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Analysis of the Latest FCA Updates by Phil Lewis

Don’t you know? They’re talking about a regulation…

It’s not quite the Tracy Chapman hit single, but the point still stands. As always, the FCA’s recent updates are the hot topic of conversation throughout the financial services sphere.

In August, the regulator published the latest in a series of consistent updates and analyses, which addresses several themes and concerns in the eyes of the FCA.

How has the FCA’s approach to assessing “value” in financial products evolved from 2014 to the implementation of the Consumer Duty in 2023?

There’s been an evolution of sorts since the initial idea of ‘value’ was introduced in 2014 as part of the FCA’s market study into GI add-on products.

The regulator declared they ‘remained committed’ to introducing a ‘measure of value’ for GI products. This initially proposed the value of products could be measured by the claims ratio – the proportion of premiums paid back to policyholders in claims.

There was significant push-back from the industry, however, stating there was more complexity involved with value, that things aren’t as simple as one set of figures.

Several years and a few pilot exercises later, and this complexity has taken the form of ‘fair value’ under what we now know as Consumer Duty.

The FCA now defines fair value as the price a customer pays for a product or service being reasonable in comparison to the benefits they receive.

The complexity of value in relation to the claims ratio may have been understated, but these figures would play a key role in the regulations to come.

What are the key challenges in defining and measuring “fair value” in the context of General Insurance products?

The answer above quotes the FCA’s definition of fair value, which is very high-level. 

The FCA has said, essentially, that firms have to work out what fair value means for themselves in line with that high-level definition, although feedback to the industry so far suggests most firms aren’t doing what the FCA expects.  

Of course, ‘poor value’ isn’t the aim for most firms, but proving your product offers fair value is a different kettle of fish, conceptually.

Without specific guidance, firms have to figure out their own measures to prove they provide fair value.

How does the FCA’s CP24/16 consultation paper propose to assess the quality of service for pension products, and which aspects could be relevant to the General Insurance market?

CP24/16 proposes a value framework for pension products. This series of measurements can be used to ‘prove’ fair value. 

This is a very detailed framework, although crucially it doesn’t contain a line in the sand between what scores are ‘good’ and which are ‘bad’.

I personally think this is a great starting point, given identifying correct data items is the initial challenge the industry must face.

Many points in this paper specifically addresses pension providers, but several chapters will catch the attention of insurers and brokers. Some of the relevant data points to the General Insurance market are below:

• Frequency of customer data reviews/updates
• Promptness and accuracy of transactions
• Customer satisfaction
• The level of use of apps and online portals by customers

Why might the introduction of a standardised customer satisfaction survey be seen as controversial by some firms, and what potential implications could it have?

As part of CP24/16, the FCA has proposed customer satisfaction should be measured by a standardised customer satisfaction survey, to ensure that comparisons between firms is fair.   

My take? I think a standardised survey risks turning something that is often a useful information-gathering exercise for firms into another regulatory process. this may come with costs attached, depending on the capability of these surveying firms.

What is the significance of the FCA’s focus on the promptness and accuracy of transactions in assessing service quality, and what metrics could be relevant for General Insurance?

The promptness and accuracy of transactions is the key measure of quality of service in CP24/16.

Despite the clear aims in this paper towards the pensions market, I think the GI industry could start to think about what transactions are most important to a policyholder.

Claims resolution time would be one fairly obvious example, but there will be others.  

How might the proposed requirements in CP24/16 for pension products eventually influence regulations in the General Insurance market?

I think we are likely to see a ‘trickle down’ effect from the pensions framework, if it’s adopted by the industry. By that, I mean that we are likely to see the same broad concepts applied to a General Insurance product, it’s just that some of the specific data items will be different.

How do you think firms and individuals have adjusted to Consumer Duty since its introduction last summer?

Judging by the firms we’ve spoken to, a huge amount of work has been done on it – I think this is something the FCA has also acknowledged. The FCA is however, not particularly satisfied with the results of that work.

The FCA’s latest report shows that many firms are not meeting their product governance standards. What are the key reasons behind for this, and how can firms address them?

Whilst the FCA has acknowledged the effort put in by many firms, there is a clear dissatisfaction with what they’ve seen in their testing so far.

There are a few things they have expressed discontent with, particularly when it comes to product governance:

• Governing bodies (for example, Boards) have not been involved enough in the product governance process
• Some firms hadn’t carried out a fair value assessment, and many of those who had provided very limited information in support of their FVA
• The FCA has expressed some concerns about percentage-based commission, and how it could affect value over the long term. In most instances, product manufacturers hadn’t provided any justification for the amount of remuneration paid to distributors.
• Distributors also largely failed to articulate the value they provide in return for their remuneration
• Very few target market statements fully met the FCA’s expectations, often due to inaccuracies or oversights

The report indicates that many firms struggled with Fair Value Assessments. What are the most common mistakes firms make with FVAs, and how can they improve their processes to meet FCA expectations?

The big issue with fair value assessments seems to be the lack of information that sits behind them.

I think the FCA is expecting quite a bit of detailed MI to sit behind the fair value assessments, and most firms appear to have produced them with only very high-level information sitting behind them. As a result, most firms could not ‘evidence’ that their products offered fair value.

With the FCA expressing clear disappointment, what immediate actions should firms take to align with regulatory standards? Are there specific areas they should focus on first?

I think firms, brokers particularly, should really focus on articulating the value that their services add. And once they have done that, they should go and seek MI that supports that value. The critical thing then is to act if their MI shows them that they may not be adding the value that they expect. I suspect that most firms, brokers in particular, can express the value that they add, they just haven’t put it down on paper yet.

What can firms expect from the FCA in terms of potential future regulatory changes and requirements? How should firms prepare for these developments?

The latest feedback from the FCA shows a regulator running out of patience with the industry. 

Many firms, especially smaller firms, are calling out for a bit more detail to help them get it right. I’m not sure this is coming straight away for the GI sector, but I do think the fair value framework that has been proposed for the pensions sector will trickle down to the GI sector eventually. 

Until that happens, I suspect we will get more feedback from the regulator which will hopefully provide some more guidance about how firms can get closer to the FCA’s expectations. 

To read more useful pieces such as this, see the rest of our blog!