Brokers still have a lot to discuss ahead of implementing the FCA’s proposals on fair value this year, including considerations around commissions
The FCA’s obsession with fair value is most readily associated with individual household and motor policies and the discussion around price walking, where renewal prices are generally increased over time.
But, since the release of the regulator’s September 2020 consultation paper, General insurance pricing practices market study - Consultation on Handbook changes, it has become clear that SME business is also far from immune when it comes to value-related changes.
The regulator is determined to spare general insurance buyers from being sold anything constituting poor value - the proposals in the aforementioned governance paper affect all but the largest risks.
This represents an expansion of the current Product Intervention and Product Governance Sourcebook (PROD) rules, which were originally only for new products launched or significantly changed since October 2018. These didn’t include any specific fair value requirement.
Michael Sicsic, managing director of financial services risk and regulatory consultancy Sicsic Advisory, told Insurance Times: “Because the price walking ban proposals were contained in the same consultation document, the ramifications for all other products and SME insurance were perhaps eclipsed by them in public discussions.
“But the proposals would broaden product governance rules to include a fair value assessment for all products, including business insurance sold to SMEs and extending to core products, add-ons and premium finance.”
Sicsic is adamant that fair value, which the FCA defines as the relationship between the price paid by the customer and the quality of that product, is “a topic here to stay”.
Compliance and commission clarity
So, brokers need to ensure they have processes in place to meet obligations that will begin as early as the end of this September.
David Sparkes, head of compliance and training at Biba, said: “As with most changes, senior leadership within brokers need to find time to meet and agree how to implement these requirements.
“No exact penalties for non-compliance have been announced yet, but we are commonly seeing the FCA exercising a mixture of fines and restitution to the customer.”
The most onerous demands listed in the FCA’s proposals, which must be complied with from 31 December 2021, apply to product manufacturers – these businesses will have to undertake and document their assessments of fair value so that the regulator can compare measures.
Branko Bjelobaba, principal of insurance compliance consultancy Branko, explained: “The proposed pricing and automatic renewal regulations are more aimed at larger brokers who are typically involved in the manufacture and design of products.
“They need to look at covers from the perspective of whether they actually provide the identified target market with what it wants in terms of cover and value.”
But even smaller brokers will have to comply with the regulator’s requirements from 30 September 2021, to ensure that distributors understand the value assessments undertaken by manufacturers.
They must consider the impact that the total distribution strategy and process, including any remuneration involved, has on the value of the product.
“Brokers need to make judgements as to whether the overall price and the commission insurers have set represents ultimate fair value for customers,” continued Bjelobaba.
“Even the smallest brokers should have a real think about how commensurate commission levels are and only sell those products where they think the commission is reasonable.
“They need to be aware of everyone in the distribution chain and what they get their commission for because the FCA is concerned with unnecessary elongated chains where everyone gets a slice, but [this] does not necessarily add any value to the end customer.”
Avoiding selling poor-value products could be particularly difficult if these are for very niche covers, with no alternatives. But, in such cases, brokers who continue to sell these products must at least be transparent and point out to the client that they have not been able to meet that particular need.
Smaller brokers will also need to provide any supporting information that manufacturers require in their product reviews.
This could range from their average fee, if they make charges on top of the premiums quoted by the insurer, to the number of customer complaints they get about a product.
Experts stress that the FCA’s implementation dates here were virtually set in stone in March 2021.
Although an official policy statement is due to be published at the end of May – still forthcoming at the time of writing – this is expected to confirm what the industry already knows about the proposals.
Sparkes said: “From what we are hearing so far, I’ll be very surprised if there are any major changes. All the policy statement is likely to do is provide exact wordings to already known outcomes.”
Research published in the 2020 Biba Manifesto showed that more than one in four full-time equivalent staff in small brokers are already being employed to attend to regulatory requirements.
So, not surprisingly, the broking community feels it has quite enough on its plate without these additional requirements.
Stuart Williams, client director at broker Konsileo, added: “The FCA proposals have the potential to increase brokers’ costs and rising regulatory costs invariably increases prices to the end customer, which would seem to go against the objective of treating customers fairly.
“So, while ethical business process is to be applauded and helps with sorely needed brand building, this can’t be to the detriment of the customer.
“Overall, there should be an aim to reduce the cost of regulation without impact to the end customer.”
Proposals of concrete remedies to this cost conundrum are not forthcoming, however. Declaring something to be broken is one thing, but deciding how to fix it is quite another.