Urgent action required on product governance and fair value | Insurance

FCA “disappointed” at inadequate progress by Insurers and Brokers on product governance and fair value, and offers a conditional forbearance period for distributors

The FCA has taken the unusual step of offering general insurance (GI) distributors a three-month forbearance period from 1 October 2022 to 1 January 2023 from some of their responsibilities under the product governance and fair value rules (PROD 4). The regulator is concerned that GI manufacturers are behind in meeting their fair value assessments before the 1 October 2022 deadline. The FCA see the risk of market disruption and consumer harm if distributors are obliged to cease distributing products – as the rules require – if they have not had the time to complete their own fair value assessments.

The FCA will not be amused to have their hand forced by some manufacturers’ failure to make adequate progress. Any further delays or inadequate compliance will not be greeted sympathetically. Senior management are advised to review progress against these obligations as a matter of urgency, and to bring work forward where at all possible. The FCA’s expectations are summarised below, but please note that the rules in PROD 4 are extremely detailed, and this is where compliance teams need to start from.

Distributors who may need to use the FCA’s three month forbearance period should look carefully at the conditions well in advance of the 1 October deadline, as some of the conditions may not be practical.

The first step is to determine whether your company is acting as a manufacturer or as a distributor of a product. This distinction does not sit neatly along the broker/carrier divide: it depends on the part played in the market. Some brokers act as manufacturers; some carriers act as distributors; MGAs may act as either or both.

FCA expectations for manufacturers

• Complete the value assessments in good time, so that any necessary changes to products can be made before the 1 October deadline. Contingency plans should be drawn up in the event of the deadline being missed;
• Pass their value assessments, in good time, and in sufficient detail, to the distributors, so that they are in a position to complete their own assessments;
• Put product governance frameworks in place, which must demonstrate that products provide fair value in their target market for a foreseeable period;
• Identify all products subject to the FCA’s “value measures,” and demonstrate that they are subject to the special processes and fair value assessments, and take any remedial action;
• Take all reasonable steps to extract from distributors the information needed to complete product reviews (though see paragraph 2 in Detail below)

FCA expectations for distributors

• Complete by end September their assessment of how their distribution strategy is consistent with providing fair value to consumers;
• Engage with product manufacturers so that they receive, in good time and in sufficient detail, the manufacturers’ value assessments;
• Provide manufacturers with the information they need to carry out product reviews.

How the forbearance period for distributors works

Distributors will be able to continue distributing GI products without the need to understand the manufacturer’s value assessment for an extra three months until 1 January 2023. This forbearance is subject to three conditions:

1. Distributors must have completed their own assessments on the impact distribution arrangements will have on the value of the product, and taken any necessary remedial measures;
2. Distributors must have met any requests from the relevant manufacturer for the information needed to carry out product reviews;
3. The distributor must demonstrate that they received the manufacturers’ value assessment too late for them reasonably to carry out their own assessment.

However, this is not a get out of jail card. Distributors must of course meet all their other obligations.

Detail

1) On 29 July the FCA published two stiffly worded letters about inadequate progress on the product governance and fair value rules.

2) A review by the FCA in February 2022 found that:

• a third of product manufacturers had scheduled their value assessments for Q3, in advance of a 1 October deadline. In the FCA’s view this leaves insufficient time for any changes to be made as a result of the assessments, and for distributors to make their own assessments;
• some manufacturers intended to provide information to their distributors through generic web-based outcome statements. These are unlikely to be adequate;
• a third of manufacturers had not undertaken the special fair value assessment required for “value measures” products;
• London Market manufacturers were having difficulty obtaining from overseas-based distributors the information needed for product reviews. While holding manufacturers to their obligations, FCA has agreed to review whether these requirements are necessary for overseas customers.

3) The very detailed product governance and fair value rules for GI products are to be found in:

• PROD 4.2 sets out the responsibilities of manufacturers
• PROD 4.3 set out the responsibilities of distributors
• PROD 4.4 sets out additional duties, for example the obligation to meet claims promptly

All these rules applied to new products and to significant adaptations from 1 October 2021. They apply to existing products from 1 October 2022. This is the deadline that is causing concern at the FCA.

• PROD 4.5 sets out the special product governance and fair value rules applying to those products for which information has to be provided under the FCA’s “value measures” initiative.

These rules applied from 1 January 2021.