Thematic Review TR24-2: Key Insights for General Insurance and Pure Protection Markets

Published  29 October 2024
   5 min read

By Gregor Sked and Justin Corliss, Technical Marketing Managers at Royal London 

In a recent podcast, we delved into the findings of the FCA’s thematic review TR 24-2, focusing on product oversight and governance within the general insurance and pure protection markets. This review is crucial for professionals in these sectors, as it highlights key regulatory expectations and areas for improvement. 

Background and Purpose of the Review

The FCA’s thematic review aimed to assess whether firms have effectively implemented the rules under PROD 4, ensuring that their products offer fair value and deliver good outcomes for consumers. The review analysed data from 28 manufacturers and 39 distributors, covering ten different general insurance and pure protection products. 

Hi everyone. I'm Gregor Sked and I'm joined today by Justin Corliss. We're both technical marketing managers here at Royal London. And welcome to this podcast where we're going to be exploring the findings from, now bear with me, it's a long one, the thematic review TR 24-2 Product Oversights and Governance Thematic review to where we are almost there for the general insurance and pure protection markets or prod 1.4 and prod 4.

Now, while we would recommend everybody involved in the general insurance or pure protection market read this paper in full, this podcast will aim to summarise the key FCA messages, and hopefully help you to avoid some of the key issues that the regulator identified. So, this is the latest in the series of communications to protection professionals, following on from the strengthening of the Product Governance Sourcebook, or PROD 4, back in 2021, and of course, the introduction of consumer duty back in 2023.

The FCA also state that this paper supersedes their dear CEO Letter to manufacturers dated the 23rd of February 2023, as that contained key observations from this FCA, whereas this report contains actual findings following a thematic review. So, I guess we should begin with a fairly high-level view of what the regulator did and why they did it.

Yeah, absolutely. Gregor, you know, what were they trying to identify. And from there, of course, we'll look at some of the key points in a little bit more detail. So at a high level, the FCA looked at whether firms had appropriately implemented the rules introduced under PROD 4, which make them responsible for ensuring the products they manufacture and distribute offer customers fair value that they had assessed and could clearly demonstrate their products and services, provide fair value, and how the product governance arrangements delivered good outcomes for consumers that they had introduced appropriate systems and controls necessary to effectively implement these requirements, that they had taken appropriate action where they had identified actual or potential issues, where products may not be providing the intended value. Now, when doing this, they analysed information from 28 manufacturers and 39 distributors covering ten different GI and pure protection products.

Yeah, and the paper splits the findings into those relating to manufacturers and distributors. And of course, we need to remember that some firms will fulfil both roles. But I suspect most of you listening today will predominantly be distributors.

So that's what's going to be our main focus for today. Now, I should also say that we will predominantly be focusing on pure protection points raised rather than general insurance products, as we’re less involved in the general insurance space and therefore have less insight into the specifics of that market. Having said that, I am now going to commit the cardinal sin for podcasts and briefly run through the key issues that the FCA found in relation to manufacturers.

So why are we to do that, having just said that we're going to mainly focus on the parts relating to distributors? Well, it's simply that once you know the areas of improvement that the FCA are seeking from manufacturers, it actually provides a bit of context for the points the FCA make regarding distributors. So very briefly, the FCA raised the following concerns in relation to product manufacturers in the thematic review.

Broadly, many firms were not fully meeting the requirements under PROD 4 and couldn't ensure any evidence that their products are delivering fair value and creating good client outcomes. Many were actually unable to evidence that there was a robust challenge when considering that the value of their products, many were unable to evidence that they made clear judgments supported by appropriate evidence in their product reviews and fair value assessments.

Many were unable to evidence that they had appropriate MI and analysis to support that decision making, and also many were unable to evidence that they had proactively identified products with value problems and actually acted to address them. Now, the FCA saw shortcomings in the quality of the fair value assessments undertaken by many firms as well. These include firms that didn't adequately consider the total price paid, including the impact of remuneration on the overall value of the product.

Also not having sufficient MI to monitor distributors remuneration and ensure that it was consistent with providing fair value to their customers. Also not having sufficient or good quality MI to assess value or appropriate metrics to identify fair value problems, and also being unable to demonstrate how the assess whether the product was delivering fair value to all customers, including those that were vulnerable or actually outlier groups of customers.

And lastly, not identifying value problems, even where these were apparent.

Now, in addition, the FCA noted that target market statements were often too high level and lacked granularity, and that many manufacturers had not appropriately considered their distribution arrangements or choice of distributors, given the product and target market, many were also not providing appropriate and timely information to their distributors.

So those are the key points raised in the paper around manufacturers. But you know, if you'd rather read the 30 odd pages of additional detail around this, it is all there in the thematic review. Now, hopefully this is enough to give you a bit of context, though, to the part that we really want to focus on: the findings regarding distributors.

Yeah, so while the paper does highlight a number of good practices in the distribution space, the regulator clearly has concerns too. So the FCA highlighted several concerns around product distribution arrangements and governance associated with these. These include, and I quote, “many product distribution arrangements we reviewed were too high level and did not have sufficient detail, particularly in key areas such as distribution of strategy, remuneration and getting information from manufacturers. Some firms only provided a short one page product distribution arrangement document,” end quote. Now, ultimately, this is not meeting the FCA requirements, which is seeking granular detail to ensure that the product best meets the client's needs and objectives and is ultimately providing fair value. There is clearly a focus throughout the paper around commission levels and the impact commission levels have on the value clients experience from the product.

In fact, FCA found most distributors didn't have adequate processes to enable them to assess and understand the impact of the distribution arrangements, including any remuneration would have on the product's overall value. In addition, the regulator found that there was often no breakdown of the total remuneration, creating a lack of clarity on the impact of the different components, such as commission, and fees on the total price of the customer piece and the product's overall value.

Okay, so while there is no silver bullet solution here, that if you do this, then you'll have a light. All the FCA concerns, it would seem prudent for firms to identify the time and expertise required on a particular case, and to compare the commission received to the remuneration they would expect if they charged an hourly rate and waived all of that commission.

Now, that isn't suggesting that protection firms move from a commission to a fee-based model. Rather, to use this as a measure to identify value improvements. Now, in the paper, the FCA state where Commission was based on a percentage of the premium paid, many distributors had not considered the level at which this remuneration might not provide fair value.

Many did not have arrangements to manage this, such as setting a cap on the pound value of commission. Now that could result in poor value or remuneration, which did not bear a reasonable relationship to the benefits or services provided for products, for example, with larger premiums, or when the risk price increased.

Yeah. Now, the next issue raised was that there was often a lack of clarity in the governance structures and processes.

So it wasn't clear who was responsible for product distribution arrangement decisions and how oversight and escalation of issues worked. Now, once again, the regulator didn't - they actually did - identify good practice in this area. And throughout the paper, there are actually examples of this. However, the value in podcasts like this is often to identify the issues raised so that firms can ensure they're not fallen foul of expectations. Now, the FCA expect to see robust governance processes around product distribution arrangements with appropriate business input and senior management oversight and challenge.

They believe this delivers clear, well-evidenced outputs that allow firms to identify and address the value problems. So firms need to ascertain if they feel they’re actually meeting this, and doing so will need to identify if these effective processes for gathering target market information from manufacturers, and in doing so, it would likely be they will be on occasions identifying information that needs to be shared with them, with the manufacturer.

Perhaps they find clients who fall within the identified target market group for a product or service, but in fact have characteristics or maybe circumstances that mean the product or service doesn't meet their needs. There is an expectation that this insight will be shared with the manufacturer to help that manufacturer continuously refine the target market.

Now, this is difficult for distributor firms to achieve if they don't collect and collate management information: Am I at a granular level?

Now, failing to do these risks missing trends around aspects like cancellations and complaints, and claims data that can often be key indicators of a product not meeting the needs of a client or importantly, not meeting them as well as another product might. Now, one of the points raised in the paper with regard to distributors is that in too many instances, the FCA found they didn't have adequate, relevant MI to assess the impact of their own activities on the product's intended value and whether the product continued to provide the intended value to the target market.

Now, the FCA go on to say that distributors, although to be fair, this point was equally levelled at manufacturers, could not adequately evidence their decision making and did not provide the FCA with any meeting minutes to show the firm had adequate oversight of its product distribution arrangements.

The regulator also expects to see ownership of these controls, and further, to be an owner of this responsibility, with sufficient seniority in the firm to actually be able to interrogate and challenge current practices to ensure client values are achieved.

Now, the FCA found a lack of evidence of this in too many instances, with either not happening owners lacking sufficient seniority to actually affect processes or MI lacking sufficient detail to allow for this to happen effectively. In fact, there's a word we've used here a few times, which is no surprises, it pops up 33 times in the paper, and that word is evidence.

As we're no doubt all aware, “evidence” is the buzzword since the implementation of the consumer duty and really since the Prod before it. Firms may have the best process and procedures in the world if they're not documented and evidenced, and if there isn't a defined written process for how issues will be overcome and how sufficiently senior people in the organization have strict oversight of this, well, it's unlikely to meet the regulator's expectation.

Yes. In fact, in this section of the paper entitled “What We Found,” there's a section that reads, and I'm quoting, “Some firms simply stated the product offered fair value with no other information to back up the statement from the information provided to distributors, we could not see how they could be able to understand the intended value of the product.”

Now it goes on to say less than five manufacturers in the sample provided adequate information about the impact of distribution arrangements on the product's overall value. However, distributors have their own obligations under prod 4.3 to ensure they had adequate arrangements to get this information from their manufacturers. So I think it's fair to say that the FCA believe manufacturers need to do more to facilitate this flow of information.

And yes, that clearly makes it more difficult for distributors. But the crux of the matter is distributors have their own obligations around gathering this information. So in essence, the FCA seems to be saying yes, poor information sharing from manufacturers is an obstacle, but it's not a valid excuse. Now, another point I should highlight from the thematic review, in regard to distributors, concerns reviews.

Now, while the FCA found some distributors had provisions in place for at least an annual review of products, they were often missing details of the triggers to identify the need for more regular reviews. Now this was - this is - intrinsically linked to the value measure and the need for plans to be adapted to the changing circumstances of the client.

Yeah, and the FCA also made it very clear in the Consumer Duty Handbook under section 5.2, if you want to a look at it, that the reviews they require of firms provide an opportunity to identify both new and emergent harms. Now, protection products by nature should be reviewed regularly to ensure that the cover is still suitable. The thematic review highlights a potential lack of awareness amongst advisers.

Just how many opportunities protection firms provides to trigger a review, potentially the birth/adoption of a child, a change of job, increase in salary, change in house and tenure, to name but just a few, should really be monitored. And also the impact that unexpected life events could have on the client's financial resilience potentially triggered by these life events, must be revisited on an ongoing basis.

Value-added services as well can support advisers to demonstrate the value that they provide to their clients through accessing tangible support services available alongside their protection products. Now these services don't need to be triggered by an annual review. And often advisers, can use that as an opportunity to provide their clients with access to recovery and wellbeing support available 365 days a year, often without the need for a claim to be made.

Ultimately, advisers should be having a sufficient process in place for addressing protection advice with customers and should be signposting that customer to protection specialist, i.e. handing over the process rather than ignoring it where it isn't provided in-house.

Yes, now, the FCA found that while distributor firms often acknowledge the need to manage conflicts of interest, many of them lacked comprehensive policies or effective mechanisms to identify and manage these.

Now, while not explicitly stated, it's interesting to note that market study MS 24/1.1 which was published around the same time as this thematic review and focuses on the distribution of pure protection products to retail customers. Now, one of the key points raised in that market study was around commission, it, representing value at different levels and a particular focus on loaded commissions.

Now, while it's not our intention to go into the detail of that paper today, mainly because it's a forthcoming market study with no conclusions drawn yet, the points raised around managing conflicts of interest would appear to tug at that thread. Now, I think we'll all be watching the outcome of that market study with pretty keen interest. If anyone is looking to input to that market study, perhaps to suggest areas that the FCA should focus on, there is a means of contacting the FCA at the bottom of that paper.

So that's market study MS 24 stroke 1.1. And responses need to be received by the 11th of October 2024. Anyway, back to, this thematic review TR 24 stroke two and the final point that FCA made concerning distributors is most distributors did not adequately ensure the distribution of products alongside other products, did not negatively affect each product's intended value.

Now for this, they included an example of better practice. And just to try and paraphrase that a little bit, it said, this included the nature of risks and actions that should be taken to manage those risks. Examples of risks identified included duplication of cover, appropriateness of the package, considering the nature and type of cover provided by the individual products in the package, and ensuring the price of the package did not exceed the total cost of the individual products, had they been bought separately.

And actually, if we shine a deeper protection light on this, there has been an increase in trend in protection products being sold through multi benefit arrangements. 11 multiple claims to be made on different elements of the cover whilst keeping other covers intact. And these solutions can provide customers the option to cover multiple risks with just one provider.

But again if we show the thematic review on this multi benefit policies while growing in popularity, do shine a little bit of a light on the reliance on a single insurer, which could result in less comprehensive coverage.

The product requires distributors who are distributing products alongside the other products to show that these are providing value. Now, this prompts a question do you advisors need more support to show the value of these multi benefit plans? And also how do you advisors look for more support, evidence and protection advice alongside mortgage advice or wider holistic financial planning?

So just in case you want to just give us a quick summary of some of the main points that we've looked at in today's podcast in relation to the FCA’s main observations for distributors?

Yeah, absolutely. Firstly, many distribution arrangements were too general and lacked detail. There was a lack of clarity in governance structures and processes. While firms recognized the need to manage conflicts of interest, many lacked comprehensive policies or effective mechanisms to address them, including issues around commission levels.

Some distributors didn't ensure that products distributed together did not negatively impact each product's intended value. And finally, there were concerns, raised, around the quality and frequency of reviews. Now, once again, if you are involved in the general insurance or the pure protection market, we do suggest that you read this paper in full. But for today, that's about all that we've got time for.

 

Key Findings for Manufacturers

The review identified several areas where manufacturers fell short:

  • Fair Value Assessments: Many firms could not demonstrate that their products provided fair value or that they had robust processes for assessing this.
  • Management Information (MI): There was a lack of sufficient MI to support decision-making and identify value problems.
  • Target Market Statements: These were often too high-level and lacked the necessary detail.
  • Distribution Arrangements: Manufacturers did not always consider their choice of distributors or provide them with timely information. 

Key Findings for Distributors

The review also highlighted significant concerns for distributors: 

  • Product Distribution Arrangements: Many arrangements were too general and lacked detail, particularly regarding distribution strategy and remuneration.
  • Governance Structures: There was often a lack of clarity in governance processes and oversight.
  • Commission Levels: Distributors frequently did not assess the impact of commission on product value, and there was a lack of transparency in remuneration breakdowns.
  • Management Information: Distributors lacked adequate MI to assess their impact on product value and ensure products continued to meet customer needs.
  • Review Processes: Regular reviews were often missing, and there was a lack of triggers for more frequent reviews based on changing customer circumstances. 

Recommendations and Best Practices 

To address these issues, the FCA recommends: 

  • Detailed Distribution Arrangements: Firms should ensure their distribution arrangements are detailed and specific, particularly regarding strategy and remuneration.
  • Robust Governance: Clear governance structures and processes should be in place, with senior management oversight.
  • Transparent Remuneration: Firms should provide a clear breakdown of remuneration and assess its impact on product value.
  • Effective MI: Collect and analyse detailed MI to monitor product performance and identify value issues.
    Regular Reviews: Implement regular and trigger-based reviews to ensure products continue to meet customer needs. 

Conclusion

The FCA’s thematic review underscores the importance of robust product oversight and governance in ensuring fair value and good outcomes for consumers. By addressing the identified shortcomings and implementing the recommended best practices, firms can better meet regulatory expectations and enhance their product offerings. 

For a more detailed understanding, we encourage professionals in the general insurance and pure protection markets to read the full thematic review (opens in a new window).