General insurance (GI) has been under increased scrutiny by the Financial Conduct Authority (FCA). In 2017 and 2018, it carried out diagnostic works into the GI distribution chain and found multiple areas of concern.
The FCA's GI findings
- There is potential harm to customers arising from both product development and distribution
- Customers paid significantly more than the production and delivery costs of the products they purchased
- Some firms did not properly consider risks of harm to customers in the development of products
- Some manufacturers gave control of the product design to third parties in the distribution chain without proper oversight and consideration of the impact on customers.
- Some firms did not conduct appropriate due diligence and oversight of third party distribution partners.
As a result of these findings and the implementation of the Insurance Distribution Directive in 2018, the FCA produced guidance providing firms with clarity on its expectations in the GI sector (the Guidance). This Guidance was published in November 2019.
FCA guidance on GI sector
The Guidance is applicable to all firms who conduct the following regulated activities:
- Insurance Distribution Activities
- Effecting and carrying out contracts of insurance
- Managing the underwriting capacity of a Lloyd's syndicate as a managing agent at Lloyd's.
The Guidance is split in two parts. Chapter 3 applies to firms manufacturing insurance products and Chapter 4 applies to firms conducting insurance distribution activities. We have detailed below some of the key new requirements established by the FCA in the Guidance.
Chapter 3 – Firms manufacturing insurance products
Firms must put in place a product approval process. This should cover product design and review. Firms will be required to evidence that the appropriate considerations have been made and conclusions reached. In addition, where firms delegate activities to third parties, they must have adequate systems and controls to ensure that these activities are delivered in line with their obligations. Further, where the product review indicates a risk of harm to customers, firms must respond appropriately. Processes must be in place for correcting products that are detrimental to customers including, where necessary, the withdrawal of the product from the market.
Chapter 4 – Insurance distributors
Firms must consider the impact of their distribution strategy and remuneration on the overall value of the product. The FCA states that products and distribution arrangements should be monitored and that distributors should have processes in place to identity signs that a product is resulting in customer harm owing to its value. This may, for example, be through direct contact with customers, FCA data or analysis of claims or complaints.
The amount of distributors' remuneration may result in the product failing to provide the intended value identified in the product approval process. The FCA has highlighted various non-exhaustive scenarios where this may be the case:
- A distributor receiving a level of remuneration which bears no reasonable relationship to their costs or workload to distribute the product
- A distributor receiving significant remuneration, but where their involvement in the distribution chain provides little or no benefit beyond that which the customer would receive from the product anyway
- A distributor receiving remuneration which incentivises them to propose or recommend a product which either does not meet the customer's needs, or does not meet them as well as another product would do
- A distributor receives a net rate from the product manufacturer, and is able to set their own remuneration by determining the final selling price themselves.
The FCA also state that firms must regularly review their distribution processes to ensure compliance with the new guidance as well as existing requirements.
The new Guidance issued by the FCA will come as no surprise to the GI sector. Firms must now ensure that the Guidance is properly reflected in updated processes in order meet the FCA's expectations.