In December 2018, the Financial Conduct Authority (FCA) wrote to the boards of life insurance companies setting out the FCA’s view of the key risks of harm life insurance companies pose to their customers and the markets in which they operate. The letter set out the FCA’s two-year strategy for mitigating these risks. The period was extended to Q1 2021 as a result of COVID-19 and on 5 August 2021, the FCA sent a letter to life insurers providing an update on the progress of the FCA’s strategy, setting out an updated view of the key risks of harm to customers life insurers pose, outlining the FCA’s expectations of life insurers and giving an overview of the FCA’s supervisory strategy and programme of work to make sure firms are meeting the FCA’s expectations, and the risks of harm are being mitigated.
The updated strategy has been extended to include regulated Third-Party Administrators (TPAs) providing outsourced service, administration and systems functions to life insurers. The FCA has emphasised particularly the responsibility of senior managers to ensure that the FCA’s expectations are being met and to take reasonable steps to prevent breaches of FCA requirements.
The FCA identified the following as ‘key drivers of harm’ and specified the following expectations in response:
Key drivers of harm
FCA expectations/FCA actions
Weaknesses in pricing and product governance practices leading to customers experiencing excessive fees and charges, resulting in poor customer outcomes.
Firms should be able to demonstrate that:
the best interests of customers are at the centre of strategic planning, objectives and product and proposition planning,
through robust product governance, existing products continue to meet customer needs and adverse customer outcomes arising from changing circumstances are mitigated, and
distribution strategies, including remuneration arrangements are appropriate when considering customer outcomes.
FCA actions: The new rules in the General Insurance Pricing Practices Market Study Policy Statement which are applicable to pure protection products will come into force on 1 October 2021. The FCA will monitor firms’ compliance with the new rules. The FCA will consider whether to update its regulatory returns to target key risks, such as excessive fees and charges.
Weaknesses in product governance arrangements and the management and execution of mitigation programmes resulting in customers receiving poor quality services and products.
Firms must have robust product governance arrangements to ensure products and propositions meet the needs of the identified target market and are distributed in accordance with FCA requirements. The FCA expects servicing standards to be maintained on a transfer of business to another insurer.
FCA actions: the FCA are currently consulting on changes to its Guidance on Part VII transfers.
Weaknesses in the management of operational risks:
resulting in interruption of services to customers, causing inconvenience and potential consumer loss; and
relating to IT and cyber security results in the loss or misuse of customer data.
Firms and TPAs should be able to demonstrate robust management of operational risks, including operational resilience and cyber security.
Firms are expected to notify the FCA of incidents involving the loss or misuse of customer data.
FCA actions: the FCA’s policy statement on Building Operational Resilience was published in March 2021. The FCA will monitor how firms implement the new rules and guidance.
The risk of poor customer outcomes arising from a disorderly exit from outsourcing arrangements between an insurer and a TPA.
Firms should keep under review the effectiveness of their outsourced activities and their plans to exit these arrangements in all circumstances, including in an unplanned scenario.
FCA actions: the FCA will continue to monitor the capital and liquidity positions of solo-regulated TPAs.
Weaknesses in product governance arrangements resulting in customer buying/being sold unsuitable products.
Expectations and actions are as for item 1 above.
Markets develop in a way that results in customers not having access to products that suit their needs. (For example, the supply of sustainable products may not meet customer demand which may lead to firms overstating the ESG credentials of products (‘greenwashing’).)
No specific expectations.
FCA actions: the FCA are consulting on proposals for enhancing climate-related disclosures by asset managers, life insurers and FCA regulated pension providers. It may do targeted work on firms’ ESG offerings to ensure they fit consumer demand. It will also monitor issues arising from Brexit that may impact firms.
Weaknesses in control and oversight arrangements and awareness raising of scams with customers, increase the risks of customers suffering financial loss as a result of scams.
The FCA has seen good practice from firms in raising awareness of scams with customers and with other firms and reporting scams to the FCA.
FCA actions: The FCA expects this to continue and develop as scam activity evolves. It will continue to support firms to remove the threat of scams.
The FCA will review and provide a further update in 2023. In addition, although not mentioned in this recent letter, firms will also need to take into consideration other FCA regulatory requirements set out in the guidance on the fair treatment of vulnerable customers and in the new Consumer Duty proposals (currently under consultation). For more details about the Consumer Duty proposals see our series of articles on Engage.
Authored by Kirsten Barber.
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