Warning to firms operating in the general insurance sector

United Kingdom

On 10th April 2019, the FCA issued three publications concerning the general insurance (“GI”) sector alongside a warning to firms operating within this sector. The clear message from the FCA is that it will not hesitate to intervene where it considers that a firm has not shown appropriate regard to the value received by their ultimate customers – which will have implications for firms and certain senior managers with the implementation of the Senior Managers and Certification Regime.

What has been published?

The FCA has published the findings of its thematic review (TR19/02) of the GI distribution chain. Despite recent FCA reports highlighting failings in the governance and control of such chains (in 2015 on Delegated Authority and in 2016 on Appointed Representatives), the FCA has concluded that significant potential for customer harm remains.

In particular, the FCA highlights how the remuneration of all the parties in the distribution chain can result in customers paying significantly higher prices than the production and delivery costs of the products they are buying. It has also stressed that, in some distribution chains, there can be a high risk of unsuitable sales, for example, where the distributor sells insurance alongside non-financial products.

The review identifies two key underlying causes for such potential harm:

  • The purpose and values of firms and associated issues with business model and strategy; and
  • Poor governance and oversight, accompanied by a failure to implement adequate systems and controls over the end to end product and service development, manufacture and delivery chain.

The FCA stresses that firms operating within the GI sector should urgently address issues of culture and governance, and any consequent failure to consistently focus on customer outcomes. In order to assist with this, the FCA has also published guidance for manufacturers and distributors (GC19/2). This comprises non-Handbook guidance that seeks to clarify the FCA’s expectations and to remove any remaining ambiguities. The FCA flags that it will use this additional guidance to facilitate decisive future interventions in respect of firms that continue to fail to meet their obligations to customers.

Next steps

The FCA has addressed a Dear CEO Letter to the CEOs of all authorised GI firms setting out the next steps it expects such firms to take. In particular, it stresses the importance of fully considering the contents of the review and guidance. These are expected to be used by firms as a basis for a gap analysis, with immediate steps to be taken to remedy any identified shortcomings.

As regards the FCA’s next steps, Jonathan Davidson, executive director of Supervision – Retail and Authorisations, at the FCA said:

'The widespread extent of these issues demonstrates a culture which pays insufficient regard to customer outcomes in some parts of the general insurance sector. We are going to carry out further supervisory work to make sure that firms meet their obligations and will not hesitate to use the full range of our regulatory powers.'

Co-authored by Anchali Muraleetharan