The Financial Conduct Authority (FCA) has sent a ‘Dear CEO’ letter from Roma Pearson, Head of Department, Retail General Insurance, to intermediary firms setting out the key risks posed by insurance intermediaries to customers. The letter asks firms to consider the extent to which the risks identified exist in their business and assess strategies to reduce those risks. The letter sets out the FCA strategy until September 2021.
The FCA has identified significant risks of harm in both individual firms and in specific markets. The greatest risk is that customers might buy unsuitable or poor value products. Inappropriate sales tactics and insufficient or unclear customer information are the biggest contributors to this harm. The FCA warns that healthy cultures and behaviours must be embedded to prevent governance and controls being undermined in a warning to the sector. The letter recognises that intermediary firms may have struggled as a result of the Covid-19 pandemic and may ultimately fail. In this context firms are expected to plan ahead and consider how to exit the market in an orderly way. Firms should maintain an up-to-date wind-down plan that takes the impact of Covid-19 into consideration. If firms think that they will be unable to meet capital requirements, be unable to meet their debts as they fall due or they have identified material execution risks they should contact the FCA with a plan for the immediate period ahead. During a wind-down firms must continue to meet the FCA rules and Principles for Businesses.
The Dear CEO letter identifies the following key drivers of harm which the letter expands upon in detail:
- Poor governance and oversight;
- Incentive arrangements that do not support a healthy culture;
- Problems within the general insurance distribution chain;
- Business interruption insurance and the recent FCA test-case; and
- The withdrawal from the EU.
The FCA has identified common themes in the above drivers of harm against which it will prioritise its supervisory work. These are ineffective governance and oversight, incentive arrangements that do not support the right culture and business models that provide poor control over sales and conflicts of interest.
Intermediary firms should expect these issues to be at the top of the FCA’s agenda in their conversations with the regulator over the next few months.