The Financial Conduct Authority (FCA) has asked insurance advisers and brokers to be mindful of whether a policy provides significant added value to their clients before any insurance is recommended or arranged for them.
The FCA guidance document explains that the regulator is using a very specific definition of ‘value’ in this respect. Here it means the balance of the overall costs to the end customer and the quality of the product and services.
For example, a consideration of ‘value’ might include an assessment of:
- Whether the product is compatible with the objectives, interests and characteristics of the target market
- The cost and charges of the product itself
- The level of cover provided under the policy
- How claims are handled or how other services are delivered
A broker fee would not be included in this assessment as it is not part of the design of the product.
Insurance providers are expected to carry out this value analysis before they commence offering a product. Examples of relevant management information to assist in this analysis could, for example, include customer research, claims and complaints data.
One of the key areas the FCA warns firms to consider is the remuneration structure – does this result in the price paid by the client being well in excess of the risk price?
Where necessary, the regulator says firms may need to consider taking some of the following steps where it is identified that clients may not be receiving value for money:
- Making changes to the product
- Changing the target market
- Altering the distribution strategy
- Modifying the remuneration structures
- And, as a last resort, withdrawing the product from the market, if none of the above strategies would deliver good client outcomes
Although they do not design the product, the FCA expects insurance brokers and advisers to carry out their own value analysis. For example, a broker’s remuneration for arranging a particular policy could be sufficiently large to mean that the client does not receive a good value outcome.
Ways in which a broker may be able to identify evidence of harmful outcomes may include:
- From their direct interactions with customers
- By carrying out assessments of customers’ demands and needs
- Analysis of claims and/or complaints data relating to specific products
The guidance warns brokers to be particularly wary of three scenarios concerning remuneration:
- The broker firm receives a level of remuneration which is excessive when consideration is given to the costs or workloads they incurred in distributing the product
- The broker firm receives significant remuneration, but their involvement in the distribution chain provides little or no benefit beyond that which the customer would receive from the product anyway
- The remuneration arrangements incentivise the broker to propose or recommend a product which either does not meet the customer’s needs, or does not meet them as well as another product would
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article