Part of the FCA’s ongoing work to ensure consumers receive fair value, the 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. In addition, many firms are likely to be unprepared to meet new enhanced rules on product governance, which come into force on 1 October 2021. These new rules are part of a wider package of remedies introduced by the FCA to tackle the loyalty penalty and ensure that firms focus on providing fair value to all their customers.
The review found weaknesses including:
- Insufficient focus on customers, outcomes and product value, including when considering value in the context of Covid-19
- Shortcomings in governance and oversight of products
- As an example, it was not always clear firms have adequate processes in place to assess whether intermediary remuneration (such as how much a broker is paid) bears reasonable relationship to the costs or workload to distribute the product as set out in previous guidance and required under the rules applicable from 1 October 2021.
Deadline for insurance compliance looms
Sheldon Mills, Executive Director for Supervision, Policy and Competition at the FCA, said: “We know some firms are doing the right thing but with the deadline for implementing our enhanced rules less than two months away, it’s worrying that some firms may not be ready. 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.”
The FCA’s enhanced product governance rules were introduced following its General insurance pricing practices market study which found home and motor insurance markets were not working well for consumers, particularly loyal customers. The rules are designed to ensure that firms have processes in place to deliver products that offer fair value to customers (all non‑investment insurance contracts, not only home and motor insurance).
Consumers need fair value from insurance products
Ian Hughes, CEO at Consumer Intelligence, commented on the FCA review: “Earlier this year, we started talking to consumers about fair value, because we wanted to see and measure this through their eyes, knowing that the regulator would require this of insurers. The results so far have been eye opening and, as the FCA points out, show a radically different view of product value from that seen through the insurer's lens. We think it is really important for insurers to re-frame their understanding of product value and governance in order to avoid the sort if issues the FCA has highlighted today.
“Our research tells us that demonstrating fair value for consumers is a win-win. It would lead to positive business outcomes such as increased retention, brand perception improvement, increased recommendation and positive customer reviews, ultimately leading to sales growth. However, fair value means different things to different demographics. Therefore firms need to gain a deeper understanding of their customer base to truly get this right. Insight gathered from research such as ours is vital to support confident decision making in this space.”