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FCA review of the general insurance distribution chain - “at a glance” guide

Herbert Smith Freehills LLP

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United Kingdom May 2 2019

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 [email protected]

Barnaby Hinnigan Partner, London T +44 20 7466 2816 [email protected]

Alison Matthews Consultant, London T +44 20 7466 2765 [email protected]

Grant Murtagh Of Counsel, London T +44 20 7466 2158 [email protected]

Caroline Hagg Associate, London T +44 20 7466 6311 [email protected]

"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

Subscribe to HSF Insurance Notes

for further commentary on

the latest developments on insurance topics

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

55643855

Herbert Smith Freehills LLP - Geoffrey Maddock, Barnaby Hinnigan, Alison Matthews, Grant Murtagh and Caroline Hagg

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Filed under

  • United Kingdom
  • Insurance
  • Herbert Smith Freehills LLP

Organisations

  • Financial Conduct Authority (UK)

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