Recommended response to FCA warning to firms operating in general insurance sector

10 May 2019

This article first appeared on Practical Law, and is published with the permission of the publishers. 


On 10th April 2019, the FCA issued three publications concerning the general insurance (GI) sector, alongside a clear warning to firms operating in this sector.

These publications comprise the FCA’s findings of its thematic review (TR19/02) of the GI distribution chain (Thematic Review) which is supported by the proposed guidance for manufacturers and distributors (GC19/2) (Guidance). The importance of these documents and the FCA’s expectations of firms are further stressed in the accompanying Dear CEO letter.

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. This will have implications for firms and senior managers who have, or will have, the relevant responsibilities under the senior managers and certification regime (SM&CR). This warning should not be underestimated by firms or their senior management. The FCA has set out a clear intention to be more interventionist in this area of the market and failure to meet FCA expectations despite these recent publications is likely to be viewed as an aggravating factor in any enforcement action that may ensue.

This article provides an overview of the FCA’s findings and consequent expectations. It then sets out some practical steps that firms should take to ensure that the FCA’s expectations are, and continue to be, met.



The FCA carried out the Thematic Review in response to concerns it held regarding the length and complexity of some distribution chains and the influence of parties not regulated by the FCA. The FCA considered that these factors gave rise to two key risks to customers:

  • An increase in the price of products which adversely affects the end value of the products (and associated services).
  • A negative effect on the delivery of the services and outcomes for the customer.

To better understand the nature and severity of these risks, and their potential harm for customers, the FCA carried out a diagnostic thematic review of value in the GI distribution chain alongside a multi-firm supervisory review of delegated authority arrangements.

FCA findings

The FCA findings focus on two key aspects of the GI market as giving rise to significant potential for harm to customers:

  • The product development process.
  • The approach to distribution that is employed.

Examples of the harms arising from deficiencies in these two areas include: (i) paying high prices due to high levels of commission within the distribution chain; and (ii) a failure to deliver services to customers appropriately, particularly around the processes and practices of claims handling which could result in valid claims being rejected.

The FCA has found there to be two key causes underpinning the identified potential harms:

  • The purpose and values of firms, and associated issues with business model and strategy. The FCA stresses that GI firms should place customers at the heart of their business model. A lack of focus on customer outcomes can give rise to: (i) the development of products and related distribution arrangements which risk harm to customers; (ii) an inappropriate allocation of complete control over all elements of the product sale to distributors, which has a significant impact on the value of the product and customer outcomes; and (iii) a failure to consider or assess through appropriate diligence the suitability of delegates.
  • Governance and oversight. The FCA highlights the need to have adequate systems and controls in place over the end-to-end product and service development, manufacture and delivery chain. It is not sufficient to make sure that customer outcomes are at the forefront of GI firms’ values. This must be reflected in the delivery and oversight of the product. For example, firms must implement appropriate governance and risk structures, have clarity regarding roles and expectations of the various parties in the distribution chain, and collect, and act on, appropriate management information (MI) focused on customer outcomes.

FCA expectations

The Thematic Review and Dear CEO letter outline the FCA’s expectations of GI firms, manufacturers and distributors which also underpin the Guidance:

  • All GI firms must act fairly, honestly and professionally in accordance with the best interests of their customers.
  • All GI firms should maintain appropriate systems and controls over the remuneration they receive.
  • All GI manufacturers should have sufficient knowledge of the roles and remuneration of all entities in the distribution chains they use to be able to assess the impact they have on the value customers receive.
  • All GI firms must maintain appropriate systems and controls (including production and use of appropriate MI) over their GI products and services.
  • All GI distributors should consider the impact of their distribution strategy.

The FCA has carried out previous work and interventions within this sector, which identified similar issues to those identified in the Thematic Review. Further, it has recently taken a hard-line approach in its interventions with various GI firms including fining The Carphone Warehouse over £29 million in March 2019 for misselling an insurance product, and an insurer over £5 million in October 2018 which resulted from the firm’s failure to adequately handle claims in a GI distribution chain. Ongoing breaches and failures to meet the expectations above are therefore likely to be taken very seriously. We set out the below our recommendations to assist with firms’ consideration of existing procedures to ensure compliance with FCA’s expectations.

Steps manufacturers should take to meet FCA expectations

To maintain compliance with the FCA’s expectations, manufacturers should consider taking the following actions as a matter of best practice. The two important elements for manufacturers to consider are the adequacy of the product development stage and the distribution strategy employed.

Product approval process document

This document will be key to ensuring that a manufacturer can evidence to the FCA that it is placing customer outcomes at the heart of its business, and that it is considering the value of its products within the broader context of the distribution chain. With this in mind, manufacturers should implement, and document, a clear product approval process covering both product development and distribution strategy. Where such a process already exists, it should be reviewed as soon as possible and amended if necessary.

We recommend that the product approval process document should include the following:

  • A requirement that, in respect of each product that is developed, consideration of the following are clearly documented and assessed to ensure that they achieve positive customer outcomes:
    • the benefits the product intends to provide to the target market;
    • the value considerations relevant to the target market. This should include both a consideration of internally available information and external information (for example, an analysis of competitor products and FCA work on value measures in the GI market); and
    • the overall cost to the end customer, including product costs and charges and any remuneration to be paid to entities in the distribution chain. Where any “net-rate” is being offered to a distributor in the chain, the remuneration of other parties should be obtained to consider this overall cost.
  • A clear explanation and justification of the distribution chain that will be used to bring the product to market. This should include:
    • an explanation of the role of each entity within the distribution chain and the benefits to the customer afforded by the involvement of each entity;
    • detail of the manner in which the manufacturer has satisfied itself that each entity within the distribution chain is suitable to provide the relevant services;
    • detail of the remuneration that is to be paid to each entity involved in the distribution chain and an assessment of whether such remuneration is appropriate, commensurate with the service provided and does not raise a conflict with the best interests rule;
    • an explanation of how the manufacturer will ensure that entities within the distribution chain are made aware of the relevant target market of the product; and
    • an explanation of the systems and controls that will be implemented in respect of any entities involved in the chain and how this will provide sufficient reassurance that the manufacturer can monitor the value delivered by the product and its compliance with the needs, objectives and characteristics of the target market. This should include detail of the MI that is to be obtained from relevant parties which should, as a minimum, include complaints information, commission received by various entities in the chain, file reviews and claims data.

    It should be noted that each of the above applies also to unregulated entities in the distribution chain, such as retailers relying on the connected contracts exemption.

  • Inbuilt approval stages throughout the development process, with such approval to be provided by an appropriate member of the team (which should include legal or compliance personnel) following an assessment of the product against its stated objectives. Such approvals should be documented, as should any challenge that is provided during this process and the steps that have been taken in response.
  • A regular review process to ensure that the product is continuing to achieve positive customer outcomes. This should include:
    • a reconsideration of the benefits, value and cost of the product and the impact of the distribution chain as discussed above. To assist with this, the manufacturer should also consider the MI that it has obtained;
    • the requirement for approval by an appropriate individual(s), which should be documented alongside any challenge posed and a plan for the implementation of any amendments to the product or its distribution that may be necessary; and
    • to the extent that any concerns are raised as a result of this review, the firm should consider whether there is a need for a customer communication or redress exercise, or both. Again, the outcome of this consideration should be documented.

It should be noted that existing products should be subject to this review process, not just products that are new to market.


It is not sufficient for the product approval process document to be in existence. It has to be fully implemented in relation to a manufacturer’s full product range. We, therefore, encourage manufacturers to provide training to relevant members of staff, ensuring that they are made aware of the FCA’s findings and the importance of adherence to the product approval process document. Manufacturers should also satisfy themselves that they have sufficient oversight of the training that is provided to distributors in respect of the products they have developed to ensure that the product, and its intended target market, is adequately understood. This could be achieved either by the manufacturer providing the training itself or by ensuring that it has sufficient oversight of the training that is provided.

Steps distributors should take to meet FCA expectations

The core concerns raised by the FCA in relation to distributors revolve around remuneration and the distribution process. We would encourage distributors to review their current arrangements in respect of these areas in line with the below, and to update these reviews on a regular basis to ensure ongoing compliance.

Remuneration review

The FCA has highlighted the potential for a conflict to exist between the distributor’s remuneration and its compliance with the customer’s best interests rule. Each distributor should, therefore, review the level of remuneration that it currently receives and pays, and document how it has satisfied itself that such remuneration does not present a conflict of interest. As part of this, the distributor should pay due regard to the manufacturer’s assessment of the value that the relevant product should provide to customers. In undertaking this review, distributors should note that the FCA has flagged the following situations as requiring particular attention:

  • The receipt of remuneration which bears no reasonable relationship to the distributor’s costs or workload when distributing the product.
  • The receipt of significant remuneration where involvement in the distribution chain provides little or no benefit beyond that which the customer would receive in any event. This has been flagged as a particular problem in relation to retail firms that distribute in reliance on the connected contract exemption.
  • The receipt of remuneration which incentivises a distributor to propose or recommend a product which does not meet the customer’s needs, or does not meet them as well as another product would.
  • The receipt of a net rate from the manufacturer, from which the distributor is able to set its own remuneration by determining the final sale price.

When undertaking this review it should be born in mind that the FCA has adopted a broad interpretation of “remuneration”, explicitly noting that distributors should consider all economic and non-economic benefit that is received in connection with the distribution process. Further, distributors should also take into account any fees which may become payable after the customer has taken out a policy, such as administration fees for mid-term adjustments. The findings of the review should be subject to approval by an appropriate member of the team, which should be documented.

If such review concludes that that remuneration does cause a conflict then it will not be sufficient to rely on disclosures to manage this conflict. The FCA has made it clear that this is not acceptable in the context of GI distribution. Rather, firms will need to amend their remuneration arrangements appropriately and consider whether there has been any customer detriment.

We recommend that this initial remuneration review is updated regularly to ensure ongoing compliance, and would, in particular, encourage distributors to update the review whenever changes are made to the distribution chain or the remuneration arrangements.

Distribution review

Responsibility for ensuring a GI product is distributed appropriately does not rest solely with the manufacturer, but also with the relevant distributors. To ensure that there is a clear focus on achieving positive customer outcomes throughout the distribution process, a distributor should, on a regular basis, conduct a review of its distribution process. Such review should consider the following factors:

  • Does the distributor, and any entities to which it has delegated activities, have sufficient knowledge about the relevant GI product and its target market, FCA compliance, and appropriate resources for the services it is to provide?
  • What steps have been taken to ensure that the distribution process is in line with the intended target market of the product? If there is a risk that customers outside the intended target market may purchase the product, how is this risk mitigated?
  • What MI is being gathered in relation to the distribution of the GI product? Is this sufficient to enable the distributor to assess whether the GI product is reaching the intended target market and the value provided by the distribution process?
  • If the MI raises any concerns, is there a clear escalation procedure to ensure that potential issues can be considered in more detail and rectified if necessary?
  • If the distributor delegates activities to other parties (including unregulated entities), are there adequate systems and controls in place to ensure that the activities of such entities are delivered in line with the needs and objectives of the customer? In particular, is sufficiently detailed MI being obtained from such firms and are regular file reviews being conducted? Is there a clear escalation procedure in place should concerns be observed in relation to the services provided by the delegate?
  • Is there a clear understanding of the circumstances in which issues should be escalated to the product manufacturer? This should include, at least, instances where the potential for customer harm has been detected and any evidence that the product is being distributed outside the intended target market.

The review should be documented, approved by an appropriate member of the team and any points of action should be recorded and followed up without delay.


As with manufacturers, we would suggest that distributors provide training to the relevant personnel, including any delegates, to ensure that the core messages of the FCA’s findings and, in particular, the importance of focusing on customer outcomes, are embedded within the business.

What happens next?

This will not be the last that we hear from the FCA in relation to the GI sector. The Guidance is currently at consultation stage, with comments requested by 9 July 2019 and the finalised version to follow. The FCA also intends to communicate with the GI sector and associated trade bodies in relation to its findings, is considering the need for further interventions, and is planning a programme of additional supervisory work. The FCA has made it clear that it will take a hard line against any continuing failures in this area. Firms should be able to evidence how they have taken account of the Guidance in their processes and procedures, and why they are satisfied that they are delivering the right outcomes.

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