The report highlights how the remuneration of all the parties in the distribution chain can result in customers paying significantly higher prices than the production and delivery costs of the products they are buying. In some distribution chains there can also be a high risk of unsuitable sales (e.g. where an insurance product is sold alongside a non-financial product, such as a car).
The FCA has warned the sector to closely review its practices in light of the recent findings and make immediate improvements or face further regulatory intervention.
The General Insurance sector includes all types of non-life insurance policies, such as motor, home and travel cover. More than 300 insurers and 5,000 intermediaries operate in Britain’s GI marketplace. The FCA’s Thematic Review highlights the importance of GI products to the wider economy, explaining: “GI products are key to giving UK consumers and businesses the security and stability to go about their daily activities with confidence. It is therefore essential that they can access high quality, good value insurance products.”
This is not the FCA’s first foray into the GI sector. Its 2015 Thematic Review on Delegated Authority and its 2016 Thematic Review on Appointed Representatives both identified failings in the governance and control of GI distribution chains. While the FCA has indicated that some progress has been made it considers that significant potential for customer harm remains, saying “many GI firms have not responded appropriately and are not sufficiently focused on customer outcomes”.
Findings of the GI distribution chain Thematic Review
The FCA’s starting point is that a customer’s experience should not be affected by whether a product or service was provided and distributed by a single institution or two or more institutions (Responsibilities of Providers and Distributors for the Fair Treatment of Customers Regulatory Guide).
However, after reviewing three specific GI products (travel, tradesman and GAP/motor ancillary insurance) – selected to give a representative sample of the wide and varied GI market – the FCA has found that:
- 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.
In his comments on the Thematic Review, Jonathan Davidson – executive director of Supervision – Retail and Authorisations at the FCA said: “The widespread extent of these issues demonstrates a culture which pays insufficient regard to customer outcomes in some parts of the general insurance sector.”
In its report, the FCA also highlighted the requirements of the Insurance Distribution Directive that came into force on 1 October 2018 and:
- requires firms to act honestly, fairly and professionally in line with the best interests of the customer; and
- prohibits remuneration for insurance distributors and their employees that conflicts with their duty to comply with the customer’s best interests.
The Senior Manager and Certification Regime is designed to make Senior Managers accountable for the actions of their firms. It has applied to insurers since 10 December 2018 and will be applied to GI intermediaries in December 2019.
Bearing all this in mind the FCA has issued a warning to firms that: “it will not hesitate to intervene with both firms and their senior managers…where it sees a failure to have appropriate regard to the value their ultimate customers receive”.
What must GI firms do?
The FCA has issued a “Dear CEO” letter to share its findings and make clear that the FCA expects firms to act immediately to identify and address any shortcomings and to ensure they meet the FCA’s expectations.
GI manufacturers should consider the value provided by their products through their product approval processes and their oversight of distribution arrangements.
GI distributors should consider the impact their distribution processes have on the value the customer receives from the product and ensure they are not remunerated in a way that conflicts with customers best interests.
The FCA has also published draft non-Handbook guidance giving further clarity on the FCA’s expectations of firms in the GI sector. The key points 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, we 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 guidance is open for consultation until 9 July 2019.
Authored by Lydia Savill