The first batch of changes from the FCA’s pricing reforms are coming into effect at the end of this month, but industry commentators fear brokers won’t be ready

Although brokers and insurers still have until the end of this year to fully implement the most publicised aspects of the FCA’s pricing reforms for the motor and home insurance markets, other areas of compliance relating to the regulator’s changes have a tighter timetable.

By 1 October 2021, firms must ensure they have implemented systems and controls, as well as have product governance frameworks up and running to assess whether insurance products deliver fair value for customers. There is then an additional 12-month period for appraising individual products.

Matt Connell, director of policy and public affairs at the Chartered Insurance Institute (CII), explained: “Brokers need to form a view on whether what is being charged is reasonable and what services are being provided for that charge.

“If you can map across any revenue you are receiving to the value you are adding to the customer, then you are on safe ground.

“If you’re making an honest attempt but not getting it 100% right, you can still show you’ve got the right kind of culture. It’s not necessarily about perfection, but it’s about senior people having the right conversations.”

Pricing model changes and auto-renewal remedies designed to prevent price walking practices and provide easier methods for opting out at renewal must then be in place by 1 January 2022, alongside the ability to adhere to additional reporting requirements.

Rules relating to premium finance disclosure are also scheduled to come into force from the new year, recently switched from the 1 October deadline.

Is the industry ready?

Raluca Boroianu Omura, head of conduct regulation at the ABI, is adamant that insurers will be ready for both deadlines, despite the hefty amount of preparatory work required.

She said: “They have been planning for this challenge for many years and devoting huge resources.

“All the firms we have been talking to have been prioritising this and making sure they get over the line on time.”

For brokers, however, the picture of readiness is less certain - despite the fact that October’s launch date is more relevant for them due to incoming product governance requirements and their involvement in the value chain.

Paula Gaddum, partner at law firm Eversheds Sutherland, described the impending deadline as “a rude awakening for some smaller brokers”.

She continued: “There is no clear information about [the] potential penalties [of not being ready], but I’m expecting the FCA to show zero tolerance as it put down a marker to be more assertive in its business plan this July.”

A particular area of compliance concern is that many brokers appear unaware that new product governance requirements also apply to brokers working in commercial lines, as well as personal lines.

For example, Branko Bjelobaba, principal at insurance compliance consultancy Branko, flagged a distinct lack of commercial brokers that attended the eight talks he conducted on the reforms in July.

Michael Sicsic, managing director of financial services risk and regulatory consultancy Sicsic Advisory, added: “The application is much broader than many people thought.

“The key challenge concerns the information around the value chain. You need to go through the products and pricing and see whether you are happy or not.”

The fact that the final structure of the reforms was only fully finalised in May this year is also throwing up problems – the associated 217-page policy statement, for example, confirmed that the new requirements do not just apply to products manufactured or significantly adapted after 1 October 2018, when rules about acting in the customer’s best interest came into force.

Laura Scarpa, general insurance sub-sector lead at Deloitte UK, explained: “We have noticed that whilst many brokers are compliant with post-2018 products, they are not yet addressing legacy products.

“Quite a lot of effort will be required to change this and their product governance committees only tend to meet quarterly or monthly.

“It’s about having an up-to-date list of all legacy products and working out a logical way of appraising them over the next 12 months.”

Preparing for January

Following industry concerns around the initial four-month implementation deadline proposed by the FCA for launching the entirety of the pricing reforms, the regulator confirmed in March 2021 that it would split the workload across two deadlines – 1 October this year and 1 January 2022.

David Sparkes, head of compliance and training at Biba, said: “Making changes to IT systems to deliver the pricing changes and ensuring they haven’t caused IT problems elsewhere takes time, so the additional three months to do this will be a big help.”

But, there is still plenty of work to do - even brokers that don’t get involved with price setting will still have additional reporting obligations from January 2022.

Sparkes continued: “It is possible that the existing [management information] that firms produce for themselves will not help them in completing the [new] reports, so system changes may be necessary to be ready in time.

“Firms should also be gearing up to explain to customers how auto-renewal of their policy works and how to go about cancelling this feature if they want to. This has to be made clear at new business and renewal.”

Unintended consequences

As a result of the incoming changes, home and motor insurance new business premiums are expected to rise, potentially impacting customers who shop around regularly to attract more competitive prices.

David Robinson, pricing director at Axa UK, said: “Non-standard risks could be particularly impacted.

“An already small market may get even smaller if firms find it too difficult to navigate the challenge of finding an equivalent new business price.”

There is also a danger of not having a level playing field while the changes bed in.

James Hillon, insurance director at KPMG, explained: “In some areas, there may be differences in interpretations of fair value. Firms won’t publish how they think about fair value, so a consensus won’t emerge.

“But it will become fairly clear about what the norm is regarding pricing, so things will settle down after initial volatility.”

Even following the implementation deadlines, however, the work for insurers and brokers will not stop because firms are required to institute at least an annual review of their products.