As part of the drive to ensure customers achieve good outcomes, the FCA conducted a review of the implementation of PROD across the General Insurance and Pure Protection market.
The FCA strengthened the requirements for firms to ensure insurance products provide fair value to customers in the target market in 2021 and deliver good customer outcomes. The introduction of Consumer Duty in 2023 set a higher standard of conduct.
The thematic review covered both manufacturers and distributors and assessed whether firms had
- Taken appropriate responsibility to ensure products were fair value for customers
- Implemented appropriate governance arrangements to deliver good outcomes for customers
- Implemented appropriate controls to meet the requirements
- Acted where actual or potential issues had arisen
The Outcome
Manufacturers
Pleasingly, most manufacturers included in the review were found to have materially strengthened their product oversight and governance arrangements and appointed appropriate senior managers responsible for product governance. This shows a real willingness for insurers to focus on delivering good customer outcomes. The FCA highlighted good practice areas, including examples of robust product approval processes in some firms, and timely sharing of product information with distributors.
However, the review also identified several shortcomings in many firms’ arrangements and how they applied them, including:
- Many firms had not implemented effective product governance frameworks, so were unable to evidence their assessment of fair value or show why their products give good customer outcomes.
- Fair value assessments and regular product reviews did not include sufficient MI to monitor distribution arrangements, or identify fair value problems, even where they were apparent.
- Target market statements were often too high level and without sufficient granularity, increasing the risk of poor outcomes if products were sold to customers outside of the target group.
Distributors
Similar to manufacturers, some distributors have materially strengthened their product governance and oversight arrangements, including considering the impact of their remuneration structures on customer value. However, the review further identified shortcomings in the distribution space, including:
- Product distribution arrangements without sufficient detail, which failed to consider adequately the target market and distribution strategy
- Insufficient MI to assess remuneration, and therefore the costs versus the benefits of services, and overall impact on customer value
- Ineffective processes in sharing information with manufacturers, to understand common areas such as target market, and the product’s intended value
What does this mean?
The weaknesses identified in the review create the real risk of actual and potential harm to insurance customers. The FCA will undertake activities to address the issues.
This could be in the form of remedial actions supported by senior manager attestations, skilled person reviews, or even intervening to have products withdrawn from the market. Where harm has been identified, actions will be taken to remediate customers and provide appropriate redress.
What should firms do?
Review product governance arrangements
Product governance arrangements need to be comprehensive, and effective. There needs to be sufficient senior management oversight, challenge and scrutiny for both new and existing product reviews to deliver clear, well evidenced outputs.
The arrangements should include routes to action, so where potential or actual harm is identified, issues can be remediated and treated with the appropriate level of urgency. This requires appropriate and timely MI to support decisions based on data. Both manufacturers and distributors consider whether their current processes are sufficiently robust.
Revisit fair value assessments – including distribution arrangements, and target markets
Whilst fair value assessments have already been undertaken, firms should revisit to ensure they are sufficiently detailed and granular to evidence clear conclusions, and consideration of customer outcomes.
Fair value assessments need to be broader than simply price – they need to consider the quality of services provided. This should include remuneration paid to distributors, which is usually a significant component of the total price paid by the customer.
The FVA needs to be in the context of a well-defined, clear target market. This information should be shared between manufacturer and distributor to ensure both are aligned in delivering the desired good outcomes of the insurance products.
Improve information sharing between manufacturer and distributor
PROD places requirements on both manufacturers and distributors to deliver good customer outcomes. This is only possible where information is clearly communicated between both parties, including target market, product strategy and distribution strategy.
Manufacturers should review the MI they receive from distributors, and vice versa, to ensure it is appropriate to identify potential harm, or deviations from the intended purpose of the products.
Prepare to have your homework marked
Whilst firms have, in the main, improved product governance oversight and control, there are areas where there has not been evidence of reviews happening in practice. Firms need to consider what the key controls are which should be evidenced regularly, to ensure best practice product governance, and therefore good customer outcomes.
Firms should not only identify the MI needed to adequately monitor outcomes, but further create an appropriate record of well evidenced decisions and conclusions. This should ultimately make regular reviews more active and useful and provide firms the opportunity to intervene on poorly performing products earlier.
Is this something you are interested in? Please contact either Cara Spinks [email protected] or Ewen Tweedie [email protected]
