The FCA has proposed non-handbook guidance for insurance product manufacturers and distributors – see GC19/2. Insurance intermediaries, as product distributors, should consider the impact that their distribution strategy has on the overall value of the product to the customer.
What does this mean?
Product value in general insurance (GI) is an increasing area of concern for the FCA. The FCA’s focus has been to explore to what extent the value customers receive from their insuranceproducts is reduced by the way distribution chains operate. The key points from the guidance are:
All firms in the distribution chain have an obligation to act fairly, honestly and professionally in accordance with the best interests of the customer (the customer’s best interests rule).
Value is an important consideration for firms when designing products, determining distribution strategies and setting their remuneration structures.
Manufacturers have an obligation to design, monitor and review products to ensure they meet the needs of the target market and prevent/mitigate customer harm. This includes considering the cost of the product to the customer, and overseeing the impact on value from the distribution chain.
With the introduction of the Senior Managers & Certification Regime, the FCA also expect there to be clear lines of individual accountability within all firms for each of the expectations and related activities detailed in the guidance.
The FCA expects distributors to monitor the products they offer, and their distribution arrangements, on an ongoing basis. This enables them to act if they identify situations where the product is not providing the intended value to customers, resulting in customer harm. This includes situations where they become aware that the level of remuneration they are receiving is not in the customer’s best interest, because of its impact on the value of a product.
Why should insurance intermediaries care?
The FCA published a report this week (TR19/2) that found:
There is a potential for harm to customers arising from the product development and distribution approaches used in some sectors of the GI market.
Many customers paid prices which appeared significantly higher than the production and delivery costs of the products. This was due to very high levels of commission within the distribution chain.
Many firms did not adequately consider risks of harm to customers when developing products and their related distribution arrangements.
Some product manufacturers were giving control of the product design (including pricing) to other parties in the distribution chain without proper oversight and without considering the impact on the value of the product and outcomes for customers.
Some firms had a lack of appropriate due diligence and oversight of distribution partners. This meant they were failing to consider the suitability and ability of parties to whom authority, control or responsibility is being delegated or passed.
Customer harm, therefore, can arise from the following:
failures in product design
a lack of robust oversight of the distribution chain
poorly designed product distribution strategies
conflicts of interest caused by remuneration structures
Insurance distributors should identify signs of a product resulting in customer harm through, for example, the following:
through their direct interactions with customers
through their assessments of customers’ demands and needs
by referencing the data published as part of the FCA’s work on value measures in general insurance
through analysis of claims or complaints
When distributors identify that the product is resulting in customer harm, they should inform the manufacturer and, if necessary, amend the way they distribute the product.
This might include stopping the use of a particular distribution method (for example, through aggregators), reducing the amount of remuneration they receive or ceasing to distribute the product entirely.Distributors should also ensure that they understand the product manufacturer’s assessment of the value the product should provide.
If, after considering the factors set out in the guidance, a firm concludes that remuneration arrangements conflict with its duty to act in accordance with the customer’s best interests rule, the FCA expect it to amend those arrangements. The definition of ‘remuneration’ is broad, including revenue from commission, profit share agreements, fees and all other economic or non-economic benefits received as part of the distribution of an insurance product. Distributors should be mindful of any remuneration arrangements that may conflict with the customers best interests rule; the guidance consultation has some useful examples.
If a distributor delegates activities to other parties within the distribution chain, including to firms who are not FCA-authorised (such as retail brands), they must have adequate systems and controls to ensure that these activities are delivered in line with the needs and objectives of the customer. This should include ensuring they have appropriate ongoing management information and processes in place to monitor and assess customer outcomes.
We would also direct clients to Annex 1 of the guidance consultation which contains useful rules-mapping as relevant to the guidance published.
Whilst the guidance is not binding on firms, firms will be more likely to be able to evidence compliance with the FCA’s rules if they follow the guidance.
What can FinTech Compliance do to help?
At FinTech Compliance, we are working with some of the leading InsurTech and Insurance Intermediary firms to help them remain compliant.
Whether you are an existing regulated insurance intermediary, you are looking to get regulated for the first time, or you are not sure whether or not you are within the scope of the Insurance Distribution Directive (IDD), we can help. In particular, we offer the following services:
Insurance intermediary applications to the FCA
Ad-hoc reviews of thematic areas of your business
IDD authorisation and Variation of Permission applications