FCA finalises UK insurance distribution chain guidance

The guidance (21-page / 535KB PDF), which takes effect immediately, is intended to address some of the main findings of the FCA's review of general insurance distribution chains as well as the entry into force of the EU's Insurance Distribution Directive (IDD) in October 2018. It also forms part of a broader focus by the regulator on product value.

The FCA published the findings of its distribution chain review in April. It found that some insurance policyholders were paying prices significantly higher than the production and delivery costs of their products, mostly due to high levels of commission in the distribution chains. The FCA said that many firms were not adequately considering the risk of harm to their customers arising from these processes, while some firms did not have sufficient oversight of other parties in the distribution chain.

The guidance does not contain new rules but rather clarifies the FCA's expectations of firms which create insurance products, which it calls 'manufacturers', and firms which conduct insurance distribution activities, which it calls 'distributors'. The guidance states that remuneration paid to distributors by manufacturers such as commission, product sharing or fees must not conflict with distributors' duty to ensure that products sold are in the best interests of the particular customer.

Manufacturers are required to consider the value that a product presents for its intended customers, and how the distribution chain affects overall value. As part of this, they should consider the difference between the risk price and the end premium paid by the customer. According to the guidance, an end premium that "bears no reasonable relationship" to the cost of the product could indicate that the level of value that the product is offering is causing harm to customers.

The FCA also expects manufacturers to consider whether their product is compatible with the needs, objectives and characteristics of their target market, and whether the distribution chain is consistent with that target market. Firms are expected to be able to appropriately evidence these considerations and the conclusions reached. They must also ensure that adequate systems and controls are in place to ensure that any activities delegated to other parties in the distribution chain are performed in line with their obligations as manufacturers.

Manufacturers are required to "respond appropriately" where their product review processes indicate a risk of harm to customers, including a risk that products are no longer providing the "intended value". They must have processes in place to take corrective action when products are detrimental to customers including remediation of the harm and, where necessary, withdrawing the product from sale or significantly changing the distribution model.

Distributors are expected to monitor the products that they offer along with the broader distribution chain on an ongoing basis, and to act if they identify situations where the product is not providing the "intended value" to customers. The guidance states explicitly that this includes situations where the level of remuneration received by the distributor is unlikely to be consistent with the customer's best interests because of the impact on the value of the product.

Where the distributor identifies that the product is causing possible customer harm, it should inform the manufacturer and possibly amend the way the product is distributed. This could mean reducing the amount of remuneration received, or ceasing to distribute the product entirely. If the distributor delegates activities to other parties in the distribution chain, they must again make sure that they have adequate systems and controls in place to ensure that the requirements are met.