Liz Booth explores why insurers are struggling with new rules on product governance
Brokers have been warned to improve standards or face the wrath of the regulator. New product governance rules came into force on 1 October 2021, however, the UK’s Financial Conduct Authority (FCA) has warned that too many firms, in particular brokers, are failing to meet the required standards.
One of the challenges for brokers appears to be in whether they identify themselves as a manufacturer or a distributor. The new enhanced product governance rules apply to manufacturers and distributors of all general insurance or pure protection products, except contracts for large risks or reinsurance contracts.
In a ‘Dear CEO’ letter to the market, Nicola Denton, FCA retail insurance department manager, states: “We contacted a sample of general insurance intermediaries that told us they were neither a manufacturer nor a distributor and asked them to explain their answer. The vast majority of firms contacted confirmed that, on reflection, they were in fact either a manufacturer or distributor and, therefore, subject to the enhanced product governance rules.”
The letter goes on to flag the FCA’s primary concern.
“The findings of the survey, and our follow-up engagement with a sample of firms, suggest that some firms have failed to understand the impact of the enhanced product governance rules on their business. This in turn raises concerns about the outcomes customers may experience, should firms have failed to comply with the rules when they came into effect.”
The letter explains that a manufacturer will create, develop, design or underwrite a contract of insurance, while to distribute means advising on or proposing a contract of insurance to a customer.
Where firms are not consistently meeting existing requirements and expectations, it risks harm through poor-value products or products being sold to the wrong customers
It states: “We expect in almost all cases, firms with permission to carry out insurance distribution activities [that] are not manufacturers, are distributors. This applies to all personal and commercial general insurance products, excluding contracts of large risks and reinsurance contracts, not just home and motor insurance products.”
Ms Denton says firms now need to ensure that they establish whether they are a manufacturer or distributor of insurance, assess the impact of product governance rules on their operations, ensure compliance with updated rules effective from October 2021 and notify the regulator if any breaches have occurred.
Meeting customers’ needs
The regulator was already flagging its concerns before the rules came into effect. Back in the summer, it explained: “As part of the FCA’s ongoing work to ensure consumers receive fair value, a review looked at how firms designed, sold and reviewed their products, to ensure they met the needs of their customers.
“The findings show that some firms had made good progress in meeting the FCA’s existing rules and guidance on product governance and value, issued in 2018 and 2019, as well as against temporary guidance on product value, issued in response to Covid-19 last year. However, too many firms are not fully meeting the FCA’s standards.”
At the time, the regulator went on to say that many firms were likely to be unprepared to meet new enhanced rules on product governance coming into force on 1 October 2021, and which were part of a wider package of remedies aimed at tackling the loyalty penalty and ensuring that firms focus on providing fair value to customers.
The review found weaknesses including insufficient focus on customers, outcomes and product value, including when considering value in the context of Covid-19, as well as shortcomings in governance and oversight of products.
Sheldon Mills, executive director for supervision, policy and competition at the FCA, said at the time: “Where firms are not consistently meeting existing requirements and expectations, it risks harm through poor-value products or products being sold to the wrong customers. These firms have significant work to do urgently to be able to comply with the enhanced product governance rules. Firms that fail to do that work risk regulatory action.”
Substantial changes
Insurance law expert Charlotte McIntyre, of Pinsent Masons, says the FCA’s actions underline the complexity of the new rules and the “substantial” changes the FCA is expecting of insurers and intermediaries, within “a challengingly short timeframe”.
“While the market is keen to ensure its customers are treated fairly on pricing and renewals, some of the practical implications of implementing the new rules are significant, particularly where existing IT systems are required to bend to fit the new requirements,” she says.
“The industry will welcome the FCA acknowledging the practical challenges it faces in implementing the new rules, along with its adjustment of certain rules to ensure that the overall aim is achieved but through more achievable means.
“For example, insurers will be relieved that cases where the customer chooses to lapse their current policy and take out another policy with the same insurer via a different partner, intermediary or channel are now excluded from the new broad definition of renewal and can be treated as new business. Most systems were not designed to capture such information,” Ms McIntyre concludes.
Liz Booth is contributing editor of The Journal
