Overview of The FCA’s Guidance
The Financial Conduct Authority (FCA) recently released guidance outlining its supervisory priorities for insurance firms over the next two years within its latest “Dear CEO” letter. The FCA stated,
“We are concerned that not enough action is being taken to ensure good outcomes. We therefore expect firms’ Boards to ensure concrete, proactive action is taken throughout the firm to improve outcomes in line with our rules and expectations and not to treat them as a compliance exercise or wait for us to force action.”
With this stern warning from the FCA, firms must act with urgency to ensure compliance or face the consequences being enforced by the FCA. The FCA has taken direct supervisory action against firms engaged in practices that lead to poor consumer outcomes. FCA’s actions were in response to the following:
- The continued sale of products lacking fair value
- Unspecified justification of high third-party commissions
- Discriminatory pricing
- Undervaluation of motor claims
- Failure to implement pricing rules properly
- Weak identification of vulnerable customers
- Poor business interruption claims handling
- Excessive claims settlement delays
Through supervisory interventions across these areas, the regulator aims to achieve concrete changes that put customer interests first. Insurers should expect intense scrutiny and be prepared to justify their practices, especially regarding fair value, pricing, claims handling and treatment of vulnerable consumers. Robust compliance in these critical areas is essential to avoid FCA enforcement.
The FCA is steadfast in ensuring positive outcomes for consumers, fair value in insurance products and minimising harm. This consumer-centric approach aligns with the FCA’s statutory objective to make financial markets function well.
Specific Areas of Focus
Implementing the Consumer Duty
A key priority is the effective implementation of the Consumer Duty. This became enforceable in July 2023 for new and existing open products. The FCA will scrutinise how firms are assessing and addressing product value, pricing, consumer understanding and support.
Clear fair value assessments should lead to real changes in product value, such as reduced commissions. Firms must be able to demonstrate how they are delivering fair value, justifying pricing and commission levels. Distribution chains should be efficient, with parties collaborating on data sharing.
Preventing Financial Crime
Reducing and preventing serious harm to customers is another priority, with a specific focus on combatting financial crime in the wholesale insurance market. The FCA continues to see financial crime in wholesale insurance, particularly due to rapidly imposed sanctions from the war in Ukraine. Wholesale firms face increased financial crime risk because of their international business and exposure to politically exposed persons. Intermediaries with poor anti-bribery and corruption controls and insurers with poor sanction controls exacerbate this risk. The regulator expects robust, effectively implemented controls to detect, prevent and combat financial crime. They will act on intelligence about suspected incidents or firms lacking appropriate controls. Wholesale insurers must make financial crime prevention a top priority to avoid significant regulatory consequences.
Operational Resilience
Contingency planning for outsourcing relationships requires improvement to prevent customer harm from disruptions. This includes planning for cyber-attacks and third-party information security. Firms should comply with the Operational Resilience Policy, including meeting Impact Tolerances for Important Business Services.
ESG, Culture and Governance
Under its ESG priorities, the FCA expects insurance firms to reflect on their culture, particularly in the wholesale market. Wholesale insurance has significant room for improvement in building an inclusive culture where staff feel safe speaking up about issues they may face in the workplace. Unhealthy cultures and behaviours are critical to address, including discrimination, harassment and bullying. Despite FCA emphasis on these matters, progress has been lacking – with some firms claiming culture change will take a generation to effect. Nevertheless, the regulator is prepared to enforce against non-financial misconduct, therefore firms must report serious incidents promptly and have systems to handle them. The FCA will support behaviour improvements and hold senior managers accountable on culture. Wholesale firms should make meaningful culture enhancements now, rather than wait for regulatory action. The FCA will engage non-executive directors on their firms’ progress in relation culture and non-financial misconduct.
Oversight of Appointed Representatives
To reduce harm, principals must ensure appointed representatives meet standards. This includes service quality, conduct and culture. More stringent FCA rules give principals more responsibility for oversight. Data analysis will identify high-risk principals for engagement.
Priorities for Personal and Commercial Lines
This includes fair pricing, access to insurance, claims handling, sales practices and support during cost pressures. Firms must end loyalty penalties and price walking. Pricing must not discriminate based on protected characteristics. Claims should be settled promptly and fairly.
Access must be improved for underserved groups like leaseholders and those with pre-existing medical conditions. Low-coverage policies require clear communication so customers understand what is included.
Recommendations for Insurers
By understanding the FCA’s priorities and expectations, insurers can proactively comply with the regulatory and best practice requirements. Firms should seek expert guidance to ensure their business models align with the regulator’s goals and the insurers compliance must move beyond a checklist approach.
Staying ahead of FCA oversight is essential for insurers. Robust governance, data analysis, product reviews and customer-centricity will enable firms to meet regulatory expectations and avoid enforcement action. Putting fair consumer outcomes at the heart of business will build resilience.
How Complyport Can help?
At Complyport, our specialist Insurance Regulatory Advisory Team, led by Paul Grainger, helps the insurance market navigate an increasingly complex regulatory landscape.
Our expertise and tailored solutions can aid you in addressing the specific concerns raised by the FCA regarding general insurance products, with the overall product governance requirements (including fair value) as follows:
- Comprehensive Assessments: We will conduct thorough assessments of your insurance offerings and business processes to identify gaps with regulatory expectations.
- Compliance Consulting: We can help you rectify or implement any necessary changes to ensure compliance with FCA’s requirements. In addition, we can assist you in handling any communications with the FCA and deliver on your behalf quality assurance reports demonstrating your compliance to the regulator.
- Regulatory Updates: Our team stays abreast of regulatory changes and can help you meet the FCA’s requirements while minimising compliance risks.
- Value Enhancement Strategies: Together, we can develop strategies that enhance product governance, fair value, and customer satisfaction, bringing you in line with regulatory expectations.
- Training and Education: We offer training and workshops to equip your staff with the necessary knowledge and skills to ensure compliance and uphold customer-centric values.
Contact us today at jan.hagen@complyport.co.uk to discuss how our services can be tailored to meet your specific needs and address the FCA’s concerns. Together, we can navigate these regulatory changes and enhance your compliance.
