The FCA has recently published a thematic review covering 67 manufacturers and distributors of general insurance and pure protection products. The regulator’s disappointment with the lack of progress is evident in its response, and boards, senior managers, and compliance teams should quickly get to grips with its expectations for the insurance sector.

Firms in other sectors would also be wise to consider the implications for their own product governance processes.

What does the thematic review cover?

In the review, the General insurance and pure protection product governance thematic review or (TR) 24/2, the FCA assessed whether:

• firms could demonstrate their products and services offer fair value;
• they had effective governance arrangements over PROD compliance;
• appropriate action was being taken where products may not be providing sufficient value.

It contains extensive examples of both good and poor practice, and the FCA has pulled-no-punches in its very clear conclusion that it is disappointed with a lack of progress by manufacturers and distributors. The FCA states: “We expect all firms involved in the manufacture and distribution of general insurance and pure protection products to urgently consider the contents of this report, assessing whether and to what extent these issues apply to their manufacturing and distribution activities. Where they identify shortcomings in their product governance arrangements, we expect them to act promptly to remediate including providing redress to customers where harm has been identified”. (TR24/2 para 1.29).

Top 10 matters raised by the FCA

From the many areas highlighted by the FCA’s review, we’ve pulled out some of the most significant aspects of the PROD regulation based on the compliance challenges we’ve seen firms facing in this space.

1. Unclear or overcomplicated leadership structure

Some firms in the sample had multiple committees involved in product design, product oversight, and product governance. Those firms weren’t always able to demonstrate which committee had ultimate responsibility for PROD compliance and, crucially, which committee had overall responsibility for making changes to a product which was not demonstrably fair.

Check that your governance structure is fit for purpose, including simplifying leadership structures. This can mean appointing one committee if appropriate, rather than two or three. Crucially, ensure your governance and committee structure includes a clear ranking so that committee subordination is understood.

2. Insufficient evidence around MI and actions taken

The FCA expressed frequent concern with firms failing to design, distribute, and use sufficient quality management information (MI) to measure, monitor, and manage their risk of non-compliance with PROD. The regulator expressed particular frustration around firms not being able to evidence meaningful action had been taken where existing MI indicated that products were not providing sufficient fair value.

The lesson here is twofold:

1. Ensure good quality MI is distributed and reviewed.
2. Ensure that where the MI doesn‘t evidence the fairness that should be expected from a product, meaningful action is taken and its impact assessed. For example, this could relate to a reduction in cost, an enhancement to the sales process, or a reinterpretation of a policy exclusion.

3. Lack of cooperation regarding fair value

Co-manufacturers need closer cooperation. The FCA identified concerns that some hadn’t carried out sufficiently comprehensive fair value assessments (FVAs), particularly where another firm was also involved, in elements of the manufacture of the product.

Make sure you’re not placing an over-reliance on others. Co-manufacturers should be cooperating not just in the design / manufacture and ultimate distribution of the product, but there must also be sufficient cooperation in the assessment of fair value.

4. FVA answers missing detail and evidence

The regulator has remarked that FVAs usually require the assessor to answer a series of questions, and that too often the assessor didn’t give due regard to the answers or ensure they were accompanied by evidence.

When designing and subsequently completing an FVA, ensure it pushes the assessor to:

• give due consideration to the answers;
• collate evidence for the statements of fairness and customer treatment made;
• ensure that the FVA is not merely generic.

It is important to improve the quality of your fair value assessments and ensure they are completed at least every 12 months.

5. Product prices not fully considered

When reviewing FVAs, the FCA was particularly dissatisfied with the constitution of prices of the products put forward and the features affecting these prices.

On this, the regulator said: “Where firms had undertaken an FVA, they did not always consider the expected total price and the elements that make up the total price. There was also no clear rationale and justification of how each element of the total price was consistent with providing fair value. FVAs must consider all the elements that make up the total price the customer pays”. (TR24/2 paras 4.30 & 4.31)

Specific matters the FCA highlighted regarding the price of the product included the lack of consideration of all elements which make up the total price of the product. It underlined the costs to the firm for operating the product, for example claims handling and policy administration, not just costs of paying the claim or of underwriting the product. The regulator also mentioned the remuneration paid to distributors and the impact this has on the total price.

6. Ambiguity around price and distribution chain impact

A lack of due regard to price and the impact of the product’s distribution chain on its overall value was a big area of concern in the review. According to the FCA, “many firms could not show they had assessed the remuneration of distributors (any commission, fee, charge, or other payment) or how it was consistent with providing fair value” (TR24/2 para 4.31).

A far greater degree of cooperation and information sharing is expected between co-manufacturers and manufacturers and distributors. Make sure you’re capturing all elements of cost in your value assessments.

7. Relying too heavily on benchmarking

While benchmarking your product against similar firms in your sector can be informative, the thematic review mentions the dangers of an over-reliance on benchmarking in the context of product governance and fair value assessments. Firms often seek to be ‘within the pack’ rather than an outlier, but this logic – though understandable at first glance – will let you down if the pack is failing.

Alongside any benchmarking you’re conducting, focus on completing a sound fair value assessment with evidence behind it that adequately considers the impact your product and service has on customers.

8. Absence in oversight of distribution chains

There wasn’t enough evidence of oversight of the distribution chain, where according to the FCA “firms failed to set out how they considered the risks inherent in the selected distribution strategy, including the level of remuneration and the distribution chain.” A general over-reliance by manufacturers on distributors, and distributors on manufacturers, was also noted.

If you’re a manufacturer, you need to go back to basics and ensure you have sufficient insight into your distribution chain and all the firms within it, whether they’re your own appointed representatives or introducers.

9. Inadequate checks on information

Similarly, distributors need to be prepared to challenge manufacturers on the information provided to them and not just accept information about the product and its aims at face value. The FCA highlighted its concern that distributors appear content with information supplied by manufacturers when the regulator itself isn’t.

Core matters for distributors to consider include:

• target market statements which don’t include sufficient detail or granularity on the actual target market;
• distributors being given only a high-level summary of the fair value assessment or a mere email confirmation that one had taken place;
• a lack of information from manufacturers on additional features alongside the main product, such as premium finance;
• the price paid by the customer for the product, including the remuneration paid to participants in the chain.

10. Limited evaluation of fair value

Distributors need to ensure their involvement in the chain does not lead to customer harm and that they are clear on the:

• benefits the product is intended to bring to the target market, and the characteristics and needs of that market;
• price paid by the customer and the benefits provided to the customer by the distributor and / or any person acting on its behalf;
• the remuneration it receives and whether it’s likely to mean the product no longer offers fair value, and whether a distributor needs to be involved in the sale of the product at all.

What can insurance firms do to improve their product governance processes?

It’s vital to carry out a full gap analysis of the thematic review and the FCA’s product governance rules to make sure you understand their requirements and how they affect your business.

Manufacturers should ensure they have effective product governance processes and perform FVAs that:

• “provide robust oversight and challenge when considering the value of their products;
• are supported by appropriate MI and analysis;
• reach clear and appropriate judgments on a product’s value supported by robust evidence, in line with the rules;
• proactively identify where there are value problems and act on them to manage and remediate harm.”

Distributors should ensure they understand the product, the distribution strategy, and their place in it, and the target market. They should specifically focus on whether they:

• “are acting consistently with the distribution strategy and only distribute the product to customers in the identified target market;
• appropriately assess the impact of their activities and remuneration on the distribution strategy and product value;
• identify distribution or value problems which present a risk of harm to customers and act promptly to address these.”