The FCA (Financial Conduct Authority) has set out its expectations regarding the distribution of insurance products. Details of their expectations can be found by reviewing the FG 19/5 The GI distribution chain: Guidance for insurance product manufacturers and distributors and the FG19/2 Senior Managers and Certification Regime: Guidance on statements of responsibilities and Responsibilities Maps for FCA firms.
The FCA are a principle-based regulator and as such have not stated specifically what Firms must do, particularly regarding their retail pricing strategy and their margin. However, they have given Firms some direction and inferred by referencing similar situations and practices, particularly using the Plevin court decision as an example.
Many product providers/manufactures have already reacted to the FCA’s comments and activity. We have seen numerous providers enhancing their products, while others have introduced a maximum retail price and as a result capping the Dealer Margin.
This activity has had a significant impact on the Ancillary product market. Some Dealers have reacted by incorporating the cost of distribution into the retail price allowing them to stretch their margin. This activity has not been tested by the Regulator … yet!
Over recent months we have seen other strategies being proposed into the marketplace. Products that have traditionally been Insurance-based are being dressed-up and offered by product manufactures to reduce the regulatory burden and to potentially avoid FCA scrutiny to Dealers. These derivatives are often being defined as “maintenance “contracts, offering similar benefits to the consumer but potentially do not offer the same degree of consumer protection.
It must be assumed or at least anticipated that the Providers offering these contracts have taken legal advice to confirm the status of these arrangements.
In any event it may be a mistake to assume that, even with legal opinion that the FCA would accept or concede that these arrangements fall out of their scope!
There are potentially 3 areas to consider:
Legal status of the product – Providers of these options are offering Dealers their assurance that Maintenance Contacts (or similar) will if necessary, pass the test and be declared as “out of scope” by the FCA and be treated as a non-regulated arrangement. It is worth mentioning that the FCA, as defined in the Insurance Distribution Directive requires Firms (including Dealers) to conduct their own Product Due Diligence. This would include the status of the contract; this due diligence must be documented and be available to the FCA on request.
Product structure – Is another aspect Dealers should consider, the economics of the contract are worth considering. A sample premium reviewed sets the net to Dealer Price at being £150 for a 36-month arrangement. These types of contracts typically allow between 4 and 6 claims per year, therefore potentially 15+ claims in the life cycle of the arrangement. It is difficult to see in these scenarios how claims can be sustained.
A quick calculation might suggest that these “schemes” run into trouble if 25% of customers claim at 50% of the maximum claim frequency. Arguably claims may be less frequent, however care should be taken. These arrangements are not bound by solvency requirements or by regulatory finance reporting, this could potentially result in the retailer being held responsible for future expenditure should the Provider fail.
Another aspect relates to the selling Dealer also completing the repairs. Potentially this may provoke a conflict of interest, it should be apparent who the Dealer is working for, the customer might want to know.
Firm Risk – As mentioned above, Providers are offering this arrangement with the benefit of little or no regulatory burden. If the legal advice is sound and robust and assuming the FCA deem the arrangement to be out of scope, there are potentially other implications. The FCA could judge a Firms decision to take this route as questionable, most Dealers will be authorised by the FCA for other activities such as consumer credit. It is possible that the regulator may view a Firms decision to use these products as an attempt to avoid or navigate around their TCF (Treating Customers Fairly) objectives and/or their intention to reduce potential consumer harm. If matters where to escalate, a Firms compliance to the FCA ‘s Principles of Business may be questioned.
All Firms are required to comply with the FCA ‘s Principles of Business:
- Integrity – A firm must conduct its business with integrity.
- Skill, care and diligence – A firm must conduct its business with due skill, care and diligence.
- Management and control – A firm must take reasonable care to organise and control its affairs responsibly and effectively.
- Financial prudence – A firm must maintain adequate financial resources.
- Market conduct – A firm must observe proper standards of market conduct.
- Customers’ interests – A firm must pay due regard to the interests of its customers and treat them fairly.
- Communications with clients – A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and accurate.
- Conflicts of interest – A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
- Customers: relationships of trust – A firm must take reasonable care to ensure the suitability of its advice and discretionary
decisions for any customer who is entitled to rely upon its judgment.
- Clients’ assets – A firm must arrange adequate protection for clients’ assets when it is responsible for them.
- Relations with regulators – A firm must deal with its regulators in an open and cooperative way, and must disclose to the regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice.
This note is designed to highlight key issues and factors that should be factored into any decision a Firm may choose to make. Some of the Providers are presenting a diluted picture of the issues. Others have suggested that not only can Firms avoid the requirements of the FCA, but also the FOS (Financial Ombudsman Service), claiming that complaints would be referred to the OFT (Office of Fair Trading), which is interesting as the OFT ceased to be a Government body in 2014…. Firms should consider carefully before proceeding.