[co-author: Martin Katunar]
On 21 August 2024, the Financial Conduct Authority (FCA) published Thematic Review TR24/2 (Review), as part of its on-going scrutiny of the general insurance sector, focusing on pricing and value for money provided by insurance products.
The Review focused on whether insurance manufacturers and distributors are meeting their product governance and oversight obligations under the rules in PROD 4 for general insurance (GI) and pure protection (PP) products. The Review also considered the impact of the Consumer Duty, which sets higher standards for products and services for retail customers.
What Was in Scope of the FCA’s Review?
The FCA’s Review involved an assessment of 28 manufacturers and 39 distributors, covering 10 different GI and PP products. The FCA looked at whether firms had:
- Appropriately implemented the rules in PROD 4, which require them to ensure that the products they manufacture and distribute offer customers fair value.
- Assessed, and could demonstrate, that their products and services provide fair value and how their product governance arrangements delivered good outcomes for customers.
- Introduced appropriate systems and controls necessary to meet these requirements.
- Taken action to address any identified issues where products may not be delivering the intended value.
Key Findings for Manufacturers and Distributors
The FCA found that, while most manufacturers have materially strengthened their product oversight and governance arrangements and had product governance frameworks in place, many were not fully meeting the requirements under PROD 4. The Review found that there had been more limited progress by distributors.
Key issues included:
- Inadequate product governance arrangements
- Many firms lacked effective product governance frameworks for compliance with PROD 4. For example, many firms did not provide any minutes or records to evidence product approvals, and senior managers had limited input or oversight of the approval process. This meant the firms were unable to adequately evidence how and why their products offered fair value and give customers good outcomes.
- In particular, in the case of distributors, there was insufficient management information (MI) being produced to assess the impact of their own activities on the product’s intended value to the target market.
- Poor quality of fair value assessments (FVAs)
Issues identified by the FCA included:
- Lack of adequate consideration of the total price paid. While most manufacturers considered the risk price and cost of underwriting, other elements such as the costs of operating the product (including claim handling and administration) were not assessed.
- Failure to consider distributor remuneration. The FCA found that some manufacturers did not review the impact of distributor remuneration on the overall value of the product.
- Inability to demonstrate how firms assessed whether their products were delivering fair value to all customers, including vulnerable or outlier groups of customers.
- Failure to identify value problems even where those were apparent.
- Failure to act on those value problems, including by changing, suspending or withdrawing products.
- In the case of distributors, insufficient MI and analysis to assess their remuneration or the interaction between the price paid by the customer, the quality of the distributor’s services and whether any remuneration was appropriate in the context of the FVA assessment. Distributors were also not able to provide evidence of any such assessment and its outcomes.
- Inadequate information and information flows
- Information being produced by manufacturers and distributors was often too high level and lacked granularity, and did not consider whether there were groups of customers for whom the product would not provide the intended value, risking the sale of products to customers outside the intended target market who are unlikely to get fair value or achieve good outcomes from the product.
- Insufficient MI was being produced by manufacturers to properly to assess value. The FCA also found that manufacturers did not have appropriate metrics in place to identity fair value problems, to monitor distributors’ remuneration and to ensure that such remuneration is consistent with providing fair value to customers. The FCA also pointed to few firms having product-specific MI, and underdeveloped metrics and standards/tolerance limits.
- Distributors frequently lacked effective processes to get appropriate information from manufacturers to allow them to understand the target market, distribution strategy and the product’s intended value. Some distributors received only limited information from their manufacturers on the FVA outcome or stated that the product offered fair value without backing said statements with information.
- Non-compliant co-manufacturing arrangements
- For manufacturers, where several parties were involved in manufacture, many firms did not understand or meet their responsibilities under PROD 4, instead entering into co-manufacturing agreements which did not set out clearly how the firms collaborate to meet the requirements for fair value.
- Inadequate distribution arrangements
- Many manufacturers had not appropriately considered their distribution arrangements or choice of distributors, including by identifying or demonstrating why the selected distributors were consistent with the target market. Many were also not providing appropriate and timely information to their distributors, providing instead FVAs which were high level summaries with little substance or relevant information.
- Some distributors did not have a distribution strategy which met the requirements of PROD 4.3 and was appropriately aligned to the manufacturer’s distribution strategy for the product. In particular, distributors’ target market statements sometimes differed materially from those of manufacturers, raising concerns about the product being sold to customers outside the target market and the resulting risk of harm.
What Should Manufacturers and Distributors Do Now?
The FCA messages can be distilled to three key areas of focus for both manufacturers and distributors:
- “Assess value properly”:
- Distributors and manufacturers should review their FVA processes and map these against the FCA’s findings, and ensure there is sufficient granularity for each product type and customer type; this includes making sure there is a clear framework on signing off for the totality of a product.
- In particular, firms must explicitly include an assessment of distributor remuneration in these assessments.
- “Write things down and share”:
- Co-manufacturer arrangements should be reviewed to make sure these adequately capture the FCA’s requirements.
- In addition, both distributors and manufacturers should ensure their agreements cover information sharing, and that appropriate information is being shared between each party —i.e., clear articulation of a manufacturer’s target market assessments and FVAs, as well as distributors sharing their own value assessments (including the impact of their remuneration arrangements).
- MI should be reviewed to ensure it is sufficiently granular to support senior decision making.
- “Do something about it”:
- Of particular relevance to manufacturers will be the need to demonstrate that they have acted on MI received and demonstrated how they changed or withdrew products (or adapted a distribution strategy or target market assessment) based on the information received.
- Any such decision should be recorded (including the rationale for the decision) to evidence how firms are meeting their requirements.
The FCA has stated that it is giving feedback to firms subject to their review and is considering appropriate regulatory and supervisory actions. This includes setting action plans and timelines, requiring firms to withdraw products from the market (as it has done in relation to GAP insurance products), and using the skilled person review tool (i.e., section 166), where appropriate.
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