The FCA's latest review shows that the regulator is clearly disappointed that insurance firms are falling short of their product governance obligations.
While this review falls under the FCA’s PROD 4 rules, and is therefore focused on the insurance sector, the Consumer Duty outcomes for ‘price and value’ and ‘products and services’ mean that product manufacturers and distributors in all sectors should understand the expectations for effective fair value assessments (FVAs).
The report highlights several findings, relating both to the governance process around firms’ product reviews and FVAs, and to the robustness of the assessments themselves. Many of these are interrelated; we identify three of the most important themes below.
One of the core requirements under the PROD 4 rules is for firms to be able to demonstrate that they have assessed whether a product offers fair value, how they've done this, and why they have reached their conclusion.
All of this should be supported by robust evidence. Where part of the assessment makes use of thresholds, limits, appetites or gradings (such as red/amber/green scores), firms should be able to articulate and demonstrate how and why they're confident that these have been correctly calibrated.
In short, the FCA thinks that too few firms are achieving this; as shown by the relatively small number who have amended or withdrawn a product following a review.
Firms must write FVAs with the assumption that an external audience will read them – assume no prior knowledge, and reference all of the supporting evidence and decision-making process within the assessment document.
Selling products only to the correct target market is a fundamental part of delivering fair value. Documented ‘target market statements’ are therefore vital in helping manufacturers and distributors understand who they should, and shouldn't, sell products to.
The FCA has found that too many target market statements aren't sufficiently detailed or granular to effectively serve this purpose. One example is cited from the motor insurance sector, which stated that the target market for a car insurance product was “anyone who owns a car as it’s a legal requirement”.
This is resulting in many distributors seemingly not understanding manufacturers’ target market statements (as evidenced by use of their own statements which differ materially) and the lack of use of target market statements in value assessments to validate whether products are being sold to the current target markets.
Manufacturers should clearly document all aspects of the target market – including sub-groups – and groups not in the target market at a sufficiently granular level and link this back to the objectives and needs of customers.
Distributors should ensure that they have captured an audit trail of obtaining and understanding the target market statement from the manufacturer. If firms are unable to obtain this, or if it isn't sufficiently granular, any decision to continue distributing the product will need to be documented with a robust supporting rationale.
Distribution arrangements are subject to particularly heavy criticism by the FCA from almost all angles. Distribution strategies are often not documented in a way that justifies how and why particular distributors, channels, packaging, and add-on products (including premium finance) deliver fair value. Information sharing between manufacturers and distributors is also, in many cases, not effective enough to support all parties in fulfilling their obligations.
Inevitably, the most significant concerns relate to the levels of remuneration being earned by distributors. The FCA doesn't consider that the FVAs it has reviewed demonstrate a convincing or effective weighing up of the costs incurred, work undertaken, and benefits delivered by firms compared to the payments they receive from customers.
Firms should consider why specific distribution chains and channels are being used, and what value these bring to customers. This should be clearly documented and evidenced at an appropriately granular level.
In June 2024, the FCA published its findings from a multi-firm review of consumer outcomes testing. The summary findings of that review were strikingly similar to those of the PROD 4 Thematic Review, with key limitations to effective monitoring, including metrics and data that weren't comprehensive enough and reliance on thresholds and gradings that weren't supported by an evidence-based rationale.
The FCA set out the following illustration of a 'causal chain' for effective monitoring:
| Clearly defined customer outcomes | A suite of metrics chosen to monitor those outcomes | Identification of poor or potentially poor outcomes | Investigation and, where needed, actions taken | Evaluation of customer outcomes using targeted metrics |
The key factors in this chain are similar to those that should be employed in an effective fair value assessment.
These similarities between two seemingly distinct elements of the Consumer Duty regulations demonstrate the importance of effectively embedding ‘Consumer Duty thinking’. Indeed, the FCA’s latest guide to good and poor practice for fair value assessments explicitly highlights the importance of considering Consumer Duty outcomes holistically.
Firms should ensure that their overall culture and business strategy promote the provision of good customer outcomes, and that they have evidence to demonstrate that this is the case. Tone from the top, critical thinking, and formal challenge from senior management is paramount to achieving compliance with the Consumer Duty.
The FCA has to date focused on two of four outcomes defined within the Duty. However, firms should not ignore their approach to the remaining outcomes, how they demonstrate compliance with these, and the cross-cutting rules that set overarching requirements across all activities.
For more insight and guidance, get in touch with Ben Farmer.
