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Dear CEO | Release Date: 10th April 2019

To read a shorter summary of this Dear CEO letter, click here.

To access the original FCA document, click here.

Long Summary

The Financial Conduct Authority (FCA) has released a thematic report on the general insurance (GI) distribution chain, highlighting significant concerns regarding customer outcomes in the sector. This report, following a thematic review and a multi-firm review of delegated authority arrangements, aims to clarify the FCA’s expectations of firms involved in the manufacturing and distribution of GI products. The issuance of this letter and the accompanying non-Handbook guidance consultation underlines the urgency with which the FCA is addressing these issues.

Areas of Potential Harm Identified

Inappropriate Products and Increased Prices

The thematic report has identified several areas where customer harm could occur, including the purchase of inappropriate insurance products and price inflation due to unnecessary or excessive remuneration in the distribution chain. These issues stem from inadequate consideration of product value and failures in product design and distribution strategy.

Weak Oversight and Conflicts of Interest

Another significant concern is the weak oversight of the distribution chain and poorly designed distribution strategies, which often lead to conflicts of interest due to the remuneration structures of firms. Such structures can detract from the focus on customer outcomes and lead to products that do not align with customer needs.

Progress and Regulatory Actions

Despite some progress following earlier reviews (TR15/7 and TR16/6), many GI firms continue to demonstrate insufficient focus on customer outcomes. The FCA has already taken regulatory actions against firms such as Liberty Mutual Insurance Europe SE, Express Gifts Limited, and The Carphone Warehouse for their failures in managing claims, product value, and complaint handling respectively. The FCA has made it clear that it will not hesitate to take further action against firms that fail to meet regulatory standards and cause customer harm.

Impact of New Regulations

Insurance Distribution Directive (IDD) and SM&CR

The introduction of new rules from the Insurance Distribution Directive (IDD) on 1 October 2018 has direct implications for the manufacture and distribution of GI products. These rules mandate that all parties involved in the GI distribution chain act in the best interests of their customers. Furthermore, the Senior Managers and Certification Regime (SM&CR), which has been applicable to insurers since December 2018 and will extend to GI intermediaries by December 2019, aims to enhance the accountability of senior managers, focusing particularly on customer outcomes.

FCA Expectations and Proposed Guidance

Ensuring Value and Compliance

Manufacturers are expected to assess the value provided by their products through thorough product approval processes and to oversee distribution arrangements meticulously. Distributors need to evaluate how their distribution processes affect the customer value and ensure their remuneration does not conflict with the customer’s best interests.

Systems and Controls

The FCA stresses the need for robust systems and controls, particularly concerning the remuneration received and the overall management of GI products and services. Firms must also have a deep understanding of their distribution chains to effectively assess their impact on customer value.

Next Steps and Supervisory Focus

Review and Adaptation

All firms are urged to thoroughly review the FCA’s report and the proposed non-Handbook guidance. Firms must identify and rectify any gaps or shortcomings promptly to mitigate the risk of customer harm.

Ongoing Supervision and Compliance

The FCA plans to conduct further supervisory work to assess firms’ compliance with the relevant rules and its expectations. The authority will utilise the full range of regulatory tools to intervene if firms are found not meeting their obligations under the new regulations introduced by the IDD and enforced by the SM&CR.

Conclusion and Takeaways

Urgent Review Required

Firms must urgently review their product design, distribution strategies, and oversight mechanisms to align with the FCA’s heightened expectations and regulatory standards.

Share and Implement

Firms are expected to share the contents of this letter with their boards or equivalent bodies and ensure that the insights and directives are integrated into their operational strategies.

Prepare for Enhanced Oversight

Firms should prepare for more rigorous FCA oversight under the new regulatory frameworks, ensuring that all aspects of their operations are compliant and focused on delivering genuine value to customers.

This comprehensive overview serves as a crucial call to action for all firms involved in the GI sector, underscoring the need for immediate and sustained improvements to meet the FCA’s standards and enhance customer outcomes in the industry.

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