The FCA has published letters that it has sent to firms in the retail, wholesale and life sectors updating them on its market wide priorities for the insurance market for the period 2023 to 2025, along side the sector specific risks of harm it is most concerned about, what it wants firms to do about them and where it intends to focus the majority of its work in the market.
There are some common themes within the letters:
Spotlight on Consumer Duty:
Unsurprisingly, the Consumer Duty looms large over much of this - and the FCA is focused on insurers embedding the Duty throughout operations.
The FCA expects firms to put the consumer at the centre of their business to ensure they are delivering good consumer outcomes – both for open products and services now and in readiness for the Duty applying to closed products and services from 31 July 2024. The FCA notes in some letters a concern that boards may not be taking enough action to ensure the positive outcomes for consumers which are essential for full delivery of the Consumer Duty. The FCA particularly note that “We therefore expect firms’ Boards to take proactive action on our priorities and not treat them as merely a compliance exercise” nor simply wait for enforcement action.
The FCA particularly reminds firms to ensure that they are checking their products are providing fair value to their customers. This appears in part to have been driven by the FCA’s observations in reviewing its general insurance value measures data – the FCA concurrently published its first full year of general insurance value measures data for Jan-Dec 2022. In a previous publication the FCA highlighted concerns that the data showed individual firms, or products, were not providing fair value. Despite this, the new data suggests that there are still several examples where individual firms, or products do not appear to be providing fair value (particularly in the context of vehicle GAP insurance). The FCA has separately written to firms manufacturing GAP insurance products telling them they must take immediate action to prove customers are getting a fair deal, or it will intervene – giving firms a three-month ultimatum. This particular action is specific to GAP insurance, however the FCA makes clear that the concerns raised potentially relate to wider issues – and wants Boards to take note of this action and make sure they are meeting their product governance and pricing requirements across all retail products.
Governance and culture:
the FCA is underscoring the need for firms to show how they are actively working towards having a diverse workforce at all levels in their organisation.
Operational resilience and the increasing reliance on third parties
: the FCA is taking this opportunity remind firms of its Operational Resilience Policy (PS21/3)-accompanied rules and guidance, which came into force at the end of March last year. By the end of March 2025, in a nutshell, firms must have performed the necessary mapping and testing in order to remain within impact tolerances for their important business services.
Improving Oversight of Appointed Representatives
: the FCA is using data and analytics to help identify higher risk principals and is taking appropriate action on outlier firms. It will be testing that firms are properly embedding the new rules across the AR regime and increasing its engagement with principal firms and other stakeholders.
In terms of the sector-specific priorities:
: key focus areas include:
- putting customers’ needs first – particularly in the context of price and value, consumer support and service, effective customer journeys, supporting customers in financial difficulty and suitability and value of life protection products;
- the effectiveness of outsourcing oversight - and in particular ensuring that the risks that the increasing reliance on TPAs presents to life insurers forms a key part of firms' risk assessments; and
- ensuring firms meet their obligations when it comes to sustainability-related investments and disclosures (including that sustainability claims must be clear, fair and not misleading). Interesting too is the FCA's focus on the diversion of investments to sustainable default funds for pension schemes - the FCA's concern is that members inertia – a perennial problem with pensions – may lead to them being landed in funds that they may not understand or not change if they don’t want to be invested. The FCA ultimately expects firms to have a good grasp of customers’ expectations and appetite for sustainable investments, and communicate clearly on this topic.
Wholesale Insurance: the FCA has highlighted a number of focus areas including:
- its intention to engage with London market trade bodies when developing future proposals to support the competitiveness of the London market (firms are encouraged to provide feedback to these trade bodies);
- governance/culture/non-financial misconduct;
- financial crime - reiterating the expectation on firms to have robust and effectively implemented policies, procedures, systems and controls to detect, prevent and combat financial crime; and
- prudential risk to debt servicing and ensuring firms having adequate financial resources to satisfy threshold conditions and to service debt over time, even under stressed scenarios.
Personal and commercial lines insurance
: the focus remains on putting consumer needs first, with a focus on consumer support, claims, access, sales practices and governance, culture and non-financial misconduct.
The FCA expects firms to take all necessary action to ensure that they are meeting FCA requirements, including the obligations and expectations set out in the portfolio letter they have received - and in particular expects firms to ensure preparedness for the additional requirements that the Consumer Duty brings to these priority areas. The FCA will use the Senior Managers & Certification Regime to engage directly with accountable individuals on areas of concern.