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Subject area: Insurance

Re-start: the FCA sets out its stall for the forthcoming months and into 2021

Timothy Goodger

First published by Elborne Mitchell LLP,, 9 September 2020

It was only going to be a matter of time before the FCA returned to focus on the main issue of the day, being the protection of the consumer. The FCA’s Dear CEO letter dated 4 September 2020 has not failed to disappoint and has neatly swept up topics which regulated firms likely have not focused on during the Covid-19 crisis, as well as a few resulting from it. Understandably, the FCA is asking firms to focus on risks to consumers or markets and how they might be reduced.

This Dear CEO letter appears to be the starting gun for re-shaping the FCA’s approach to regulation and intervention. It intends to focus on different portfolios or business types to monitor firms effectively and target those firms that pose the greatest risk of harm. This suggests that the FCA will be gathering more information from firms in the forthcoming months and actively monitoring indicators as well as testing risks at particular firms. The FCA’s intention is clear when it states: “Where we conclude that firms, and/or individuals are not meeting our expectations, we will act”.

Although the letter is directed at General Insurance intermediaries serving retail and/or commercial customers, and Loss Assessors and firms for which broking of insurance products is ancillary to their primary business, the points made hold good for many intermediaries.

Although the FCA remains focused on resilience (and orderly wind-down for firms exiting the market) in the context of Covid-19, the letter serves as notice on intermediaries to redouble their efforts to consider carefully their distribution chains and the roles of entities within them. It focuses on the need for robust governance and controls to ensure good outcomes for customers, the required oversight of businesses, the use of incentive arrangements and business models which may provide poor control over sales and renewals, as well as conflicts of interest. In this regard, the FCA singles out Appointed Representatives as an example of where risks arise.

The FCA remains concerned about customers being sold (or rather mis-sold) unsuitable or poor value products as well as the use of inappropriate sales tactics. It states that customers should receive sufficient, clear information at the point of sale and the need for a firm to have healthy cultures and behaviours embedded throughout an organisation – the key message being governance and oversight arrangements are the drivers for change.

Whilst acknowledging firms that have placed customers at the heart of their business model during the Covid-19 crisis will prosper and emerge from the crisis in a positive position, the FCA notes other firms have struggled. The FCA points to a risk that a number of firms may fail due to shortfalls in staffing or capital, and it sets out key messages in its prior publications regarding financial resilience. These include firms:

  • planning ahead and ensuring the sound management of financial resources, meaning conserving capital and planning how to meet potential demands on liquidity.
  • planning ahead to achieve an orderly exit from the market whilst taking steps to reduce harm to both consumers and the market. The FCA refers to a requirement for firms to maintain an up-to-date wind-down plan that takes into consideration the current market impact of Covid-19 and the on-going need to abide by the FCA’s Rules and Principles.
  • contacting the FCA (or its named FCA supervisor) if a firm is concerned it will be unable to meet its capital requirements, its debts as they fall due, or if its wind-down plan has identified material execution risks.


A firm’s winding down must include the orderly continued provision of services to customers such as:

  • transferring customers to another regulated firm; or
  • by arranging for ongoing, routine servicing and the renewal of policies to be handled by another party in the distribution chain e.g. the insurer itself.


Issues with the distribution chain

Unsurprisingly, the FCA lays much store by good governance and oversight, focusing on the Senior Managers & Certification Regime (SM&CR) to achieve that. The FCA refers to:

  • the accountability and responsibility for activities.
  • the appropriate channels of escalation.
  • a robust risk framework which identifies key risks of harm, monitored and mitigated by accountable individuals.
  • the important role of a strong and independent Board for oversight and challenge.


The letter serves as a warning of the FCA’s intention to review how firms have implemented and embedded the SM&CR. This will include a review of how firms have identified, assigned and documented senior managers’ responsibilities. It will look to senior managers to “both take reasonable steps to prevent issues and potential harm and also to act quickly and effectively to address and remediate when things go wrong”. Also, it expects firms to have a rigorous and robust process for the certification of staff as being fit and proper to perform their roles.

It makes brief reference to intermediaries considering the implications of the UK’s withdrawal from the European Union but, in reality, this ought to something that firms have in hand at this point.

Incentive arrangements

Remuneration incentives relating to insurance distributors is not a new topic for the FCA. However, there appears to be renewed concern about poor incentive arrangements throughout a business that “drive behaviours that harm consumers” and those arrangements which increase the risk of mis-selling. It does not appear that the FCA intends going so far as to prohibit incentive arrangements, but it does require adequate governance and controls to be in place to reduce or remove risks.

General insurance distribution chain

Also returning to the FCA’s agenda is the need for customers to be better informed and for firms to provide products which meet customers’ demands and needs i.e. the need to assess a customer’s requirements. The use of distribution chains and poor product oversight both in design and execution are areas of concern for the FCA. It refers to “customer harm”, and it singles out credit lending or credit broking as areas where this can arise, particularly a greater risk of harm for vulnerable customers. As well as the need for adequate systems and controls to be in place, there is renewed focus on conflicts of interest, product value to the end customer and the impact of the distribution arrangement on product value.

Business Interruption (BI)

Lastly the FCA notes the role of intermediaries in dealing with BI insurance customers and refers to its expectations for insurers and insurance intermediaries when handling claims and complaints for BI policies. Intermediaries ought to be familiar with the issues addressed in the FCA’s High Court test case and be able to consider how they can meet policyholders’ information needs about the test case.

In summary, the FCA has made its intentions clear: time for a re-start.

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