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Dear CEO | Release Date: 12th October 2021

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 provided an updated supervisory strategy for Lloyd’s & London Market (LLM) insurers. This follows a previous communication from November 2020, outlining significant risks posed by these insurers to consumers and the market. Despite some improvements, the FCA identifies ongoing risks that require further action by the market and individual firms.

Objective of FCA Supervision

The FCA aims to foster a wholesale market that operates effectively for all participants, ensuring integrity and consumer protection. This involves ensuring that firms not only comply with regulatory requirements but also embrace the spirit of these regulations, focusing on the end-consumer. The regulatory body stresses the importance of product governance and the management of distribution chains to ensure consumer needs are met.

Key Risks of Harm and FCA Expectations

1. Product Value

Risk: Consumers may acquire products through direct purchase or delegated distribution that do not offer fair value or meet their needs, leading to unsatisfactory claims experiences.

Expectations: Firms should continually assess the impact of the pandemic on product value and adapt their offerings to ensure they meet ongoing consumer needs and regulatory standards.

2. Claims Outcomes

Risk: Inadequate claims handling processes may lead to unfair or delayed outcomes for consumers.

Expectations: Firms must handle claims fairly and timely, particularly focusing on vulnerable consumers to prevent undue distress.

3. Operational Resilience

Risk: Essential business services might be disrupted, leading to potential losses or data breaches.

Expectations: Firms should manage operational risks, particularly those arising from increased digitalisation and reliance on third-party service providers.

4. Contract Clarity

Risk: Ambiguities in contract terms can lead to misaligned customer expectations and uncertainties about the extent of coverage.

Expectations: Firms should work on simplifying contracts and ensuring that terms are clear and comprehensible to customers.

5. Firm Culture

Risk: Existing corporate cultures may not adequately support the fair treatment of customers or the integrity of market operations.

Expectations: Firms should foster a culture that aligns with regulatory expectations, promoting diversity and inclusion and ensuring that all employees understand and implement the firm’s values.

6. Access to Business Lines

Risk: Certain business lines may become less accessible due to market conditions, impacting the availability and affordability of essential coverage.

Expectations: Insurers should ensure that their products remain accessible and appropriately priced, reflecting the genuine risks without disproportionately affecting consumers.

Supervisory Strategy and Program of Work

The FCA’s supervisory strategy involves a proactive approach to monitoring and enforcement, ensuring that firms adhere to the set expectations. This includes:

Regular Assessments: Continual evaluation of firms’ adherence to FCA rules and guidance, particularly concerning product governance and value.

Engagement with Industry Initiatives: Encouragement of industry-led solutions to improve customer outcomes, such as efforts to clarify contract wording.

Targeted Supervision: Focus on areas where there is significant risk of consumer harm or where practices fall short of expected standards.

Conclusion and Next Steps

Firms are expected to regularly review their practices against FCA expectations and adjust their operations accordingly. They should also prepare for further communications and possible adjustments to the regulatory framework based on emerging risks and market developments.

Key Takeaways and Actions

Ensure Compliance with Updated Regulations: Firms must fully integrate and adapt to new FCA regulations and guidance, particularly those related to product value and claims handling.

Focus on Operational Resilience: Strengthen operational frameworks to withstand disruptions and protect consumer data.

Enhance Transparency and Contract Clarity: Review and simplify insurance contracts to ensure that consumers clearly understand their coverage.

Cultivate a Positive Firm Culture: Develop an inclusive culture that promotes fair treatment of consumers and aligns with broader regulatory and market expectations.

Firms are encouraged to engage with the FCA through regular updates and to prepare for ongoing supervisory activities aimed at enhancing market integrity and consumer protection.

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