Background
The FCA has previously explored practices in relation to value in the distribution chain and pricing in the general insurance market in its thematic review TR19/2. The MS18/1: General insurance pricing practices market study also highlighted a need for stronger governance, and clearer information distribution. In May 2023, the FCA also released the findings from its review of fair value frameworks. Despite these efforts and the setting of clear expectations, the FCA remains concerned that customers are not always receiving fair value when purchasing financial products.
Following on from their work, on the 21st August 2024, the FCA released Thematic Review Report TR24/2. This report outlines the regulators view of the effectiveness of product oversight and governance arrangements among general insurance (GI) and pure protection (PP) manufacturers and distributors. In particular, the review tests the firms in scope against PROD 4 and PROD 1.4 of the FCA handbook and the Consumer Duty FG22/5 Finalised Guidance, which specify that all financial products must deliver fair value to customers. Although focused on GI and PP, product manufacturers and distributors in other sectors should also consider the findings and apply any appropriate read-across to their firms.
The FCA analysed information from 28 Manufacturers and 39 Distributors as part of the review, covering a range of GI and PP products. The scope focused on product oversight and distribution arrangements, including:
- How firms ensured their products and services deliver fair value to customers
- The robustness of product governance arrangements in compliance with PROD 4 and PROD 1.4 requirements
- Actions taken by firms to address and rectify any issues where products might not be providing the expected value
Key Findings
The review highlights the need for improved product governance and better demonstration of fair value to protect consumers, including:
- Product Fair Value: Many firms are not adequately assessing and evidencing that their products consistently deliver fair value to customers.
- Governance and Oversight: While some firms had robust oversight frameworks, others lacked comprehensive processes for monitoring and reviewing their products.
- Target Market Understanding: There were issues with understanding and defining target markets. Some firms did not adequately align their products with the needs of their intended customer base.
- Remuneration: Most distributors do not fully understand their responsibilities to consider their remuneration arrangements, how it influences the services and benefits they provide, and the impact on value.
- Regulatory Compliance: Firms varied in their adherence to PROD 1.4 and PROD 4 requirements. Some companies were found to be compliant, while others needed to improve their practices to meet regulatory standards.
- Action on Issues: Firms often did not take sufficient or timely action to address identified issues where products did not provide the intended value.
Actions for Firms
The FCA is currently considering the most appropriate supervisory and regulatory actions to take to address the issues identified in the thematic review.
The regulator urges all firms involved in the manufacture and distribution of GI and PP products to urgently review the report and evaluate how its findings may impact their own practices. Firms should assess whether they have any shortcomings in their product governance and distribution activities.
If deficiencies are identified, the FCA expects firms to take prompt corrective actions, including addressing any customer harm and providing appropriate redress. Remedial action should be supported by attestations from Senior Management to ensure accountability.
As the FCA stated in their ‘Consumer Duty – 1 Year On’ Webinar on 31 July 2024, any firms which are outliers in the market may bring themselves to the FCA’s attention, and those firms would be expected to have appropriate rationale and justification as to why they may be an outlier. The FCA expects firms to be responding to its requests and feedback clearly, honestly and effectively. Firms will have a chance to fix any issues the regulator identifies, however, if the issues are not resolved promptly, then those firms can expect regulatory intervention.
The FCA’s ongoing focus on these issues emphasise the severity of the product governance failures they have observed, and demonstrates the regulator’s ongoing commitment to ensuring fair outcomes for all customers.
How Square 4 Can Help
At Square 4 we specialise in regulatory compliance across the FCA agenda across the Wealth, Retail Lending and Insurance sectors. Our specialist consultants have been supporting our clients comply with regulations under PROD 1.4 and PROD 4 by successfully developing and implementing Price and Value Assessments, appropriate MI, governance and control frameworks, Outcomes Monitoring Frameworks, and other Consumer Duty and conduct-related processes.
Please get in touch with us at hello@square4.com, or the team below, should you wish to discuss how we might be able to support your firm further.
Contacts:
Sean Kulan, Client Relationships Director – skulan@square4.com
Elliot Cooper, Client Partner – ecooper@square4.com
