Background

In March 2023, the FCA began a thematic review assessing insurance manufacturers’ and distributors’ product oversight and governance arrangements, and whether firms were meeting their obligations and the FCA’s expectations.  The FCA included 28 manufacturers and 39 distributors in the review, selecting firms which were broadly representative of the types of firms and distribution chains found in the market.

On 23^rd February 2024, Matt Brewis, Director, Insurance at the FCA, wrote to insurance manufacturers setting out the FCA’s key observations and concerns.  The aim of the letter was primarily to ensure that product manufacturers acted swiftly to address the findings, but there are also messages for product distributors.

The FCA’s expectations

In 2022, the FCA carried out a limited multi-firm review to assess whether firms were going to have fully reviewed and met the enhanced product governance rules by the end of the transitional period on 30^th September 2022. Upon conclusion, the FCA provided feedback letters for both manufacturers and distributors in July 2022 setting out its disappointment at their lack of readiness and highlighting areas where actions were needed. These included governance arrangements, management information and the sharing of information between manufacturers and distributors.

The FCA expects product manufacturers, and their senior management, to have put in place:

• product oversight and governance frameworks;
• an appropriate product approval process; and
• a working fair value assessment framework;

all of which should:

• allow a  robust challenge of the value of their products;
• be supported by appropriate MI and analysis;
• reach clear, appropriately evidenced judgements; and
• proactively identify where there are value issues so such issues can be acted on.

The FCA’s view is that, where manufacturers’ oversight, governance and fair value frameworks do not achieve this, there is a real risk of harm to consumers from products that do not offer fair value.

Distributors are also required to assess the impact that their distribution arrangements may have on the overall value of the product, regularly review these arrangements, and take appropriate actions to avoid or minimise the risk of negatively impacting the fair value of the product.

Actions for firms – what did the FCA say?

• Consider the FCA’s observations and whether they apply to your product oversight and governance arrangements, to help you to identify where you may not be meeting your regulatory obligations, and any risks of consumer harm arising from the shortcomings in your current approach.
• Assess and evidence the value your products provide, in a way which brings real scrutiny, and can identify products not delivering fair value.
• Where issues are identified, you need to take appropriate action to address any harm arising, including withdrawing products from sale where necessary, whilst value issues are addressed.
• Develop practices in line with the observations of good practice outlined below.
• Avoid practices outlined as ‘not so good’, outlined below.
• Distributors must be mindful of the FCA’s commentary in relation to co-manufacturing (see the ‘Co-manufacturing arrangements’ section of this Bulletin).
• Put processes and arrangements in place to allow you to explain and evidence how all your products comply fully with the FCA’s product governance and fair value rules, including any remedial actions taken following review to ensure products deliver fair value.

What did the FCA find?

The FCA found shortcomings in product governance arrangements, fair value assessments and management information.  The FCA described these shortcomings as ‘disappointing’ given its focus and emphasis on firms’ obligations to ensure their products deliver fair value to customers.  In some cases, manufacturers’ assessments:

• did not provide real challenge and scrutiny of product value;
• did not provide clear evidence that the product offers fair value or identify where it appeared not to; and
• did not lead to any real action being taken where value issues were identified, even where this appeared necessary.

Taken together, the issues mean that the information and evidence provided to the FCA by most firms was not sufficient to consistently demonstrate that the products reviewed were offering fair value to customers.

The key observations – the good news

Most product manufacturers have materially strengthened their product oversight and governance arrangements and appointed appropriate senior managers to be responsible for product governance.  In the Annex to the letter, there are examples of where the FCA found good practice under three headings:

1. Product oversight and governance
2. The target market
3. Product reviews and monitoring including fair value assessments

These examples should perhaps provide a ‘what good looks like’ guide for all product manufacturers and distributors.

Product oversight and governance

Most firms had updated their product oversight and governance (POG) frameworks (which included their product approval process) to reflect the enhanced requirements of PROD 4.

The FCA found examples of:

• An oversight and governance framework supported by a proportionate and appropriate product approval process which was aligned to the manufacturers’ responsibilities under PROD 4.2.
• A clearly defined process for escalating issues and the outcomes of product approvals, reviews and fair value assessments to the Board, with a succinct accompanying report.
• An appropriate senior person being appointed to be accountable for product oversight and governance and the firm establishing and implementing appropriate governance committees and forums.
• Product approval process output which was clear and easy to understand.
• Clear identification of whether and how products offered fair value, and the data / evidence that was considered.
• Identification of concerns arising from the product approval process.
• Clear outlining of any limitations in the analysis or evidence that had been used.
• Specific senior management responsibility to approve and evidence in writing whether a product provided fair value and could continue to be distributed.

The target market

Although “very few” products had a target market statement that met the FCA’s expectations, the FCA saw some better examples that clearly identified the objectives, characteristics, needs and interests of those groups of customers for whom the product would provide the intended value and those for whom it would not.

• Sales scripts for frontline staff, or online sales journeys, used to determine a customer’s demands and needs were appropriately aligned with the target market statement.
• Clear identification of the target market, using defined limits for things such as age, the number of motoring convictions, the number of ‘fault motoring claims’ within a set time-period, or the number of unspent convictions.
• Clear explanation of the objectives, needs and interests of the target market.
• Clear explanation of the types of customer for whom the product would not provide the intended value.

Product approval process including fair value assessments & reviews

Most firms had reviewed the selected products in the FCA’s sample, including assessing how they provided fair value to customers.

• Examples of product reviews that included assessing the performance of products.
• Reviews assessing whether customers were satisfied with the products and services through customer surveys and complaints data.
• Appropriate call monitoring and file reviews to ensure that the product was sold to the intended target market.
• Firms reviewing claims metrics to ensure that the product was meeting customer needs and that customers were able to make claims based on their understanding of the cover provided.
• Fair value assessments where firms assessed the value of each element that made up the total price paid by the customer, not just the risk price or underwriting cost.  This included the operational costs to the insurer or manufacturer, the underwriting cost or risk price, and the distributors’ remuneration.
• Firms having a comprehensive suite of MI to assess value, including defined standards or tolerance limits for each metric along with the rationale of why the standard or tolerance limit represented fair value.
• Senior management playing a key role in setting these tolerance limits by robustly challenging how the standard or tolerance limit set for each metric represented fair value for each product (or group of similar products).
• A clear rationale and justification for why the distributors’ remuneration was reasonable given the activities carried out and the services provided by the distributor.

The key observations – the not so good news

These examples should perhaps provide a ‘what not so good looks like’ guide for all product manufacturers and distributors.  If your firm has any of the issues outlined below, it is likely that work will be required to address any potential shortcomings.

Key observations

The FCA found shortcomings in the target market statements produced by many firms, often being too high level and lacking in granularity for the product in question.  The FCA also saw shortcomings in the quality of the fair value assessments undertaken by many firms, with common issues including:

• failure to adequately consider the impact of remuneration on the overall value of the product;
• manufacturers not having sufficient MI to monitor distributors’ remuneration and ensure that it was consistent with providing fair value, or not assessing whether there was evidence of the work done or value added appropriate to this remuneration;
• firms not having sufficient, good quality MI to assess value, or appropriate metrics to identify product fair value issues;
• firms unable to demonstrate how they assessed whether the product would be / was delivering fair value to all customers; and
• failure to identify value issues even where these were apparent, or to take appropriate actions to address these.

Product oversight and governance

The FCA noted ‘room for improvement’ in a number of areas, including:

• the application of product oversight and governance frameworks was not always embedded within all parts of the business;
• product reviews and fair value assessments were not always aligned with the firm’s framework; and
• a small number of firms did not have an appropriate framework.

in a few firms, the FCA found a lack of a cohesive or consistent approach to product oversight and governance:

• no centralised oversight for each product approval / review to ensure the product is delivering fair value;
• inadequate arrangements in place to ensure the product provided fair value;
• the senior management or individuals with responsibility for product oversight not having sufficient decision-making powers; and
• no minutes to evidence that the product reviews and fair value assessments were discussed or approved by the designated governance committee / appropriate senior management, or no evidence of challenge.

The target market

Some of the issues observed included:

• most of the target market statements were too high-level / not granular enough and did not adequately consider whether there are groups of customers for whom the product would not provide the intended level of value;
• a disconnect between insurers and co-manufacturers with differences in their target market statements for the same product; and
• concerns that a lack of alignment between defined target market statements and the information used by sales teams / distributors will lead to products being not distributed to the intended target market.

Product approval process including fair value assessments & reviews

The FCA had significant concerns in this regard which we would urge firms to review and consider.  While most manufacturer firms have looked to comply with PROD 4.2, the FCA’s view is that there is significant room for improvement.

• Some insurers provided limited or no evidence to demonstrate what steps had been taken to ensure the firm had met its obligations under the rules, particularly where a co-manufacturer was involved (see section below – ‘Co-manufacturing arrangements’).
• Where firms had undertaken a fair value assessment, this did not always consider the expected total price to be paid by the consumer and the elements that make up the total price.
• Most firms considered the cost of underwriting the product but did not consider the cost of operating the product for the insurance undertaking.
• Most insurers had not adequately assessed the distribution arrangements including in relation to the value of the product.
• Firms did not evidence how the remuneration of distributors (i.e., any commission, fee, charges, or other payment etc.) was consistent with providing fair value.
• Many firms did not have sufficient, good quality MI to assess value, or appropriate metrics to identify product value issues.
• Suites of metrics and standards / tolerance limits being under-developed and, in other cases the standards / tolerance limits being set a level that did not appear to represent fair value.
• Only a few firms had MI for monitoring of distributors’ remuneration to ensure that it was consistent with providing fair value to consumer.
• Subjective assertions that the product offered fair value in the absence of any metrics (including standards / tolerance limits) to support their assessment of the value provided by a product.
• Assessing value by comparing to historical performance, despite not having previously assessed whether historical performance represented fair value.
• Assessing fair value against a market benchmark only. While benchmarking could be useful evidence to consider, firms need to articulate how the product is delivering fair value without reliance solely on the benchmark.
• Very little evidence of firms assessing fair value for different groups or cohorts of consumers (e.g., vulnerable consumers or outlier consumers – such as groups of consumers with low claims ratio compared to the average claims ratio, for the same product).
• Very few products were suspended or withdrawn from the market or otherwise adapted to ensure they delivered fair value, even though firms had identified issues that indicated that the product may not be providing fair value.

Co-manufacturing arrangements

The FCA’s approach

The FCA looked at co-manufacturing agreements in place to assess whether these clearly met the requirement to have such an agreement under PROD 4.2, and how the co-manufacturers had set out how they would collaborate in relation to the product. This included a review of arrangements where the co-manufacturer (usually an MGA or other intermediary) had assumed full responsibility for taking steps to approve / review the product including the fair value assessment.

The FCA’s observations

• The FCA often found that the individual firms could not show how they had met all PROD 4.2 requirements, especially where another firm led on key steps in the product life-cycle.
• Some firms had not appropriately considered the arrangements they needed to have in place to meet their own obligations under PROD or put in place adequate co-manufacturing agreements.
• Many of the firms in the sample did not have a co-manufacturing agreement in place. Instead, they provided a term of business agreement as evidence of their co-manufacturing arrangements, which did not contain any provisions for the co-manufacturing of products.
• Some of the agreements were in place between two intermediaries, with the insurer not being included as a co-manufacturer.

The FCA saw a number of co-manufacturer arrangements where an intermediary took the lead in terms of product approval / design, pricing, distribution strategy, product reviews and fair value assessments.

• In some of these, the insurers were unable to demonstrate how they ensured they had met their obligations under PROD 4.2 and instead appeared to place reliance on what the intermediary had done without verifying those steps (e.g., no evidence that the product had been subject to consideration by its own senior management).
• Some firms were unable to provide any evidence that they had adequate sight of / access to the performance of the product and the delivery of services, because of issues with the information being gathered from their co-manufacturers.

The FCA’s next steps

The FCA is continuing to assess the information provided by both manufacturers and distributors.  it plans to complete its review and publish its final report in Q2 2024, setting out in full:

• its findings for both manufacturers and distributors;
• its expectations, actions, and next steps; and
• full details of the scope of the review.

The February 2024 letter, therefore, must be viewed as an interim report.

The FCA may consider further supervisory and regulatory actions to address the issues identified.

UKGI can help

UKGI has assisted many clients since the introduction of the product governance rules in October 2018, and the enhancements to those Rules and the fair value requirements introduced in October 2021.  We will be happy to happy to discuss how we can assist, so contact your usual UKGI Consultant, or the Technical Helpline at helpline@ukgigroup.com or on 01925 767888.