In May 2021, the Financial Conduct Authority (FCA) released the final rules on insurance pricing and enhanced product governance (updated in Policy Statement 21-11), which came into force in October 2021. These rules aim to improve competition and ensure that firms offer fair value products to the customers. The FCA provided a one-year transitional period for the Firms (such as Insurers, Brokers, MGAs, and Insurance intermediaries) to comply with the rules, guidance and obligations by 1st October 2022.

Findings

Over this one-year period, the FCA conducted two surveys, one in August 2021 and another in February 2022. The first survey assessed the firms’ readiness to comply with the final rules. The second survey was a multi-firm-review (MFR) which evaluated the progress made by the Product Manufacturers. Following the August 2021 survey, the FCA issued a letter advising of their expectations to all insurance intermediary firms with general insurance permissions. Despite this, the findings in the February 2022 survey are that some Product Manufacturers have opted for the ‘one size fits all’ approach and have left the implementation until the very end of the transition window.

The FCA has expressed disappointment with the progress because:

• A material portion of the market has failed to adequately consider the applicability and the impact of the rules on the manufacture and distribution of their products.
• The findings show there is little cooperation between the Manufacturers and Distributors.
• There is now potential for market disruption and customer harm because the value assessments are unlikely to be completed in time for Distributors to comply with the new requirements and continue to provide those products.

Actions by the FCA

Potential extension for Product Distributors

The FCA has had to take action to prevent the significant harm this may cause the customers. The FCA has stated that the deadline for Product Distributors to carry out their assessments may be extended to 1 January 2023, if the following criteria has been met:

1. The Distributor has identified the impact that the distribution arrangements have on the value of the product by 30 September 2022 and has completed any identified remedial action as a result of its assessment.
2. The Distributor has complied with any requests from the Manufacturer for information specified in PROD 4.3.10BR.
3. The Distributor is able to demonstrate that they received the Manufacturer’s value assessment too late for them to be reasonably expected to meet their obligations by 30 September 2022.

NB: The above forbearance in relation to understanding the Manufacturer’s value assessment does not affect the Distributor’s obligations to comply with the rest of PROD 4.3.

International Distribution

The FCA has noted that there are complexities and difficulties when obtaining information from overseas distributors in relation to customers based overseas, as these entities sit outside the FCA’s jurisdiction. For businesses wholly relating to overseas distributors and customers, the FCA is considering what steps can be taken where firms are unable to comply with the requirements and whether the collection of the specific information is unduly burdensome and/or within the intended aim of the PROD fair values. In the interim, the FCA expects firms to take all reasonable steps in obtaining the required information and to carry out a fair value assessment of all products being distributed, which are not large risks.

The FCA plan to undertake a second phase of MFR encompassing both product manufacturers and distributors. The focus will be on the appropriateness of the firms’ product oversight and governance frameworks. It would include the product approval process and the product reviews (including fair value assessments) carried out in accordance with PROD 4.

Conclusion

This is not a letter that can be ignored by manufacturers and distributors of products. Insurers and other product manufacturers have been given very explicit instructions to consider the FCA concerns carefully and ensure they are able to explain and evidence any actions they have taken as a result. Distributors must ensure their own general obligations are met, and in the context of the forbearance in relation to products where manufacturers have not completed their value assessments, must be able to demonstrate the specific circumstances described have been met, if they are to continue to distribute those products after 1^st October.

Please speak with any member of the ICSR team if you would like to understand more about your firm’s obligations in respect of the FCA requirements on pricing and product governance.