The Financial Conduct Authority (FCA) has published its Thematic Review, considering implementation of PROD (the FCA’s Product Intervention and Product Governance Sourcebook) rules with notably increased scrutiny, following Consumer Duty implementation and the cost of living crisis. In particular, the FCA has considered whether general insurers and pure protection insurers are meeting the Handbook requirements in PROD 1.4 and PROD 4.
The Review supersedes its Dear CEO letter published in February of this year and has taken data from 28 manufacturers and 39 distributors, looking at 10 different products.
Key findings for manufacturers
The FCA saw deficiencies in product governance frameworks, which made it difficult for firms to evidence that their products offered fair value to customers. They also found deficiencies in the fair value assessments (FVAs), with firms not considering:
- the total price that a customer pays,
- the impact of remuneration on the value of the product,
- the quality of their management information (MI), to enable them to monitor distributors’ remuneration,
- their ability to demonstrate how the products provide fair value, including how the products performed for vulnerable customers.
It also found target market statements to be insufficiently granular, creating risks that customers are being sold products that do not meet their needs.
Additionally, concerns were raised where more than one firm was involved in the manufacture of a product, with firms not fully understanding their responsibilities under PROD 4.2.
Examples of good practice for manufacturers was highlighted, as follows:
- Robust product approval processes overseen by the Board and where senior managers provided real challenge.
- Businesses being fully involved in FVAs that reached clear, well-evidenced conclusions and identified any problems.
- Appropriate monitoring, including the use of high-quality MI, to ensure products continue to provide fair value, customers are getting good outcomes and to identify any potential problems.
- Prompt escalation and action where problems were identified, including changing or withdrawing products.
- Timely sharing of appropriate product information with distributors.
Key findings for distributors
The FCA identified deficiencies in firms understanding of their responsibilities under PROD 4.3. Particularly, it notes governance structures being in place but with limited lines of responsibility being identified, or evidence for decision making. It goes on to highlight a lack of evidence of actions taken, even where value problems have been identified. Additionally, it saw distribution strategies with insufficient detail, target markets improperly being identified and insufficient thought given to the impact of remuneration on the value of a product. Importantly, the FCA notes a lack of communication between distributors and manufacturers, to enable distributors to fully understand the value of a product.
In many cases the FCA concluded that there was insufficient MI to assess the impact of:
- remuneration (with instances of remuneration that bore no relation to the value of the service being offered)
- the distributor’s costs and
- the benefit of the service, on value.
The report also highlights examples of where firms are getting things right:
- Robust governance processes around product distribution arrangements, with appropriate business input and senior management oversight and challenge.
- Effective processes and mechanisms to get information from, and share information with, manufacturers.
- Producing complete and sufficiently detailed product distribution arrangements, including distribution strategy, target market, remuneration and the product’s intended value.
- Having appropriate MI and robust analysis of the firm’s own costs and the benefits and services to customers.
A warning comes in the report, where the FCA clearly sets out its intention to follow up on the failings it has found, stating:
Firms who still fail to fully meet their obligations in this area, and who cannot demonstrate that they are delivering fair value consistently, can expect us to intervene using the full range of our regulatory tools.
What are the FCA’s expectations, following this review?
The FCA’s review makes it clear that, whilst most firms have updated their policies, there is, in too many instances no evidence that those policies are being implemented robustly and with appropriate levels of challenge in practice. In line with its pledge to be a data driven regulator, it wants to see assertions of compliance backed up with evidence.
For manufacturers, this centres on effective FVAs. These should:
- provide robust oversight and challenge when considering the value of their products
- be supported by appropriate MI and analysis
- reach clear and appropriate judgments on a product’s value supported by robust evidence
- proactively identify where there are value problems and act on them to manage and remediate harm.
For distributors, the FCA wants to see firms:
- acting consistently with the manufacturer’s distribution strategy and only distribute products to customers in the identified target market.
- appropriately assess the impact of their activities and remuneration on the distribution strategy and product value.
- identify distribution or value problems which present a risk of harm to customers and act promptly to address these.
The FCA has highlighted concerns around customer harm from products being distributed to those outside the target market or where the distributor’s activities and remuneration adversely impact the value of the product.
How can we help?
If you have concerns around compliance with the PROD rules, FVAs or want to understand what you should be talking to your manufacturing or distribution partners about, please contact our Financial Services team.
