FCA begin to act towards insurance firms for failures of the Consumer Duty
The FCA has written to insurance firms warning that more action must be taken to ensure good consumer outcomes in what Matt Brewis, Director of Insurance at the FCA called ‘an early signal of the work we’ll be doing under the Consumer Duty.’
In the latest portfolio letters sent to all firms which hold insurance permissions, the regulator reminded businesses of the regulator’s expectations that firms are ensuring their products are providing fair value to customers.
The portfolio letters were sent the same day in which the FCA published the first full year of general insurance value measures data.
General insurance value measures data 2022
In 2013, the FCA undertook a market study of the General Insurance (GI) add-ons market (MS14/1) where the regulator identified poor product value as an area of harm in general insurance. To help combat this, the FCA introduced new rules to report and publish data on value measures, as set out in Policy Statement PS20/9 which was published in September 2020.
Under PS20/9, firms are required to:
- Report GI value measures data including claims frequencies, claims acceptance rates, average claim pay-outs and claims complaints as a % of claims; and
- Ensure that products offer fair value to customers in the target market. This has since been further strengthened under the Consumer Duty.
This latest General insurance value measures data is the first full year data results published and reflects data across January to December 2022. The FCA previous publication of value measures data was for July to December 2021, was published in November 2022 and raised concerns that the data showed individual firms, or products, were not providing fair value. This theme appears to continue across 2022.
One such product which the FCA have raised serious concerns over is Guaranteed Asset Protection (GAP) products.
Potential Failings in GAP products
Through the General insurance value measures data, the FCA found evidence that GAP products are not offering consumers fair value.
GAP insurance is an add-on to motor insurance which provides cover for a financial shortfall that can happen when:
- A customer’s vehicle is written off or stolen.
- The pay-out under a motor insurance policy does not pay back its original value at purchase or the remaining finance value (where the vehicle was bought on finance).
The FCA have written to all GAP insurers informing them that they believe that firms are not likely meeting PROD rules or are failing to provide consumers fair value. The FCA have given these firms a month to propose how they will address these concerns.
The FCA set out their concerns and whilst these are applied to GAP insurance products, they also have relevance to other Value Measures products.
Areas of concern
There are 3 main areas of concern which the FCA have identified:
- The extent and quality to which firms have implemented and embedded relevant fair value rules overall.
- Certain firms and specific products where intelligence shows that customers may not be receiving fair value – and whether firms are able to show that their value assessment of those products in line with relevant rules.
- Initial indications from FCA supervision of firms shows deficiencies in product governance and a lack of adequate management information.
The FCA have raised concerns over some distribution arrangements which do not clearly demonstrate how fair value is being delivered. The FCA found that there appeared to be high commission levels, and it was not clear how these products were being assessed to show they were consistent with fair value. As an example, the FCA saw high levels of commission in distribution chains for what appears to be standard non-advised sales, where it was not clear how the commission levels had been assessed to support the delivery of fair value. The FCA have said that addressing these concerns is a key focus over the coming months.
What does this mean?
Whilst the FCA have used GAP insurance products as an example of an area of specific concern, many of the risks the regulator has identified are potentially related to wider issues and so firms should ensure that they are meeting their product governance requirements across all retail products.
It’s important for firms to outcomes test their products and review whether they can appropriately identify where they may be falling short. We support our Appointed Representative network with ensuring that they are fulfilling their duties under the Consumer Duty and provide our expert knowledge and insights in addressing any concerns firms may have when reviewing their products and services.
