FCA sends warning to protection providers after finding 'significant failings'

In a letter, Insurance market priorities 2023-2025, the FCA stated that, when looking at specific areas of the industry, it found “significant failings”.

The letter provided examples of such failings it had taken supervisory action against in the past year including very long waiting times/settlement delays, and weak identification of vulnerable customers.

Therefore, the authority outlined that its focus was on four market-wide priorities consistent with its strategic outcomes and commitments.

These priorities included putting consumers’ needs first, ESG, minimising the impact of operation disruption, and improving oversights of appointed representatives.

Putting consumers' needs first

The FCA explained that it expects firms to assess and address issues with products & services, price & value and consumer understanding.

It added that it also expects firms to put the consumer at the centre of their business to ensure they are delivering good consumer outcomes.

Expectations on implementing consumer duty for life insurance and personal and commercial lines insurance were published by the FCA earlier this year.

The authority added that it will consider using its range of regulatory tools to assess the effectiveness of the implementation, which may include mystery shopping exercises across different sectors.

The FCA stated: "For the life protection market, through our thematic review of Prod 4 rules, we are testing whether protection products are delivering fair value to customers. We continue to engage with insurers to identify where there may be evidence of poor outcomes.

"We are also concerned that levels of commission may not always be consistent with fair value and may incentivise unnecessary product churn."

ESG priorities

Poor governance and culture in the insurance market "leads directly" to poor outcomes for consumers, market participants and employees which have been "key root causes" of recent major conduct failings.

As a result, the FCA stated that firms should be able to show how they are actively working towards having a diverse workforce at all levels in their organisation.

This will "help firms understand customers’ diverse needs and make the market an attractive career proposition for future talent", the authority stated.

It advised that these positive outcomes can be advanced through firms assessing and improving the diverse culture in their firm, and considering leadership, purpose, governance, and approach to recruiting.

Additionally, while the authority reported seeing "encouraging" market commitments in this area, it said it remained "disappointed" on the general lack of progress within the market overall.

The FCA added: "We know life insurers can have a role in driving the net-zero transition by aligning their underwriting and investment activities with net zero.

"We expect firms to align their actions with any ESG and sustainability-related public commitments that they may make. Firms should note that any sustainability-related claims must be communicated in a way that is clear, fair and not misleading."

Minimising the impact of operational disruption

The FCA reported that it has recently seen incidences of a lack of operational resilience within firms to the detriment of customers and the wider market.

It added that it is "particularly concerned" with the level of governance, oversight and contingency planning on outsourced services where, if a problem occurs, customers suffer harm.

The authority advised that it is good practice for firms to have credible plans in place to manage and recover from operational problems, take remedial action where necessary and notify the regulators promptly as appropriate.

It gave particular mention to the risks of cyber attacks and the need to ensure adequate controls in place where information is held by third parties.

Improving oversight of appointed representatives

The FCA stated that many firms in the insurance market operate as principals with ARs to bring benefits such as supporting innovation.

Therefore, it will be testing that firms are properly embedding its new rules across the AR regime and increasing and improving its engagement with principal firms and other stakeholders.

It added that it expects principal firms to ensure high standards both within their firm, and at their ARs.

Additionally, the FCA stated that principals need to take steps to ensure their ARs operate within those high standards and to take assertive action with those ARs that fall below the principal firm’s standards.

This follows the introduction of the FCA's strengthened rules, which came into force on 8 December 2022, which gave principals more responsibility for ensuring ARs are fit and proper.

Action

The FCA concluded by reminding firms to take all necessary steps to ensure consumer duty requirements are met.

It added that a “significant” part of its activity over the next two years will be to test firms against its priorities and expectations.

It will also continue to use data to identify outliers and, where firms are not meeting the rules and expectations, take action. 

Additionally, the FCA announced that it would be specifically engaging with smaller firms to understand how they are meeting consumer duty requirements and delivering good customer outcomes in a sustainable way.

tom.dunstan@ft.com

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