Yesterday morning the FCA published a thematic report with combined findings from two pieces of work concluded at the end of last year - its thematic review of value in general insurance (GI) distribution chains (VITDC); and its multi-firm supervisory review of delegated authority (DA) arrangements (looking at the systems and controls issues within these arrangements).
Given there was a "significant degree of alignment and commonality" between the two pieces of work, the FCA has taken the unusual step of combining its findings, conclusions, actions and expectations into a single report.
Stating that the findings were "extremely disappointing", the regulator has identified "significant potential for harm to customers arising from the product development and distribution approaches currently employed in some sectors of the GI markets and by some GI firms." It said "these were not narrow compliance issues with limited consequences, but issues with the potential to cause harm to customers on an ongoing basis" and that many firms have failed to respond sufficiently to its previous work and interventions most notably its 2015 report on DA arrangements. GI firms will therefore need to pay particular heed to these publications.
In terms of approach and scope, three GI products were the focus of the VITDC work and were selected to provide "insight into a range of GI distribution chains, given their different characteristics." These were (a) travel insurance - a mass market consumer product; (b) tradesman insurance - a mass market SME product; and (b) Guaranteed Asset Protection (and ancillary motor insurance products) insurance – a widely sold niche consumer product. Information was requested from forty firms involved with these three products and follow-up visits and meetings were conducted with seventeen of the firms. For the multi-firm supervisory review, seven insurers who delegated underwriting or claims-handling authority for UK-based personal and SME business customers were the focus.
Examples of poor practice in the DA space included: an insurer delegating claims authority to a coverholder and then allowing this third party to construct the claims processes and service standards with limited oversight or scrutiny; and an insurer relying on the longevity of a relationship with a particular third party and not, as a result, following standard due diligence processes.
Within the VITDC specific findings, the FCA cited numerous examples of parties involved in distribution chains for GAP insurance receiving high levels of commission; trademan insurance distributors frequently charging customers an additional administration fee as well as the standard commission earned for selling the product; and a sales process for some distributors of travel insurance which exposed customers to the risk of harm through purchasing policies they were potentially not eligible to claim under.
A key theme therefore that emerged from both sets of findings was that "customers were not being consistently placed at the heart of firms' business models" and "a customer focus had not been fully embedded within the culture of these firms."
Alongside its thematic review, the FCA has published a consultation with draft guidance for firms - to which they have the opportunity to respond until 9 July 2019. Detailed, specific and separate guidance for insurer manufacturers and insurer distributors is set out which will have to be carefully considered and given priority over the coming months. This deals with the product design process, product distribution strategy and product review process factors for manufacturers and with remuneration and distribution process factors for distributors.
One of the central messages in the FCA's communication is that the newly updated regulatory framework – with the introduction of Insurance Distribution Directive (IDD) Rules and the Senior Managers & Certification Regime (SM&CR) at the end of last year – will help it take a "more interventionist approach" on these issues if it sees failings in the future. Although its reviews were conducted within the context of the old regulatory framework therefore, the draft non-Handbook guidance, and its expectations, are set out in the context of the newly updated IDD and SM&CR regulatory context.
Details of recent interventionist action against Liberty Mutual Insurance Europe SE (who were fined £5m for failings in their oversight of claims handling and customer outcomes); Express Gifts Limited (where a £12m redress scheme was introduced following the sale of products of limited or no value); and The Carphone Warehouse (who were fined £29m for, inter alia, mis-selling mobile phone insurance) is outlined with the FCA emphasising that it will not hesitate to take action where required.
While the non-Handbook guidance is still in draft form, and being consulted upon, the FCA is clear that its thematic review report, with its accompanying suite of documents, should serve as an "immediate call to action to all GI firms".
In an accompanying 'Dear CEO' letter issued to firms this morning, the FCA is clear that firms need to consider the documents published in their entirety and "act promptly". The letter is also directed to be shared with firms' Boards or equivalents.
Finally, while the overall conclusion from the FCA's findings is disappointing, the regulator does make the effort to highlight that "there were also many other GI distribution chains and products we considered in our work which appeared to be delivering good value insurance products and appropriate outcomes, with no evidence of these harms manifesting" and that the themes and issues "were by no means universal across the sample of firms and products we considered in our work." Some respite for GI firms within an otherwise disappointing and critical report of the sector.
Elaine Quinn is an insurance law expert at Pinsent Masons, the law firm behind Out-Law.com.