Request a Demo Today

Dear CEO | Release Date: 18th May 2020

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 outlined its supervision strategy for Life Insurance firms, emphasising the importance of mitigating risks that could potentially harm customers or the financial markets. This letter serves as a directive for Life Insurance firms to assess and adjust their business practices in accordance with FCA guidelines to enhance consumer protection and market stability.

Supervision Strategy Overview

The FCA’s supervision strategy spans a two-year period starting from April 2018. This strategy is designed to identify, diagnose, and rectify any harm that Life Insurance companies may inflict on consumers, evaluating the effectiveness of these interventions periodically. The FCA plans to provide feedback at the end of this period with an updated assessment of key risks and supervisory plans.

Key Risks and Drivers of Harm

The FCA has identified three primary risks that could detrimentally affect consumers:

  1. Reduced Savings and Retirement Income: Poor fund management could lead to customers experiencing lower savings and income during retirement.
  2. Product and Service Discrepancies: Customers might receive different products or services than expected due to unclear or changing terms and conditions.
  3. Operational Failures: Failures in operational processes could prevent customers from receiving expected services or payments.

These risks stem from various factors within the life insurance sector, including complex product structures, infrequent customer engagement, and inherent conflicts of interest between various stakeholder groups. Life Insurers are encouraged to consider these factors in their strategic planning and oversight processes.

Focus Areas for Supervisory Work

The FCA’s supervisory efforts will concentrate on the following areas to mitigate potential harms:

Culture and Governance: Effective governance is crucial in the Life Insurance sector due to the complex and long-term nature of its products. The FCA will assess firms’ governance structures and culture, focusing on how well these frameworks manage and mitigate risks of harm.

Resilience and Outsourcing: Given the critical information held by Life Insurers and the reliance customers place on these services, the FCA emphasises the importance of robust business continuity and disaster recovery plans. The joint discussion paper on resilience by the FCA, PRA, and BoE highlights this priority.

Unit-linked and With-profit Funds: The FCA will scrutinise the governance of unit-linked and with-profit funds, particularly how firms manage these funds to deliver fair value to customers. Poor governance in these areas has previously led to customer harm.

Long-standing Customers: The treatment of long-standing customers, especially those with closed-book policies, remains a focal point. The FCA aims to ensure these customers are treated fairly over the long term.

Senior Managers and Certification Regime (SM&CR): Implementation of the SM&CR will be closely monitored, with a particular focus on how well senior managers fulfil their responsibilities under the new regime.

Regulatory and Market Changes

LIBOR Transition: Life Insurance firms must prepare for the discontinuation of LIBOR by the end of 2021, ensuring a smooth transition to alternative rates to avoid market disruption.

EU Withdrawal: The FCA, along with the PRA, will assess firms’ readiness for the UK’s withdrawal from the EU, ensuring that plans are in place to minimise impact on consumers and the market.

Actionable Takeaways and Next Steps

Immediate Review and Compliance: Firms are required to review their current practices, particularly around the management of funds and operational controls, to ensure they align with FCA regulations and guidelines.

Engagement and Reporting: Life Insurance firms must actively engage with the FCA, reporting any significant issues or breaches in compliance. Firms should be prepared to discuss their strategies for mitigating the identified risks and demonstrate their compliance efforts.

Continuous Improvement: Firms should continuously seek to improve their business practices to prevent potential harms, focusing on enhancing governance structures, operational resilience, and product management to meet the evolving needs of the market and regulatory environment.

Life Insurance firms are encouraged to contact their FCA supervisory contact with any queries or for further clarification on the requirements and expectations outlined in this supervision strategy. This proactive engagement is crucial for ensuring that firms not only comply with regulatory standards but also contribute to a stable and trustworthy life insurance market.

Back to the Dear CEO letter archives.