FCA finalises guidance for insurance firms on assessing product value

The guidance lays out the FCA’s expectations for firms when considering the fair treatment of all customers for an insurance product, not just those in financial difficulties due to coronavirus, and applies to all firms carrying on regulated activities relating to all non-investment insurance products for both individual and business customers.

Firms that manufacture or provide insurance products are expected to consider whether and how coronavirus may have materially affected the value of their products. This could include the firm or product now being unable to deliver a benefit, or where there has been a reduction in the risk of an underlying insured event happening, for example due to lockdown, so that the product now provides little or no utility to the policyholders.

The FCA said firms identifying a material change to the value of a product should consider appropriate action, such as different ways for delivering benefits; providing alternative, comparable benefits; or reducing or refunding premiums.

Firms should consider the impact of coronavirus on customers at different stages of a product’s life cycle, but do not need to assess customers individually, the FCA said.

Insurance law expert Charlotte McIntyre of Pinsent Masons, the law firm behind Out-Law, said the finalised guidance largely mirrored the draft guidance produced at the start of May, but that the FCA had clarified its expectation that firms should consider the value of products where there has been a material reduction in risk, so that the product provides little or no utility to the policyholder, and not just where claims are no longer possible.

“This clarification appears to contradict the FCA’s statement that the guidance is not intended to require firms to carry out remedial action where claims are still generally possible but the likelihood of a claim may change. The FCA gives the example of reduced use of cars, in the context of motor insurance,” McIntyre said.

“While the guidance may state that it is for firms to determine where remedial action is required, firms may be left unclear as to where the dividing line lies between what is a ‘a material reduction in risk’ and where claims are still generally possible but the likelihood of the claim has reduced,” McIntyre said.

“Given that the FCA also explicitly refers to its guidance on helping customers in temporary financial difficulty due to coronavirus, it may be that firms decide the prudent approach is to err on the side of carrying out remedial action where value is found to be reduced as a result of coronavirus,” McIntyre said.

The guidance took effect on 3 June and the FCA said firms should complete their review of product lines and decided on resulting actions by no later than 3 December 2020. Contentious regulatory expert Jonathan Cavill of Pinsent Masons said it was important for firms to act on the guidance.

“The FCA has taken an increasing interest in product value over recent years, and has not been hesitant to engage with firms from a supervisory perspective where it deems that products are not providing fair value. In such circumstances the FCA has been known to ‘encourage’ those firms to consider remediation exercises. There have been a number of high profile redress and remediation exercises in this space, which have been both in the public domain and ‘under the radar’,” Cavill said.

“In terms of this guidance, whilst the FCA has stated that the onus will be on firms to consider what actions they should take if they identify the product is no longer providing value to due to the pandemic, my view is that if the actions firms take do not result in fair customer outcomes, the FCA will not think twice in approaching relevant firms to discuss remediation, as they have done previously. Those firms will most likely not be able to rely on the safe haven which following this guidance would have provided,” Cavill said.

Cavill said the FCA may also consider more severe intervention if a firm’s failings were particularly egregious. He said the FCA’s ability to leverage the Principles for Businesses, particularly Principle 6 which requires a firm to pay due regard to its customers’ interests and treat them fairly, allowed it a certain amount of flexibility when considering such action.

“In that vein, firms will no doubt have given thought to the FCA’s recent commentary that redress programs can act as a mitigant to enforcement fines,” Cavill said.