The Financial Conduct Authority (FCA) has published the latest portfolio letter to life insurance firms. The last portfolio letter, being a letter aimed at a particular part of an industry, was sent to life insurers in 2018. Portfolio letters set out the identified key risks of harm to customers in a particular sector and set regulatory expectations for how those harms should be mitigated.
In this latest letter, the FCA updates the sector on its strategy to address risks identified in the previous letter. The strategy has been extended to cover third party administrators (TPA) providing services to life insurance companies.
The FCA believes that the main drivers of harm to customers have evolved since 2018. They are now identified as:
- Weaknesses in pricing and product governance practices leading to customers experiencing excessive fees and charges, resulting in poor customer outcomes.
- Weaknesses in product governance arrangements and the management and execution of migration programmes, resulting in customers receiving poor quality services and products.
- Weaknesses in the management of operational risks (including in respect of interruption to services and IT and cyber security).
- The risk of poor customer outcomes arising from a disorderly exit from outsourcing arrangements between an insurer and a TPA.
- Weaknesses in product governance arrangements resulting in customers buying or being sold unsuitable products.
- Markets developing in a way that results in customers not having access to products that suit their needs.
- Weaknesses in control and oversight arrangements and awareness raising of scams with customers, increasing the risks of them suffering financial loss as a result of scams.
Given these risks, the FCA expects life firms to:
- Demonstrate strong governance, control and oversight arrangements throughout their business and in mitigating the key risks of harm outlined in the letter.
- Ensure that arrangements adapt to the changing internal and external risk environment and risk profile of the firm.
- Ensure that functions supporting these arrangements are appropriately resourced with the required level of skills and capabilities.
- Demonstrate that they have robust governance arrangements in place to address these risks.
The letter makes clear that the FCA is relying upon those in senior management functions to take appropriate responsibility for demonstrating that they can meet their responsibilities in addressing the identified harms.
What should life insurance firms do next?
The letter sets out some clear expectations on life firms and in particular stresses that the FCA will hold senior managers accountable for failures. Given that the letter in effect states that the sector has not shown progress in addressing some underlying concerns, it is reasonable to anticipate heightened regulatory scrutiny of life firms over the next few months. Firms must be able to demonstrate that they are taking appropriately robust action to address the harms that the FCA have identified.