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Clifford Chance

Clifford Chance


The weakest link: regulatory challenges to the GI distribution model

The Financial Conduct Authority (FCA) has been looking to address changes to insurance distribution models for some time. Innovations in technology and product manufacturing have contributed to an increasingly specialised distribution chain, with greater independence between underwriters, product manufacturers and distributors.

The FCA is keen to understand the impact of this on consumers and last month concluded its two-year thematic review of general insurance distribution chains, publishing guidance of which all general insurance market participants should take note.

Insurers have had greater responsibility to exercise control and oversight of all elements of their distribution models since the implementation of the Insurance Distribution Directive (IDD) in October last year. The message from the IDD has been loud and clear: client interests must be prioritised in all aspects of product distribution and the chain is only as strong as its weakest link.

While this message has already been keenly felt from compliance and regulatory perspectives, the latest guidance takes an important new direction as it puts the economics of distribution chains – both individually and in the round – under the microscope. It sets out an outcome-based approach that looks to identify models where costs of commission are passed on to customers without a demonstrable and proportionate benefit to the consumer of those costs.

If an “unreasonable” value impact is identified, firms will be required to “correct” this. This means, for example, an underwriter that has delegated distribution or manufacturing activities to a third party will need to remain appraised of management information that monitors product value and performance and, if a poor value impact is identified, will need to make changes to correct the value impact. This could mean changes to the product, target market or commission model.

For some this will not be a substantive issue. The same innovations in product manufacturing and technology that have contributed to the FCA’s scrutiny of distribution models have, in many cases, lead to better pricing and more targeted products. There are, however, some notable areas of the market that may be disproportionately affected (irrespective of any perceived lack of value): managing general agents that focus on product design will need to scale up their review processes and underwriters that rely on products designed by third parties will need to be comfortable they can actively monitor and assess value.

Andrew Bailey wrote in his recent speech on the future of financial conduct regulation that “innovation has to be consistent with our public interest objectives”. The consumer-focused and outcome-led approach taken by the FCA toward general insurance distribution models is therefore very much the direction of travel for UK insurance regulation.

That this coincides with new rules on personal accountability through the Senior Manager & Certification Regime and only recently follows the introduction of new oversight and training requirements under the IDD will only increase pressure on firms to ensure they are taking customer interests seriously in all aspects of their business.

This article first appeared in Insurance Day