The FCA letter for the Personal and Commercial Lines Insurance Intermediaries portfolio came out on Friday 4 September. https://www.fca.org.uk/publication/correspondence/general-insurance-portfolio-letter.pdf
Although a “Dear CEO” letter from the regulator obviously means you should read and pay attention to it, it is worth putting this letter into context. Given that there are now only a very few large firms that have a dedicated supervisory team or a “relationship manager” at the FCA, the portfolio approach is how the FCA supervises firms as described in the Approach to Supervision document finalised in April 2019 with minor changes from the consultation document in March 2018.
The 60,000 firms that the FCA regulates have been allocated across 40 odd portfolios. The Personal and Commercial Lines Insurance Intermediaries portfolio is one of the largest with around 5,000 firms included in it. Hence by its nature it is covering a broad range of firms both in terms of size and business models and as the letter itself states it includes traditional insurance brokers serving retail and or commercial customers, secondary insurance intermediaries and loss assessors.
This portfolio letter is a major way in how the FCA sets out its expectation of firms. However, a letter relevant to this number of firms, is going to have to be high level and generic rather than targeting specific firms and areas. As a result, there were not really any surprises or new subjects other than the impact of Covid-19.
That said, although the FCA does not want firms to formally reply to the letter, it does ask firms to
“Please consider the extent of these risks in your business and assess if your strategies reduce the risks.”
It would be a foolhardy CEO or senior manager to ignore this letter especially given the focus on individual accountability under the Senior Managers & Certification Regime (SM&CR) we are now in!
The FCA’s main concern for this portfolio is
“We have identified that the most significant risk of potential and actual harm in the portfolio is through customers buying unsuitable or poor value products. We believe that insufficient or unclear information at point of sale and inappropriate sales tactics to be the biggest contributors to this harm.”
With it seeing part of the solution being
“Improvements in firm’s cultures, governance and oversight arrangements will ultimately drive the change that we require from this market.”
Breaking this down further the subjects covered are:
- Financial resilience due to Covid-19 and orderly wind-down (which is a summary of the more detailed follow-up questionnaire that some firms received after completing the earlier high level questionnaire). Given its prominence I think this shows how worried the FCA is about firm failures.
- Governance and oversight including clear accountabilities, a robust risk framework which identifies key risks of harm and strong and independent Board oversight and challenge. This flows into how firms should have implemented and embedded SM&CR and setting a healthy culture, something which the FCA will review in due course.
- Incentive arrangements that do not support a healthy conduct culture at various levels of a firm and focusing on primarily financial metrics.
- Distribution Chain The FCA has done a lot of work in this area with thematic reports and guidance issued last year. This is a wide ranging topic and the FCA has managed to shoehorn a lot into this paragraph, such as IDD and ICOBS breaches and even CONC breaches where consumer credit (premium finance) products are involved, vulnerable customers, robust controls for sales and renewals arrangements, managing conflicts of interest, overseeing Appointed Representatives and product value! The FCA also subsequently published its latest value measures data calling out the low amount (less than 20%) of premiums paid out in claims for personal accident and key cover add-on products.
- Business Interruption keeping customers informed of the FCA’s court case. Now that the 162 page(!) judgement is out and has brought some clarity and generally sided with FCA / clients unfortunately there is still some uncertainty over whether policies will pay out and whether insurers will appeal. Interestingly the letter is silent on the difficulties some insurance brokers are having getting PII cover without Covid-19 exclusions due to the uncertainty caused by Business Interruption policy wordings.
- EU Withdrawal being prepared for Brexit
Firms may also conduct activities that are covered by other portfolios and so may also wish to review themselves against other portfolio letters issued, such as Credit Brokers in February 2020 with the relevant issues for insurance brokers being “firms not explaining the level of service provided” and “where the firm is responsible for providing product information, not providing adequate or relevant information”. The equivalent portfolio letter for Personal and Commercial Lines Insurers issued in January 2020 was pre Covid-19 but had other similar topics to the above and with the addition of sections on pricing practices (the FCA recently said it expects to publish the final report and consult on rule changes to pricing practices later this year) and operational resilience. The letter for the Lloyd’s & London market intermediaries (including managing general agents) portfolio has yet to be issued, but they had a separate Dear CEO letter in January 2020 on Non-financial misconduct in wholesale general insurance firms and an unhealthy culture, highlighting the regulator’s concern in this area.
Please get in touch with RWA to find out how we can help you.
John King left the FCA in April 2019 after 16 years where his responsibilities included this portfolio. Since then he has been utilising his experience and working with RWA and its clients to provide compliance and business solutions.