FCA calls on insurers and brokers to demonstrate fair value and good customer outcomes

Following a review of general insurance (GI) and pure protection (PP) manufacturers’ and distributors’ product oversight and governance arrangements, the FCA has published a Thematic Review – TR24/2 – “Product Oversight and Governance thematic review – General Insurance and Pure Protection (PROD 1.4 and PROD 4)”. 

The FCA included 28 manufacturer firms (22 GI and 6) and 39 distributor firms (29 GI and 10 PP) in its sample, reviewing 45 GI and 11PP products from manufacturers, and 47 products for the distributors.

The review assessed the extent to which a representative sample of firms are meeting their obligations under PROD 4, whether product oversight and governance arrangements ensure and can effectively demonstrate that products and services offer fair value, and whether appropriate action is taken where issues with a products value arise. Alongside the review, the FCA also published the annual Value Measures data for the calendar year 2023.

Having found widespread shortcomings amongst both the manufacturers and distributors included in the review, the FCA’s tone has undergone a marked shift. The regulator stated that it is “very disappointed” to see many firms failing to fully meet their regulatory obligations under PROD 4, despite what it described as “extensive previous work and focus on this area” and the clear expectations it has set.

The FCA also noted it is actively considering the most appropriate supervisory and regulatory actions and interventions to urgently address the issues identified by the review. These include getting firms to withdraw products from the market and the use of our skilled person review tool, where appropriate. The FCA will issue individual feedback letters to the firms included in the review.

Key findings

Manufacturers 

Whilst the FCA found that most product manufacturers had strengthened their product oversight and governance arrangements and appointed senior managers responsible for product governance, they reported:

• Many product manufacturers had not implemented effective product governance frameworks compliant with PROD 4 and were unable to sufficiently assess and evidence how products offered fair value. This included a failure to demonstrate robust challenge when considering product value and how product reviews, FVAs and appropriate MI and analysis were used assess and evidence value, detect issues with value and inform proactive action to address them.
• Poor quality FVAs undertaken by many firms; specifically, failure to consider the total price paid, including remuneration, when assessing product value.
• Insufficient, poor-quality MI, preventing effective monitoring of distributors’ remuneration, assessment of overall fair value and the detection of value issues- particularly across different customer groups, such as vulnerable customers.
• Target market statements were often too high-level and lacked granularity, increasing the risk of products being sold to customers unlikely to receive fair value or good outcomes as a result.
• Where several parties were involved in manufacture, many firms did not understand or meet their responsibilities under PROD 4.
• Many manufacturers had not properly considered their distribution arrangements or choice of distributors in relation to their product and target market. Many also failed to provide appropriate and timely information to distributors.

Distributors         

The FCA noted that some distributors strengthened their governance and oversight of their product distribution arrangements, and that relevant senior managers had assumed responsibility for this, strengthening these firms’ ability to evidence that they had considered the impact their activities and remuneration had on products and value for customers. However, the following shortcomings were noted in other distributors:

• Lack of clarity around governance structures and processes with limited or no clear responsibility, rationale, or evidence for key decisions- including actions taken when value problems were identified.
• Product distribution arrangements lacking detail, with insufficient consideration given to key areas like distribution strategy, target market, remuneration, and the product’s intended value.
• Lack of effective processes to get appropriate information from the manufacturer to enhance understanding of the target market, distribution strategy and the product’s intended value.
• Not having distribution strategies which met requirements under PROD 4.3 and appropriately aligned to the manufacturer’s distribution strategy for the product.
• Insufficient MI and analysis to assess remuneration, its relationship to costs, the benefits and services provided and its impact on product value; there was also a lack of evidence of any such assessment and its outcomes.
• Cases where the statement used by the distributor differed materially, e.g. it was less granular than the manufacturer’s or less clear in identifying customers for whom the product is not expected to provide fair value. The FCA expressed concern that this could lead to the product being sold to customers outside the target market, posing a significant risk of harm.

Next steps

Manufacturers of products, including insurers, but also co-manufacturers such as MGAs and some brokers) get the most criticism overall, but distributors – intermediaries, brokers – have not escaped without criticism. UKGI recommends that all firms consider the contents of the report urgently and, in the words of the FCA, “assess whether and to what extent these issues apply to your activities”.

If shortcomings in your firm’s product governance arrangements are identified, the FCA expects prompt remedial action, including redress to customers where harm has been identified. See examples of better and poor practice set out in Chapters 4 and 5 of the report.

Key considerations for brokers

In the meantime, brokers should consider the following:

• Clarify your firm’s distribution strategy and document it– i.e. what the firm does, how it earns revenue and how it sells to whom and how.
• Assess your role in the distribution chain from insurer to customer- how do you add value? Is the final cost reasonable for what is provided? Remember to include any fees, optional add-ons etc.
• Can you justify increases in revenue (i.e. through commission) if a customer’s premium rises significantly due to circumstances out of your control? Are you still providing fair value for that customer?
• Clarify who is responsible for product governance, i.e. a Senior Manager?
• Keep a record of governance decisions and the rationale or supporting evidence for choice of products and providers
• Collate insurers’ product information, such as target market statements, FVAs- and follow up when they if they don’t deliver!
• Monitor product performance, value and customer outcomes (including feedback), and act on any concerns, ensuring that concerns are logged with the insurer.
• Clarify the intended target market for products- and only sell products to the intended target market
• Ensure products and fair value is assessed and approved annually

Learn more

Our e-learning platform, the Development Zone, contains courses to help teams to assess and build knowledge on key areas- all whilst fulfilling CPD requirements. Following the FCA’s review why not view the 'Product Oversight and Governance'?

If you are not a Development Zone user, get in touch with the team at devzone@ukgigroup.com to discuss our services and access a 14-day free trial to view the system and it's features for yourself- no commitment, no cost.