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Dear Board of Directors | Release Date: 8th January 2020

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

To access the original FCA document, click here.

Long Summary

This letter outlines the Financial Conduct Authority’s (FCA) supervisory strategy for firms within the Personal & Commercial Lines Insurers (PL&CL) portfolio. It addresses the key risks these firms pose to consumers and the markets, along with detailed guidance on expected actions from the firms to mitigate these risks. This strategy is crucial for safeguarding consumer interests and enhancing the integrity of the financial markets.

Definition of Portfolios

A portfolio groups firms with similar business models to streamline supervision. The PL&CL portfolio includes firms that deal with personal and commercial line insurance products. Regular communications will share insights, regulatory expectations, and highlight best or poor practices to guide firms.

Strategic Overview and Expectations

The FCA’s assessment indicates significant risks within the general insurance sector that need addressing to improve consumer outcomes and market fairness. Firms are expected to revolutionise their culture focusing on consumer outcomes throughout their service delivery. Governance and operational controls should also be significantly enhanced to meet regulatory changes effectively.

Key Areas of Focus and Supervisory Priorities

The FCA has prioritised several areas for immediate action based on the potential harm they pose to consumers and the market:

1. Governance and Operational Controls

Firms must improve their governance structures and operational controls to proactively engage with and implement regulatory changes. Effective implementation of regulatory changes, like those introduced by the UK’s adoption of the Insurance Distribution Directive (IDD), is crucial for fair consumer treatment and product suitability.

2. Management of Distribution Chains and Remuneration Practices

Poor practices in distribution chain oversight and remuneration can lead to consumer harm through excessive pricing or unsuitable product offerings. The FCA expects firms to have reviewed and adapted their strategies according to the guidance provided in the GI distribution chain report to ensure the value and appropriateness of products to the end consumer.

3. Product Suitability and Value

The risk of consumers being provided with unsuitable or poor-value products remains a concern. The IDD has strengthened requirements to ensure product appropriateness. Firms are expected to engage in extensive compliance work to align their offerings with these requirements, ensuring products meet consumer needs effectively.

4. Pricing Practices

The FCA’s focus extends to pricing practices, especially the differential pricing which might lead to unfair consumer outcomes. The ongoing Market Study into general insurance pricing practices aims to address these concerns comprehensively. Firms should actively participate in improving their pricing governance to prevent consumer detriment.

5. Handling of Regulatory Changes

Firms need to manage regulatory changes effectively, ensuring they are fully compliant with new rules and their implementations do not adversely affect consumers. This includes maintaining clear communication channels with consumers, particularly around policy renewals and cancellations, to facilitate informed consumer decisions.

Actions Required from Firms

Firms within the PL&CL portfolio are expected to:

Review Customer Journeys: Ensure all aspects of the customer journey comply with regulatory standards, particularly in terms of product design, pricing, and distribution.

Enhance Governance Structures: Boards and senior management should intensify their focus on regulatory compliance and consumer outcomes.

Improve Operational Resilience: Address any deficiencies in data protection and IT security to safeguard consumer information and ensure system reliability.

Prepare for Brexit: Assess the implications of the UK’s departure from the EU and make necessary adjustments to ensure seamless continuity post-Brexit.

Conclusion and Next Steps

Firms are urged to use this guidance to align their operations with FCA expectations, enhancing their practices to prevent consumer harm and contribute to a fair and effective market. The FCA plans continued engagement with PL&CL insurers and will provide updated supervisory plans by early 2021. Firms should remain vigilant and proactive in updating their regulatory compliance and operational strategies.

Key Takeaways:

This strategy underscores the FCA’s commitment to elevating standards across the insurance sector, ensuring firms act in the best interests of consumers and maintain the integrity of the financial markets.

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