FCA publishes product oversight and governance thematic review for general insurance and pure protection products

The FCA has recently published its thematic review looking at whether firms in the general insurance and pure protection sectors are meeting their product governance obligations under the rules in the FCA’s Product Governance Sourcebook (PROD 4).

The rules in PROD 4 were revised in 2021, and introduced the requirement for firms to ensure that an insurance product which is within the scope of PROD 4 provides fair value to the customers within that product’s target market.

Summary of Findings

As part of its review, the FCA analysed information from 28 manufacturers and 39 distributors.

The headline is that the FCA found that firms are not doing enough to comply with the PROD 4 rules. For manufacturers, the FCA appears frustrated by what it describes as shortcomings and inconsistencies in how firms approach their product oversight and governance arrangements. Similarly, for

distributors, the FCA noted that some firms have made limited progress

in relation to their understanding of their responsibilities under PROD 4.

Examples in the review of firms failing to comply with the PROD 4 rules included:

1. ineffective product governance frameworks;
2. shortcomings in the quality of fair value assessments;
3. a lack of granularity in target market statements; and
4. insufficient consideration of distribution arrangements.

However, the FCA did recognise that some firms had developed, and implemented, effective frameworks and procedures that were consistent with the PROD 4 rules.

Next Steps

In the review, the FCA indicates that it is disappointed to see firms failing to meet their regulatory obligations under PROD 4, and reminds them that the rules are designed to deliver fair value to customers. The key concern for the FCA is that shortcomings in compliance with PROD 4 create a risk of harm to customers.

The findings in the review echo the FCA’s recent work on the implementation of the Consumer Duty, which found some firms failing to evidence fair value properly, not paying enough attention to distribution strategies and being unable to justify remuneration.

The report warns firms that the FCA will intervene as necessary to address issues and risks arising from non- compliance with the PROD 4 rules.

We have already seen the FCA intervene at a product level to address fair value concerns, including its recent intervention in respect of Guaranteed Asset Protection (GAP) insurance products. Looking ahead, at a market level, we are likely to see the FCA putting pressure on the general insurance and pure protection sectors to improve, possibly by introducing more detailed requirements around product governance and fair value. We might also expect to see a more targeted approach, with the FCA’s frustrations translating into more severe interventions for firms that it considers risk customer harm due to non- compliance with the PROD 4 rules.