Dear CEO | Release Date: 20th September 2023
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) aims to update stakeholders on the strategic directions and regulatory focus for the UK insurance market through 2023 to 2025. This guidance covers the diverse sectors within the market, including personal and commercial lines, wholesale insurance, and life insurance, underscoring the sector’s vital role in the national economy.
Overview of the Insurance Market
The insurance sector is crucial, offering essential services to millions, managing significant financial assets, and facilitating risk management on a global scale. Despite its strength, the sector faces numerous challenges, including economic pressures from the pandemic, rising living costs, and environmental changes. These challenges necessitate rigorous oversight and adaptation to safeguard both consumer interests and the sector’s stability.
Current State and Challenges
Recent surveys indicate a robust consumer interaction with insurance products, with a significant majority actively comparing options in the market. However, the sector is not without its issues, including the handling of claims and transparency in product value, which have often not met the standards expected by regulators or consumers.
Strategic Objectives and Regulatory Focus
The FCA’s primary objective under the Financial Services and Markets Act (FSMA) is to ensure that financial markets, including the insurance sector, operate effectively. This involves ensuring that the insurance market supports consumers’ long-term financial goals and provides reliable support in adverse situations.
Identified Issues and Areas for Improvement
The FCA has pinpointed several areas where the insurance market has underperformed or failed to meet expected standards:
- Inequitable product value propositions and excessive commissions.
- Discriminatory pricing and inadequate claims valuations.
- Substandard handling of business interruption claims and general insurance pricing.
- Delays in claim settlements and insufficient support for vulnerable customers.
These findings have prompted the FCA to demand better governance and accountability from insurance firms, particularly in ensuring that their practices align with regulatory expectations and consumer interests.
Key Priorities for 2023-2025
Setting and Testing Higher Standards: The FCA stresses the importance of high governance standards, pushing for improvements in corporate culture and operational resilience. Firms are expected to develop inclusive environments that reflect their consumer base, enhancing their service delivery.
Operational Resilience: Firms must fortify their operational frameworks to handle disruptions effectively, ensuring that they have robust contingency plans for critical business services.
Consumer Duty: There is a strong emphasis on integrating Consumer Duty into business models, focusing on product suitability, fair pricing, and comprehensive consumer support. This includes preparing for the application of these standards to both existing and new products by July 2024.
Oversight of Appointed Representatives: Enhanced rules have been set to improve the supervision of Appointed Representatives, ensuring they meet the high standards expected in consumer care and compliance.
Actions for Firms
Firms are encouraged to actively engage with these priorities by:
- Integrating robust governance frameworks and addressing any cultural deficiencies.
- Enhancing data collection and analysis to better understand and mitigate risks.
- Implementing rigorous operational resilience measures.
- Ensuring all products and services are developed with a consumer-focused approach.
Conclusion and Takeaways
The FCA’s directive for the next two years is clear: insurance firms must undertake significant efforts to align their operations with regulatory expectations, focusing particularly on consumer protection and market stability. Firms are expected to proactively manage their regulatory responsibilities, with the FCA prepared to take action against non-compliance. For any further queries or urgent issues, firms are advised to maintain open lines of communication with the FCA, utilising the designated contacts provided in the guidance.