FCA review of the general insurance distribution chain
"At a glance" guide
May 2019
30 second summary
The FCA's thematic report on the general insurance ("GI") distribution chain (TR19/2) contains a clear warning to firms involved in the design and sale of general insurance products that they must do more to protect customers from harm
The FCA expects both manufacturers and distributors to consider the value provided by products and services and pay greater attention to the extent to which value identified at the product design stage may subsequently be eroded as a result of the distribution chain
The FCA intends to intervene more in this area in future to ensure potential harms are mitigated
Contacts
Geoffrey Maddock Partner, London T +44 20 7466 2067 geoffrey.maddock@hsf.com
Barnaby Hinnigan Partner, London T +44 20 7466 2816 barnaby.hinnigan@hsf.com
Alison Matthews Consultant, London T +44 20 7466 2765 alison.matthews@hsf.com
Grant Murtagh Of Counsel, London T +44 20 7466 2158 grant.murtagh@hsf.com
Caroline Hagg Associate, London T +44 20 7466 6311 caroline.hagg@hsf.com
"We identified significant potential for harm and poor outcomes for customers arising from the product development and distribution approaches in some sectors of the GI market."
Dear CEO Letter
"This report, the findings and harms set out in it and the accompanying suite of documents ... should serve as an immediate call to action to all GI firms."
FCA TR19/2
Theories of harm to customers
The thematic report categorises the practices the FCA has observed through the lens of two broad areas of potential harm, each of which is then split into three sub-categories showing how certain behaviours can lead to harm to customers. These behaviours may stem from either or both of the key causes identified.
Key causes of harm
Areas of potential harm
Manifestations of potential harm
Sub-standard quality / low value
Products with little or no utility, sometimes as a result of distribution chains eroding value
Purpose and values
Firms with business models, strategies and cultures which do not exhibit sufficient focus on
customer outcomes
Price and quality
Excessive prices
Prices which are disproportionate to production and delivery costs, and the services received
Excessive fees and charges
Charging fees in addition to standard commission without considering the impact on customer value
Governance and oversight
Firms with inadequate systems and controls over
the end-to-end product, service development, manufacture and delivery
chain
Sales and service
Purchase of unsuitable products
Customer purchases a product which is inconsistent with their needs
Failure to fulfil obligations to customers
Failure to deliver services or elements of services promptly and to an appropriate standard
Unavailability of customer services
System outages, cyber issues or technological failures leading to no service at all
FCA review of the general insurance distribution chain
"At a glance" guide
May 2019
"Where firms identify any gaps or shortcomings, we expect them to act promptly to address them to mitigate the risk of harm to customers."
Dear CEO Letter
Meeting the FCA's expectations
We suggest the following action points to enable firms to meet the FCA's new expectations:
Action points for manufacturers
Approving products: Ensure that value consideration (including intended benefits and overall cost to end customer) is appropriately documented as part of the product approval process and the rationale behind the conclusions reached is evidenced
Monitoring value: Use available data to the fullest extent to map the objectives, interests and characteristics of the target market and consider the extent to which the product offers value to the intended customers regularly assess whether changes to the product, target market, distribution strategy or remuneration structures may be required to maintain value
Understanding the distribution chain: Use contractual audit rights to obtain all relevant information on the remuneration of other parties in the distribution chain and the supporting justification for each additional cost to the end customer
Delegating to third parties: Conduct thorough due diligence on third parties performing under delegated authority and implement adequate systems and controls to confirm their compliance with the manufacturer's obligations
Action points for distributors
Contextualising the distribution strategy: Liaise with product manufacturers to understand their assessment of the value a given product should provide consider collaboration opportunities so as to design an appropriate distribution strategy which does not erode customer value
Checking for conflicts: Examine whether any existing remuneration structures conflict with the customer's best interests rule if so, amend these arrangements (unlike other situations, disclosure of the conflict is not sufficient)
Assessing charges: Evaluate current fees to determine whether any differences (either to different customers or inconsistent application) are not aligned with the customer's best interests rule
Identifying potential harm: Use a variety of sources (direct interactions, assessment of customer demands and needs, analysis of claims and complaints) to identify whether a product is resulting in customer harm, including considering whether there is a risk posed by products reaching customers outside the target market where necessary, inform the manufacturer
Next steps
The FCA guidance consultation (GC19/2) on its expectations of insurance product manufacturers and distributors will close on 9 July 2019. Subject to the responses received, the FCA intends to formalise its expectations in nonHandbook guidance to be published online
The FCA will issue additional communications on these issues, both directly with firms and via trade associations
The FCA will also plan a programme of supervisory work, covering both dayto-day supervisory activities and further thematic work this will include an assessment of firms' compliance with the Insurance Distribution Directive (IDD) and the enhanced standards arising from the Senior Managers and Certification Regime (SMCR)
"We will not hesitate to intervene in future ... we will use the full range of our regulatory tools if we encounter issues and potential failings at firms causing harm or potential harm to customers."
FCA TR19/2
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Sources
Dear CEO Letter, 10 April 2019
Thematic Review TR19/2 "General insurance distribution chain", April 2019
Guidance consultation GC19/2 "The GI distribution chain: Proposed guidance for insurance product manufacturers and distributors", April 2019
Speech delivered by Andrew Bailey at Bloomberg, London "The future of financial conduct regulation", 23 April 2019
FCA Mission: Approach to supervision, April 2019
FCA Business Plan 2019/20
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