In conjunction with the Insurance Distribution Directive and arising from their thematic review of the General Insurance Distribution Chain, the FCA, on 9th April 2019 issued proposed guidance for better outcomes for customers.
The guidance seeks to give further clarity on the FCA’s expectations of firms to consider the value that the product and distribution arrangements present to the customer.
The main concerns of the FCA are that:
- there are numerous parties in complex distribution chains giving rise to increased prices of GI products which adversely affects the value for the customer and
- with such complexity in distributions chains, this negatively affects delivery of service to the consumer.
The work undertaken by the FCA found that these concerns and other potential harms stemmed from two key causes:
1) the purpose and values of firms and associated issues with their business model and strategy
2) poor governance and oversight and he failure to have adequate systems and controls over the end to end, product services and development, manufacture and delivery chain.
In summary, the findings of the FCA’s thematic review are:
- There is potential 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 product, this being due to high levels of commission in the distribution chain
- Many firms did not adequately consider the risks of harm to customers when developing products and their related distribution arrangements
- Some product manufacturers were giving control of the product design to other parties in the distribution chain without proper oversight and without considering the impact of 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
Application of the guidance applies to the following regulated activities
- Insurance distribution activities
- Effecting or carrying out contracts of insurance
- Managing the underwriting capacity of a Lloyd’s syndicate as a managing agent of Lloyd’s
1. Chapter 3 of the guidance (product approval, design and review process) applies to firms manufacturing insurance products – this will include all firms who are “effecting” insurance products (including Lloyd’s market participants) and other firms who are involved with creating, designing or developing insurance products, including intermediaries.
2. Chapter 4 of the guidance (distribution strategy, the value of the customer and remuneration process) applies to firms who are conducting insurance distribution activities. This includes authorised firms and the activities of appointed representatives. The guidance will also be relevant to insurers and intermediary arrangements when distributing products through firms who rely on the connected contracts exclusion.
3. Annex 1 of the Guidance (which is appended below) sets out a table which maps the rules relevant to each section of the guidance.
Full guidance details, click here
The FCA are seeking comments on the proposed guidance and their specific questions on the proposals by 9th July 2019, the revised rules to follow later in 2019.