Briefing: Is the FCA misunderstanding insurance fundamentals?

By Stuart Reid

I try really hard to avoid writing about regulation in these columns, but it is impossible to avoid the implications of what has been such mighty change in our industry in recent years.

As if it’s not enough to have suffered recent issues over property insurance – and let’s be honest, it’s not like that particular issue was unknown – to then add the saga of guaranteed asset protection (Gap) insurance and the current consultation underway with premium finance providers, we now have a massive scandal looming on motor finance.

On 21 November 2024, the FCA launched a consultation on its proposals to make further temporary changes to how firms handle motor finance complaints when they involve a commission arrangement.

The consultation followed new rules introduced in January 2024, which gave an extended time frame for firms to respond to motor finance complaints that included a discretionary commission arrangement (DCA) between the lender and broker of the loan.

However, after an October 2024 judgment in the Court of Appeal regarding motor finance commissions, the FCA is now “consulting on similar rules for complaints about motor finance agreements where there was a commission arrangement other than a DCA”.

Tarred with the same brush

Like Gap, the predominant issue here will be with car dealers, but the implications across our industry are huge.

Some commentators put the bill for redress at a figure way above the £50bn that payment protection insurance (PPI) cost the industry.

If you’re asking what that has to do with you, this situation involves the financial services sector, so any hope of lighter touch regulation across the board starts to ebb away as issues like this continue to crop up.

In November 2024, Which? reported that “one in four home claims are being rejected” and that customers face “long and difficult battles” just to get their claims paid.

Furthermore, the number of customers with building insurance going to the Financial Ombudsman Service (FOS) is at its highest level for five years, with more complaints being upheld (40%) too.

However, reputational issues do not just concern industry participants.

A damning report published by the Investment Fraud and Fairer Financial Services All Party Parliamentary Group on 26 November 2024, described the FCA as “complacent, conflicted and captured”.

A contributor to the report, Lord Sikka, went as far as to say that the FCA is “a regulator that I have been convinced for quite some time [is] not fit for purpose”. Harsh words indeed.

Regulatory misunderstandings

From a personal standpoint, it has been heartening to see the FCA listen and take time to review how it could streamline its regulation, with senior figures making a concerted effort to meet with brokers of all shapes and sizes directly.

But, that said, there still seem to be fundamental points that appear to be misunderstood.

Take commission. I have heard from the regulator many times – and as recently as November 2024 – that the principle of a premium doubling and so too the commission, for similar amounts of work, does not sit well.

There is so much to say in defence of this position, but let me keep it brief.

In a hard market, premiums go up and so do commissions – due to being a percentage of the premium. But it is also obvious that in a soft market, the opposite is true.

While redress of this ‘unfairness’ has not yet been vocalised, to embroil the regulator in levelling this difference or doing away with commission completely would have massive implications.

One other issue that has been discussed recently is that of a balanced portfolio or portfolio pricing.

We all know that insurers need to have a balanced portfolio – some lines make profit and others, less so. Those books that perform well help those that do not.

To drive fair value really hard on those profitable lines, without an eye to insurers’ total portfolio, could run the risk that more unprofitable lines will have to seek cover elsewhere, inevitably leading to higher prices or no cover at all.

This is a much bigger issue than many realise and could lead to an outcome no one wants.

It has been a bruising time reputationally for the insurance sector of late and big issues remain unresolved – but there is always going to be noise in any industry as large and as important as ours.

However, you better buckle up. It looks like 2025 is going to be very loud indeed.