Insurers warned on FCA’s “fair value” requirements

Insurers are once again in the Financial Conduct Authority (FCA)’s sights with the regulator introducing new steps to stop consumers being penalised for loyalty to their existing motor and home insurance providers.

The financial services regulator has been concerned that many insurance firms increase prices for existing customers each year at renewal – a practice known as price walking. In May, the FCA published a collection of new pricing practices rules for insurers and insurance distributors designed to stamp out price walking and set out best-practice guidance for firms.

The Insurer asks Polly James, global co-leader of the financial services disputes and investigations practice group at Bryan Cave Leighton Paisner, for her analysis of the new requirements.

James said the “most problematic” new rules released by the FCA are the more “onerous and opaque” requirements upon insurers and their distributors to ensure customers – both retail and commercial – get fair value for money.

“These product governance rules have come in under the radar, hidden away in the back of an appendix to a consultation that appeared to be about pricing issues, and firms need to consider carefully how to update their policies and procedures in order to comply,” she explained.

The FCA recently confirmed plans to force home and motor insurers and their distributors to offer new and existing customers the same price from January to prevent long-standing customers being penalised when renewing cover.

The reforms – first announced in September last year – are designed to address issues identified in the FCA’s 2020 market study, which found that millions of home and motor insurance customers lose out if they renew repeatedly with their current providers.

The study revealed six million loyal policyholders would have saved £1.2bn over 2018 had they paid the average price for their actual risk.

The changes include a ban on so-called price walking or dual pricing. Under the rules, new and existing customers would be charged the same for home and motor insurance products.

In addition to the new rules on pricing for home and motor insurance, the FCA will also require insurers to do more to consider how they offer fair value to customers across all of their business lines, and will require insurance firms to report value metrics data to the regulator, some of which will be published to enable potential consumers to compare value metrics across the market. In addition, home and motor insurers will have to submit more detailed pricing reports (which will not be published) to the FCA, so that it can supervise value in the home and motor insurance market more effectively.

While most headlines have focused on the new price walking prohibition and the cancellation of auto-renewing policies, James says less focus has been given to the proposed new rules on product governance.

She said it is “very important” for firms to be aware of the “significant” new binding rules and detailed evidential provisions announced by the FCA around fair value.

“Our view is that these new requirements are among the most significant regulatory changes contained in this new rule-set,” James added (The Insurer emphasis).

James said the new rules would require an insurer selling a policy as part of a packaged product – such as travel insurance provided alongside a credit card – to assess the value that the insurance product is providing to the customer and also to assess the value of the entire package (excluding any additional insurance components underwritten by other carriers).

“It is unlikely that an insurer will have any concept of what a retail banking customer thinks is or isn’t good value from a retail banking product. Yet these rules are asking an insurer to have a considered view on the entire package,” James explained.

Insurers will already have developed product governance frameworks, but James says these processes may no longer be sufficient to meet the FCA’s demands.

The FCA has taken a policy decision to apply its new fair value governance rules to both retail and commercial lines, explaining in its policy statement that “we do not propose to exclude other commercial non-investment insurance products from the scope of the PROD requirements, as we consider value to be equally important and relevant to these products”.

The regulator has already outlined a list of the factors that “must” be considered by firms when assessing whether a product provides fair value for money to a customer.

However, James said the current list includes such “vague concepts” as “the type and quality of services provided to customers” and requires a complex consideration of whether the price is appropriate.

“In my mind, the big new entry to that list is distributor remuneration,” James added, noting that FCA concerns over the impact of intermediary remuneration on customer value for money has been “baking for some time”.

“Value for money is something that the FCA has been mulling over for a while. You see it in the new consumer duty that the FCA is consulting on at the moment; that has huge overlap with these new insurance rules,” she continued.

These new binding rules introduced for insurers and intermediaries are framed in such a way as to be difficult to disagree with in principle, but also difficult to implement in practice, James warned.

“These are rules, they are enforceable and firms and senior managers can be fined if they get it wrong,” James said.

“In view of the complex and somewhat abstract new rules and evidential provisions published (which come into force from 1 October 2021), our advice to insurers is to get started as soon as possible with reviewing and updating your product governance policies and procedures for both consumer and commercial lines, to ensure you can evidence your ‘fair value’ assessments,” James concluded.

Polly James is global co-leader of the financial services disputes and investigations practice group at Bryan Cave Leighton Paisner.

Her practice covers contentious and non-contentious regulatory issues in the financial services sector and cross-border investigations. She has a wealth of experience acting on substantial and complex cases for a wide range of clients, including a number of international insurers, intermediaries and members of their senior management.