where there are multiple parties in a distribution chain, the FCA has identified in TR19/2 that there is a risk that remuneration arrangements in the chain can result in customers paying a significantly higher price than production or delivery costs for the products they are buying. Remuneration arrangements can also result in unsuitable sales where insurance is sold alongside non-financial products.
The concerns are raised by the FCA in the context of enhanced requirements introduced by the Insurance Distribution Directive (Directive (EU) 2016/97) to consider the best interests of customers in the manufacturing and distribution of GI products and increased accountability for senior managers under the Senior Managers and Certification Regime (SM&CR), already applied to insurers and applicable to brokers from December 2019. In the Dear CEO letter the FCA says that SM&CR will enable it to take a “more interventionist” approach where it sees firms failing to meet regulatory obligations in the future.
What does the FCA expect of firms?
The proposed FCA guidance sets out its expectations for manufacturers and distributors of GI products. These are that firms:
- act fairly, honestly and professionally in accordance with the best interests of customers;
- consider the value customers ultimately receive from their products and services;
- maintain appropriate systems and controls over remuneration arrangements and that manufacturers have sufficient knowledge of the roles and remuneration of all entities in the distribution chain so that an assessment of customer value can be made;
- maintain appropriate systems and controls over GI products and services including where authority is delegated to another business; and
- consider the impact that distribution strategies have on the overall value of products for customers.
The FCA expects GI firms to review TR19/2, the contents of the Dear CEO letter and the proposed guidance. The content of the letter should be considered by the board of the firm.
Firms should review their existing systems and controls to identify where they may not be in compliance with the FCA’s expectations. Any gaps or shortcomings that firms identify should be addressed promptly to mitigate the risk of harm to customers. Firms should ensure that the value of products for customers is taken into account throughout the distribution chain and be able to evidence that this is the case.
The FCA press release comes shortly after the significant fine against Carphone Warehouse for mis-selling mobile phone insurance (reported by us earlier this year).