We recently celebrated the 10th anniversary of insurance mediation becoming a regulated activity. In regulating the general insurance market, the FSA spent much of its tenure ‘fire-fighting’ as a result of the ongoing payment protection insurance (PPI) saga. When the FSA transformed into the FCA, it was clear that the regulator wanted to adopt a change of approach in order to avoid a repeat of the PPI affair. The way in which it has sought to do this is by becoming a more proactive and less reactive regulator.
The FCA is putting this into practice by placing a heightened emphasis on ‘product governance’: in other words, insisting that product providers adopt measures to ensure that they are putting their customers’ interests first when designing, marketing and administering their products.
What does good product governance mean in practice for insurers? In our view, it will include: identifying a clear target market for each insurance product; performing a detailed analysis of the genuine demands and needs of policyholders in this market; ensuring that those demands and needs are adequately taken into account in the product design process; tailoring the product’s distribution strategies to focus on the target market; and exercising sufficient oversight and monitoring to be in a position to be confident about how the products are actually benefitting their consumers (known, in regulator-speak, as “monitoring consumer outcomes”).
In the past it has been common place for new general insurance products to be designed and developed by the prospective distributor, rather than by the insurer itself. As a result, many insurers and Lloyd’s managing agent (whose role would merely be to underwrite the policies) are having to review historic distribution models in order to ensure that they can provide their own independent scrutiny of the product design and have the requisite oversight of the distribution processes in order to discharge their regulatory obligations.
It is becoming clear that the FCA’s sights are focused squarely on product providers rather than the customer-facing intermediaries, as the party with core responsibility for ensuring that their products match the needs of the target market. During a speech to the London market, Clive Adamson (the FCA’s former Director of Supervision) said:
“Where insurers are outsourcing services to other companies acting on their behalf, they remain responsible…this continues to be the core focus of our supervisory engagement with London market insurers”.
This approach was demonstrated in August 2014 by the £8,373,600 fine that the FCA imposed on Stonebridge International Insurance Limited in relation to the oversight of the sale of accident insurance products. In that case, whilst the customer-facing intermediaries appear to have acted in breach of their duties, responsibility for such mis-selling was laid at the door of the insurer.
One obvious reason for the FCA focussing its attention on product providers is that it is simpler to do so given that they represent a relatively small number of firms, as opposed to the vast number of smaller insurance intermediaries that are distributing these products to customers. It is felt within the FCA that a more positive impact on customer outcomes can therefore be achieved by influencing insurers in their design and marketing of policies, and their own monitoring of sales standards, rather than trying to police those in customer-facing roles.
In its 2014/2015 Business Plan, the FCA announced a thematic review into sales of general insurance products through third party coverholders:
“We propose to look into the key risks in complex distribution chains and the mixed responsibilities in them, including the cultural risks relating to product design, sales and post-sales handling”.
The outcome of this review is likely to give us a fresh indication of the FCA’s expectations of insurers and Lloyd’s managing agents in overseeing the sales of policies, when they have delegated authority and effectively ‘given away the pen’.
In order to fulfil their regulatory obligations as product providers, insurers and Lloyd’s managing agents need to have robust systems and controls in place to ensure they have adequate oversight of delegated authority (and other outsourcing) arrangements with a clear focus on ensuring that good consumer outcomes are achieved. In practice, this is likely to include:
- carrying out detailed pre-appointment due diligence on the party to whom functions are being delegated;
- receiving and analysing adequate management information;
<li”>carrying out regular audits to ensure that they are meeting their obligations; and
- taking a robust and proactive approach to managing the relationship.
This is all in addition to effective product design governance and selecting distribution channels that are appropriate for the specific products.
In my view, these steps will assist a product provider in demonstrating that the fair treatment of customers is not being compromised and that customers’ interests are given appropriate priority.