In light of recent economic challenges, ensuring that financial products and services deliver fair value has become a critical focus for regulators. The Financial Conduct Authority (FCA) has responded by intensifying its oversight of product governance, particularly for General Insurance (GI) and Pure Protection (PP) products. The FCA’s Thematic Review 24/2 sheds light on the current state of product oversight and governance across the industry, highlighting areas where firms are meeting expectations and identifying significant shortcomings that require urgent attention.
Overview
The FCA’s review focused on assessing whether firms are complying with the requirements introduced under PROD 4, which mandates that insurance products provide fair value to customers within the target market. This review encompassed both insurance manufacturers and distributors, examining their governance processes, oversight mechanisms, and the effectiveness of their product governance arrangements.
Findings for Manufacturers
The review found that while some manufacturers have made strides in strengthening their product oversight, there are notable gaps that pose risks to customers. A significant concern is that many firms do not adequately assess the fair value of their products, leading to potential harm. The FCA emphasised the importance of having robust oversight and challenge mechanisms in place, supported by appropriate management information (MI) and analysis. Where these mechanisms are lacking, there is a clear risk of products not delivering the intended value, ultimately harming customers.
Findings for Distributors
For distributors, the review painted a more concerning picture. Although some have improved their governance and oversight, many are still falling short in understanding and meeting their responsibilities under PROD 4. The FCA noted that many distributors do not obtain sufficient information from manufacturers or fully comprehend the distribution strategies in place. This lack of understanding leads to products being sold outside their target markets, which can result in customer harm. Furthermore, issues related to remuneration and its impact on product value were also highlighted, with some firms failing to ensure that their compensation structures do not adversely affect the value provided to customers .
Key Areas of Concern
The FCA identified several key areas where both manufacturers and distributors must improve:
- Product Distribution Arrangements: There is a need for more detailed and granular target market statements. The review found that many firms use overly broad or vague definitions, which increases the risk of products being sold to customers who will not receive their intended value.
- Governance and Oversight: Effective governance requires clear, well-documented processes that include senior management oversight. The review found that some firms lack these processes, leading to poor product value and potential customer harm.
- Remuneration and Value: Distributors must carefully consider how their remuneration impacts the value of the products they distribute. The FCA found instances where remuneration structures were not aligned with delivering fair value to customers, exacerbating the risk of harm .
FCA Expectations
The FCA’s message is clear, firms must take urgent action to address shortcomings. This includes implementing more rigorous governance processes, enhancing the granularity of target market definitions, and ensuring that remuneration structures support, rather than undermine, product value. The FCA has indicated that it will continue to monitor these issues closely and take appropriate supervisory and regulatory actions where necessary.
The FCA’s Thematic Review serves as a crucial reminder for firms in the GI and PP sectors to prioritize fair value and robust product governance. As the economic landscape remains challenging, ensuring that customers receive products that meet their needs and deliver value is more important than ever. Firms that fail to meet these expectations risk not only regulatory action but also significant harm to their customers.
By addressing these issues, firms can better position themselves to deliver on their obligations under the Consumer Duty, ultimately contributing to a more transparent, fair, and customer-focused financial services industry.
