Briefing: FCA must ‘up the ante’ on GI pricing reform to combat ‘very slow’ industry engagement

By Editor Katie Scott

Well, the FCA has only gone and said what a lot of industry commentators were already thinking.

Putting the feelers out ahead of the first implementation deadline for its general insurance pricing reform, the regulator found that “many firms are likely to be unprepared to meet new enhanced rules on product governance, which come into force on 1 October 2021”.

This insight was gathered from the FCA’s multi-firm review, the findings of which it published yesterday (25 August 2021).

Sicsic Advisory managing director Michael Sicsic explained that this constituted of “a mini thematic review across around 20 firms, to assess what firms have done in terms of implementation of the Covid-19 guidelines around product value and, more generally, a ‘state of the nation’ in terms of product governance and compliance with existing rules and guidance in terms of remuneration and product value”.

He added that the review was very much “a readiness checker for the enhanced product fair value requirements that will be implemented under PS 21/5 from 1 October”.

However, the regulator does not appear best pleased with its review results – it revealed that some firms still have “shortcomings” in their progress plans to meet the regulatory deadlines, which is a “concern”.

Sicsic told me that the FCA’s review should act as “a strong call to action for firms, as there are only five weeks to go until the new rules on general insurance (GI) product fair value assessments come into force”.

He continued: “Any firms that do not yet have a clear action plan in place should be taking immediate action on rectifying this, as the FCA is providing a clear message that this is the last warning.

“The FCA makes it clear that it will be taking a more interventionist approach on product value in the GI market, including removing products from sale where this is deemed necessary.

“This represents a significant shift in the FCA’s approach and provides evidence of the commitments made by the new [chief executive] in [its] latest business plan about being a more assertive regulator.”

Sarah Brook, a senior associate in law firm CMS’ financial services team, agreed with Sicsic’s perspective.

She said: “This is a final warning for some firms.

“The FCA has placed a strong emphasis on enhancing customer value in the general insurance sector and has expressed its concern that firms may not be meeting its expectations.

“The regulator is likely to carry out further reviews on compliance with its product value rules and has made numerous threats to take a more interventionist approach where it perceives there to be failures.”

‘Very slow engagement’

For Branko Bjelobaba, principal at GI regulation consultancy Branko, the review indicates “very slow engagement” by the insurance industry – akin to the situation the sector found itself in regarding the business interruption test case – and reveals an attitude that is “simply not conscious as to clients that have been punished by [the] Covid lockdown”.

He believes the “FCA [is] trying and needs to up the ante”.

He told me: “Value assessments had to begin over a year ago - how was the product going to provide value over the Covid lockdown? - and now new, enhanced and onerous, rules start in just over a month – [there are] simply no excuses.

“Most brokers I have spoken to report no contact from insurers [that] are tasked with assessing [the] value of products and how this is demonstrated through distribution and remuneration arrangements. They also say that their software houses and premium lenders are also not engaging.”

Bjelobaba added that “there is no one voice for insurance”, despite his best efforts to educate Chartered Insurance Institute members on the upcoming changes. In his opinion, the “ABI [is] not leading and not all brokers are in Biba, so [they are] clueless [about the changes]”.

“Customers are the only ones that will suffer,” he noted.

The ABI’s response to the review, meanwhile, simply emphasises that insurers are “fully committed to continuing to work with the regulator to ensure change is delivered on time” – this is despite describing said change as “a once in a generation opportunity”.

James Dalton, director of general insurance policy at the ABI, continued: “This is a useful stocktake of firms’ approaches to product value, particularly in the context of Covid-19.

“Since the data was collected for this review, significant work has continued to take place across the industry to meet the enhanced product rules and the new governance rules scheduled to come into force in October and the new pricing rules due to be introduced by January.

“Together, these substantial reforms emanating from the GI pricing practices market study are a once in a generation opportunity to improve customer outcomes across the industry.

“Inevitably, whilst some firms will be more advanced than others in preparing for the new rules, all our members are fully committed to continuing to work with the regulator to ensure change is delivered on time.”

I don’t doubt that the work involved in implementing the FCA’s reform here is massive. The insurers I have spoken to on this – including Aviva, Axa and Zurich – all confirmed the tremendous workload for back-end changes that the reform supplies.

Yet, this work is hardly a surprise. Initially, firms had an even shorter implementation turnaround time before the FCA extended its original timetable back in March.

Whether this extension granted a false sense of security or not, I don’t know, but there is certainly no reason why businesses should be dragging their feet or delaying – especially with the FCA’s threat of regulatory action for “firms that fail to do that work”.

The clock is most definitely ticking – but how closely are firms paying attention to the countdown?