Finalised Guidance - FG 19/5 The GI distribution chain
In November 2019 the Financial Conduct Authority (FCA) published its finalised guidance after issuing its draft guidance for consultation in April this year.
WHAT ARE THE CHANGES?
The underlying requirements aren’t new but the guidance clarifies the FCA’s expectations following its thematic work and the Insurance Distribution Directive coming into force.
The guidance itself hasn’t changed significantly. It was accompanied by a summary of feedback, which outlines the main changes. These were for:
- Clarification of the application of the guidance to all GI products (including Private Medical Insurance and Legal Expenses Insurance) and pure protection products that are in scope of the underlying rules;
- The meaning of product value;
- Manufacturers oversight of distribution arrangements; including information that should be obtained; and
- Distributors’ obligations to provide relevant sales information when requested by manufacturers.
| Product value = Interaction between the overall costs to the end customer and the quality of the product and services. Includes compatibility with the objectives, interests and characteristics of the target market, as well as the cost and charges of the product itself. Product quality can include a range of benefits like the level of cover, how claims are handled or other services as part of the provision of the product (without separate charging arrangements). |
WHAT ARE THE EXPECTATIONS FOR FIRMS?
MANUFACTURERS | DISTRIBUTORS |
Product Approval Process Considering value for the target market and how the distribution chain affects overall value including:
Evidencing appropriately considerations and conclusions. Making changes to the product or distribution strategy to prevent harm. | Distribution Strategy and Remuneration Ensuring remuneration does not conflict with the customer’s best interest rule. Monitoring products offered and distribution arrangements on an ongoing basis. Identifying signs of customer harm due to value through:
Informing the manufacturer of any customer harm identified. Amending the way a product is distributed where necessary e.g. stopping using a certain distribution method, reducing remuneration or ceasing to distribute. Providing the manufacturer with sales information when requested, including information on regular reviews of product distribution arrangements. |
Product Design Process Using data and information available to assess product value:
Looking at the difference in risk premium and the end price as an indication of value. Where distributor remuneration appears disproportionate for their benefits/services further information should be obtained. This applies if the differential results from a single firm or multiple firms in the distribution arrangement. | Remuneration Having awareness of the broad definition covering commission, profit share, fees and all other economic or non-economic benefits, whether included in total premium or paid separately by the customer. Identifying conflicts where:
These points apply where offering a single product, or a range of products, from a single provider where it could be better for the customer not to buy a product offered. Considering fees payable after customer is tied into a contract (admin fees for mid-term adjustments). Ensuring the method for determining different levels of fees to customers is fair. Demonstrating or evidencing how fees charged can be explained or rationalised. Amending remuneration arrangements if there is a conflict with the customer’s best interests rule. The FCA emphasised that disclosure cannot be relied upon. |
Product Distribution Strategy Considering consistency with the identified target market and the role of each party in the distribution chain. Ensuring obligations are met when activities are delegated by having adequate systems and controls; including, Management Information (MI) and processes to monitor value. | |
Product Review Process Using sufficient good quality MI to consider value and the impact of the distribution chain. Responding appropriately when there is an indication of customer harm. Having processes for corrective action where customer detriment is identified, for example by:
| Distribution Process Ensuring the product manufacturer’s assessment of product value is understood. Regularly reviewing the distribution process to ensure it is in line with intended target market and not adversely affecting customers. Using sufficient, good quality MI to understand value provided by the distribution process. Considering whether distribution processes risk customer harm e.g. by reaching customers outside of the target market. Ensuring obligations are met when activities are delegated by having adequate systems and controls; including, MI and processes to monitor value. |
WHAT DO YOU NEED TO DO?
- Familiarise yourself with the guidance and the applicable Handbook provisions that sit behind it.
- Apply the applicable expectations and considerations to your firm to identify any gaps or weaknesses that need to be addressed:
- Document and implement product design, approval and review policies and procedures in accordance with the guidance;
- Document and implement remuneration and distribution strategies, policies and procedures in accordance with the guidance;
- Identify activities delegated and ensure adequate systems and controls are in place allow you to meet your regulatory obligations;
- Ensure your MI enables you to monitor product value; and
- Identify any areas of customer harm and take appropriate action.
- Appropriately demonstrate or evidence the work you have completed and any decisions made.
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