General Insurance:  FCA warns GI firms to place greater focus on customer outcomes 

The FCA’s Thematic Review into General Insurance distribution chains has highlighted that certain GI sector manufacturing, sales and distribution approaches can lead to customers purchasing inappropriate products, paying excessive prices or receiving poor service. 

Background
Previous work conducted by the FCA in 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. They stated, “Issues identified in the report indicate many firms lack sufficient focus upon customer outcomes and need to address this urgently to mitigate the potential harm to customers.”

Findings of the GI distribution chain Thematic Review
The FCA’s findings and expectations are relevant to all firms in the general insurance (GI) sector. 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). 

The FCA reviewed three specific GI products (travel, tradesman and GAP/motor ancillary insurance), selected to give a representative sample of the wide and varied GI market. There findings included examples of possible harm to customers and included: 

• 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.
• Customers not receiving the services they needed and experiencing poor outcomes, for example when making claims or complaints. This was most common where firms delegated authority to another party.

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.” 

The recently implemented Insurance Distribution Directive requires that all firms in the GI distribution chain act to act honestly, fairly and professionally in accordance with the best interests of the customer.  The Senior Manager and Certification Regime is designed to make Senior Managers accountable for the actions of their firms.  It already applies to insurers and will be applied to GI intermediaries in December 2019. 

The FCA is warning the industry that it will not hesitate to intervene with both firms and their senior managers on these bases where it sees a failure to have appropriate regard to the value their ultimate customers receive. 

Next steps
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. 

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.