UK insurers urged to prepare for ‘complex’ new product governance rules

According to the findings of a recent compliance review by the regulator, some firms are not fully meeting existing guidance on product governance and value, including last year’s temporary guidance on product value in the context of Covid-19. The FCA is concerned that these firms are unlikely to be ready to comply with the tougher new rules, with less than one month to go until they take effect.

The FCA is strengthening its insurance pricing and governance rules in response to a wide-ranging market study, in which it found that customers who did not ‘shop around’ for a new policy with a new insurer at renewal risked paying higher prices. New rules on product governance; systems and controls; and remuneration for premium finance, applicable to all general insurance non-investment products, including legacy products pre-dating 1 October 2018, come into force on 1 October. Additional measures on home and motor insurance pricing, automatic renewal, premium finance disclosure and data reporting take effect on 1 January 2022.

Last month, the FCA issued an updated policy statement amending some of the rules in response to industry feedback. These include a change to the definition of ‘renewal’ to exclude the scenario where a customer cancels a policy and then takes out another policy from the same insurer through a different broker, as well as clearer rules around discounts and incentives and reporting. The FCA also published a document addressing some of the questions it has received from the industry (9-page / 209KB PDF), which it intends to update if further clarifications are sought.

Insurance law expert Charlotte McIntyre of Pinsent Masons, the law firm behind Out-Law, said that the FCA’s actions underlined the complexity of the new rules and the “substantial” changes the FCA was expecting of insurers and intermediaries, within “a challengingly short timeframe”.

“Whilst the market is keen to ensure their customers are treated fairly on pricing and renewals, some of the practical implications of implementing the new rules are significant, particularly where existing IT systems are required to bend to fit the new requirements,” she said.

“The industry will welcome the FCA acknowledging the practical challenges it faces in implementing the new rules, along with its adjustment of certain rules to ensure that the overall aim is achieved but through more achievable means. For example, insurers will be relieved that cases where the customer chooses to lapse their current policy and take out another policy with the same insurer via a different partner, intermediary or channel are now excluded from the new broad definition of renewal and can be treated as new business. Most systems were not designed to capture such information,” she said.

In its most recent review, the FCA looked at how firms designed, sold and reviewed their products to ensure that they meet customer needs, including in the context of Covid-19. One of the issues it found was around broker remuneration: the existing guidance, and the new rules, require a reasonable relationship between broker remuneration and the actual costs or workload associated with product distribution. The FCA said it was not always clear whether firms had adequate processes in place to assess this.

FCA executive director Sheldon Mills said that although some firms were doing the right thing, “it’s worrying that some firms may not be ready” for the changes.

“Where firms are not consistently meeting existing requirements and expectations, it risks harm through poor value products or products being sold to the wrong customers. These firms have significant work to do urgently to be able to comply with the enhanced product governance rules. Firms that fail to do that work risk regulatory action,” he said.