Following our review of key issues for 2021 in this article we consider the impact of recent developments in product requirements for insurers, particularly in light of the FCA’s focus on value in distribution chains, pricing and vulnerable customers.
Since the specific product governance rules of the Insurance Distribution Directive (IDD) came into force, the FCA’s focus in related areas has increasingly referred back to the approach in these rules. It is clear from the FCA’s latest insurance consultations and guidance that firms’ product development and distribution processes are seen as central to the impact of their businesses on customers and treating them fairly.
Firms need to ensure that they are fully aware of these regulatory developments and the FCA’s focus on how firms approach their particular products and specific customer base.
The IDD requirements themselves enhanced and codified guidance already set out in the FCA’s Responsibilities of Providers and Distributors for the Fair Treatment of Customers document (the RPPD). The concepts in these rules were not new to the UK market, but the regime is considerably more robust since the implementation of the IDD.
The key requirements for manufacturers focus on product approval and testing processes, identification of target markets and careful selection and monitoring of distribution channels. These rules are supported by requirements on distributors to understand the products and their target markets and to inform manufacturers of any adverse issues for customers. The regulator expects active testing, monitoring and review to lead to action where needed and not simply to be recorded in anticipation of supervisory discussions.
The FCA’s general insurance distribution chain guidance (FG19/5) was issued in 2019 as part of the regulator’s work on overall product value. The guidance focused on responsibilities throughout the product manufacturing and distribution chain. It also reiterated the concepts of product design and review, target market and distribution strategy as ways of firms ensuring appropriate value for customers of their products.
The regulator has also proposed new product requirements in each of its general insurance pricing practices market study consultation (CP20/19, which closed in January) and Policy Statement on general insurance value measures reporting and publication (PS20/9).
These developments mean that, since January, firms manufacturing a wide range of general insurance products must already have procedures in place to ensure that the products offer fair value to customers in their target market “on a continuing basis”. This is in addition to the value measure reporting requirements that apply from July, with the first reports due in February 2022. Building on the approach under the IDD, distributors of the products must also have their own procedures in place to consider value to customers. Distributors are further expected to take action to mitigate any detriment and inform manufacturers if problems are identified.
Further developments for pricing
The rules due later in 2021, following the pricing consultation CP20/19, introduce new requirements for firms manufacturing general insurance or protection products. Amongst the proposed new requirements on pricing, are detailed rules for firms to ensure that products are not only intended to provide fair value to the target market, but do so in practice. Manufacturing insurance products is expected to be driven more by features benefiting customers than the firm’s business goals.
The new rules will also introduce enhanced requirements for product review that include a value focus and take place at least annually. As the pandemic has shown, the value of products to customers can change over time so the regulator will expect genuine assessment of any change.
Although some of these rules are not in final form, the FCA has already flagged that the new product governance requirements from its pricing consultation will come into force in September 2021. This seems to suggest that the main thrust of these rules will be little changed following the consultation.
In another key development, the product governance rules will in future apply to all relevant products, even if manufactured prior to IDD implementation in October 2018. The requirements are not intended to be retrospective but products no longer providing value to their target market will need to be changed or removed from sale.
Products suitable for vulnerable customers
Recent FCA guidance on the fair treatment of vulnerable customers issued in February (FG21/1), has also identified practical actions for firms to take in designing, distributing and servicing their products and services. The regulator expects insurers and distributors to ensure their product governance process is sufficiently detailed to alert them to the implications their products and services have for vulnerable customers. It is not enough just to consider the impact on the general target market.
The FCA already expected target market identification to take place at a level of granularity that reflected the nature, risk profile and complexity of the product. Firms now also need to take vulnerable customers into account at all stages, considering the impacts of the product and services on these customers.
The days of tick-box compliance in product design have long since disappeared under the weight of the regulator’s customer-centric expectations and the reinvigorated concepts of target markets, regular reviews and staff training. The FCA now requires firms to analyse and learn from their review processes, to build flexibility into product journeys for different customers and to take positive action where needed to ensure that all types of customers are treated fairly.
These developments, along with the FCA’s warning in its 2020 portfolio letters that it will review the implementation of IDD rules, mean it is more important than ever for firms to ensure that they have robust, reliable and up-to-date processes and checks in place for developing and updating their products specifically for their customer base.