Product value and coronavirus: draft FCA guidance

On Friday 1st May, the Financial Conduct Authority (the “FCA”) issued draft guidance for insurers and insurance intermediaries on product value and coronavirus. The guidance highlights the actions firms should be taking to identify any material issues that affect the value of their products and their ability to deliver good customer outcomes.

The guidance applies to all firms carrying on regulated activities in relation to all non-investment insurance products and, in particular, to firms who have manufactured these products. The guidance is relevant to all insurance products, no matter the type of customer (i.e. both retail and commercial customers and so includes natural persons and business customers). The guidance does not set out expectations for the review of reinsurance products.

The FCA would like to understand how insurers will implement this guidance in practice and whether the guidance is sufficiently clear. The deadline for comments is 5 p.m. on Friday 15th May.

If confirmed, the measures would come into force by the end of May and the FCA will review this guidance in the following 3 months, making necessary revisions if appropriate.

The FCA has also issued draft guidance for regulated firms operating in the insurance and premium finance markets. See our article here for more information.

Proposed guidance

The FCA says that it expects firms to consider whether and how coronavirus may have materially affected the value of their insurance products. The FCA uses the term ‘product value’ to mean what the customer is paying for and the quality of the product or service it is intended they receive. The effects of coronavirus may mean that:

• Firms are no longer able to provide expected contractual benefits, either in the expected form, timeframe, or at all. For example, where fulfilling claims would involve service providers whose movements are restricted due to lockdown, or some medical covers where customers cannot access certain benefits.
• Underlying insured events can no longer happen for any holders of the policy e.g. due to Government lockdown or other circumstances connected with coronavirus, resulting in a fundamental change in risk for the firm. For example, public liability insurances for businesses that are unable to operate, such as hairdressers, bars and restaurants.

Changes such as these could affect the intended value being delivered to customers holding certain insurance products. The FCA’s expectation of a product level assessment is restricted to cases where firms or the product itself cannot deliver a benefit, or where the customer cannot make a claim as the underlying event is no longer relevant. Some firms may choose to go further than this, which the FCA has said it would welcome, but does not require. The draft guidance is not intended to create an expectation that firms should reassess the value of policies at a product level as a result of coronavirus where claims are still possible but the likelihood of a customer making a claim may have changed (e.g. motor insurance where there has been a reduction in car usage).

There may be some circumstances in which the factors above may have led to a material change in the value of a product for customers in temporary financial difficulties as a result of coronavirus. The FCA expects firms to consider the value of the product where customers contact them, or where a firm contacts the customer, regarding missed payments. Where firms identify something that could materially affect the value of the product they should consider the appropriate action to take. This could include delivering benefits in a different way, the provision of alternative, comparable benefits, reducing premiums for the duration of the change in value, or partial refunds of premiums already paid.

Firms should consider how best to address any changes in circumstances and to identify what precise steps to take where it is found the product is not delivering the value intended for customers. The FCA is not mandating specific actions. It expects firms to be able to demonstrate to the FCA how they have met their obligations at a product level and treated their customers fairly.

Firms should communicate clearly with customers where an issue is identified that may adversely affect the customer and explain any actions being taken.

The FCA acknowledges that many insurance providers are already considering how their products have been affected by coronavirus and are taking action. It is important that firms have sufficient opportunity to assess the overall impact of Covid-19 which may not yet be clear. The FCA is therefore proposing that firms complete their review of their product lines and decide on any resulting action no later than 6 months from the finalisation of the guidance.

What does the guidance mean for firms?

Firms already regularly review the insurance products they offer, taking into account any event that could materially affect the potential risk to the identified target market and product manufacturers regularly consider whether their products remain compatible with the needs, objectives, interests and characteristics of the target market. In this respect, the draft guidance doesn’t add anything new. It perhaps goes further than any previous guidance in explaining that firms need to take proactive action in respect of existing customers who bought products which were perfectly suitable at the point of sale but which, through a change in external circumstances, have become less suitable or valuable. This reflects the FCA’s wish to act quickly to protect consumers in these difficult times by reminding firms that they should be reviewing their policies and taking action now.

The FCA makes a distinction in the draft guidance between: (1) a review of value at product level where firms need only consider whether the product itself cannot deliver a benefit or a customer cannot make a claim because the underlying event is no longer relevant (this flows from product governance rules); and (2) a review at customer level for customers in temporary financial difficulty in contact with the firm where there have been material changes in the value of a product (this flows from TCF and customers’ best interests obligations). The inference being that firms are not being asked to consider material changes in the value of products at a customer level for customers who are not experiencing financial difficulties and not therefore in contact with the firm. However, the draft guidance is far from clear on this point, with the FCA leaving it to firms ‘to identify what precise steps to take where they identify the product is not delivering the value intended for their customers’.

Article co-authored by Anna Burdzy.