Global Regulation, Local Solutions Emerging Themes 2020 - Page 31

Two main areas of potential harm
were identified:
The FCA expects manufacturers to have a
product approval process covering design and
review, which considers the value the product
presents for the target market and how the
distribution chain affects value. By “value” the
FCA means cost to the customer and compared
to quality of both the product and services.
The FCA expects distributors to be able to
identify signs that a product is not delivering its
expected value through direct interactions with
customers, assessments of customers’ demands
and needs, analysis of claims and complaints
and referencing FCA published data on value
measures in general insurance.
Firms should use their own customer research,
claims and complaints data and external
information like analysis of competitor products,
to assess value at the design stage. They
Where they identify that a product is
detrimental they are expected to amend
distribution, for example, by stopping the use
of particular distribution methods, reducing the
amount of remuneration they receive or ceasing
to distribute the product.
Price and quality

Sub-standard or low quality products

Excessive fees and charges affecting
customer value.
Sales and customer service

Sales of unsuitable products not consistent
with the customer’s needs

Failure to fulfil obligations to customers,
such as claims handling, promptly and
to the appropriate standard

Unavailability of services, because of
system failures or cyber issues.
According to the FCA, the key causes are:
Purpose and values – firms having business
models and strategies characterised by
a lack of focus on customer outcomes
Poor governance and oversight – failure to
have adequate systems and controls over the
end to end product and service development,
manufacture and delivery chain.
These issues are exacerbated by the increasing
length and complexity of distribution chains.
The FCA seems concerned in particular
that firms do not have sufficient oversight of
unregulated distributors, and are not complying
with their Insurance Distribution Directive
obligations to ensure sales through unregulated
parties meet the required standards. The
FCA comments on the potential for chains
to be influenced by parties who are not FCA
regulated, like large retailers.
The FCA expects manufacturers to
have a product approval process
covering design and review
should consider the difference between the
risk price and the end premium, including
commission received by other parties in the
chain; and, where they can reasonably obtain it,
information on fees charged by those parties.
Where potential poor value is identified, firms
should consider what other information they
can reasonably obtain to determine whether
there is harm to customers. This might include
cost/remuneration information from other
parties in the chain (bearing in mind wider
legal obligations including competition law)
and details of the role of each party, to assess
whether remuneration is justified.
Manufacturers should carry out ongoing
product reviews, and ensure they have
management information to help them
assess product value and the impact of
the distribution chain. Where products are
detrimental to customers, manufacturers
must have processes in place to mitigate and
remediate harm. This may mean withdrawing
the product from the market or significantly
changing the distribution method.
Distributors must understand the manufacturer’s
assessment of the expected value of the
product and ensure that remuneration
arrangements do not erode that value or
conflict with the customer’s best interests rule.
Where there is a conflict (for example because
remuneration bears no reasonable relationship
to the distributor’s costs or workload) the
arrangement must be changed. Unlike other
cases of conflict, disclosure is not sufficient to
address the issue.
Distributors are expected regularly to review
their distribution process to ensure it is not
detrimental to customers, for example, by
reaching customers outside the target market or
to whom it does not provide value. Distributors
must provide manufacturers on request with
appropriate information on the results of their
reviews and with sales information, to support
the manufacturer’s product reviews. They must
also have adequate systems and controls over
delegated activities.
The FCA clearly feels
that firms have not
taken enough action
to address concerns
previously raised
The FCA clearly feels that
firms have not taken enough
action to address concerns
previously raised by it,
including in its 2015 report
on delegated authorities.
The FCA’s finalised guidance
is designed to remove any
ambiguities around its
expectations, and to make
it easier to intervene where
it identifies failings. Firms
should ensure they are ready
to demonstrate that their
design and distribution
processes protect customers
from the potential harms the
FCA identifies.


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