FCA GI Pricing Remedies – FCA publishes amendments and clarifications
In our June Hot TopICS we set out an overview of the FCA’s new rules in relation to general insurance pricing – Policy Statement (PS21/5). The FCA has now also issued a subsequent, if brief, Policy Statement (PS21/11) providing some amendments and clarifications to the pricing rules and guidance, and a Q&As document to accompany it.
This next Hot TopICS in our GI Pricing series looks specifically at the amendments and clarifications that have been published.
This is the fourth in a series of Hot TopICS to outline the details of the final rules, to consider changes to the original proposals as set out by the FCA in the Consultation, and the implications of the new rules for and the likely impact on insurance brokers and other distributors.
Hot TopICS in this series published so far
- New rules in relation to general insurance pricing (June 2021)
- FCA pricing remedies – product governance for product manufacturers (July 2021)
- FCA pricing remedies – product governance for product distributors (August 2021)
The next Hot TopICS to be issued this month will focus on the price setting requirements.
The updated rules and guidance cover the following:
- clarify the application of some of the rules to firms that give discounts or other incentives to customers;
- clarify the application of reporting rules to intermediaries that rebate commission;
- amend the definition of a ‘renewal’ (this will alter the way in which the pricing and reporting rules apply to firms);
- clarify the operation of the transitional rules; and
- make minor amendments to some of the reporting and other rules.
The amended rules and guidance, and their impact
ICOBS 6B.1.2A R, ICOBS 6B.2.35 R, SUP 16.29.9 R
The new pricing rules require that where a firm sets a renewal price this must be no higher than the equivalent new business price (ENBP), which must reflect both cash and cash equivalent incentives that are offered to new customers. This is to ensure that a firm with an ongoing relationship with a customer – that is involved at renewal – cannot price walk by applying a cash or cash equivalent discount for new business which it does not apply to equivalent customers at renewal.
These rules apply to insurers which set prices at renewal (either a net or gross price), and intermediaries which set prices at renewal by adding their commission to a net price set by an insurer or by offering a cash discount on a gross price set by an insurer. The rules, however, were unclear as to how they apply to intermediaries which set prices at renewal by offering a cash-equivalent incentive on a gross price set by an insurer, or which offer cash or cash-equivalent incentives at new business and are involved in arranging the renewal, but do not set prices at renewal.
As a result, the FCA is amending the rules to clarify that, in both cases, the intermediary would be caught by the pricing rules and required to replicate the new business discount or cash equivalent incentive in the ENBP. This will prevent consumer harm from any price walking resulting from incentives offered by intermediaries in these circumstances. These changes are within the scope of the original policy intent.
Commission rebating and price setting
ICOBS 6B.1.2A R, ICOBS 6B.2.35 R
Commission rebating means that intermediaries which rebate commissions are setting the premium paid by the consumer, which means that they are price setting. The FCA included a rule, though, to clarify that intermediaries would not be prevented from foregoing commission to reduce the end price for a new business customer. However, the FCA also explained that this would then be equivalent to a discount and so needs to be reflected in the ENBP when setting the price for a renewing customer.
The commission-rebating intermediary, therefore, is and will remain a price-setting intermediary under the amended and clarified rules; the amendments make no change to this position and clarify it with an amendment to the scope of the application of the new ICOBS 6B.
Commission rebating and reporting
SUP 16.29.9 R
The July Policy Statement set out different reporting requirements for what the FCA referred to as ‘net rated business’ and ‘gross rated business’. Under the final rules as published in July any commission-rebated business would be treated as net rated business (where the eventual premium paid by the customer is set by the intermediary). For net rated business, both insurers and the price setting intermediaries were required to report pricing data. For gross rated business, where the price is set by the insurer, only insurers need to report the pricing data.
The FCA has accepted that requiring intermediaries to report business where commission rebating has taken place could potentially reduce the usefulness of the reported data. As a result, the FCA no longer considers it proportionate for intermediaries to report pricing data on commission-rebated business (the FCA will already be receiving pricing information on this business from insurers). The FCA is, therefore, amending the rules to clarify that, for reporting purposes, commission rebated business counts as gross rated business, where only the insurer is required to report data.
However, under the changes, the FCA is introducing a requirement for intermediaries to notify it, where over 25% of either intermediaries’ home or motor sales include commission rebating. This will give the FCA greater insight into the extent of commission rebating in the market and will allow it to monitor more effectively the impacts of its remedy package.
Attestations that price-setting firms are required to submit under the rules
The FCA is currently working on the final wording of the attestation. This form will also allow firms to make the necessary notification about commission rebating, and the FCA expects to publish the form very shortly.
The definitions of ‘renewal’
The Glossary definition of ‘renewal’
Under the FCA’s insurance rules there are two definitions of renewal. Most rules in ICOBS have a narrow definition of renewal (the Glossary definition – unchanged since January 2004), which captures policies that follow on from an existing policy when it expires. The renewal transparency rule at ICOBS 6.5.1 R (2) expands this to introduce the concept of ‘renewal with the same insurer or the same intermediary’.
For the GI pricing and reporting rules the FCA introduced a broader definition of a renewal, capturing any situation where customers take out a policy of a similar type from the same firm as their existing contract. This was to reduce the risk of firms seeking to circumvent the pricing rules by moving existing customers to new products and charging a higher price than the ENBP for their existing product.
The FCA has accepted that this broad definition could be problematic because it could capture situations where the customer chooses to lapse their current policy and take out another policy with same insurer via a different partner, intermediary or channel. Consumers who choose to take out a new policy with the same insurer in these circumstances will, the FCA expects, benefit from a new business price and so will not be exposed to risks of price walking; such circumstances, therefore, don’t need to be protected from price-walking.
The FCA is, therefore, amending the new renewal definition to clarify that:
- where an existing customer actively buys a policy with the same firm through a different channel or distribution arrangement, then firms should treat this as new business rather than renewal business; and
- where firms actively move a customer to another channel, distribution arrangement or to a different policy (of a similar type) at the lapsing or expiry of an existing policy then they should continue to treat these as renewals for the purposes of the pricing and reporting rules.
Auto renewal transitional rules
Transitional Provision – ICOBS TP 2 8 R (3)
The auto renewal rules come into effect on 1 January 2022. However, the FCA applied transitional provisions for the disclosure elements of the rules, which allow firms who cannot implement on this date to do so by 17th January 2022. Where a firm takes advantage of the transitional provisions, they must provide the relevant disclosures for policies entered into during the transitional period:
- Firms must take this action in relation to communications made during the transitional period that do not comply with the disclosure rules in ICOBS 6.2.6R and ICOBS 6.5.1R (the auto-renewal information disclosure rules). However, the FCA is aware that the rules as drafted were unclear about whether this includes policies that have not been entered into during this period, e.g., where renewal notices sent out during the transitional period are for policies which have renewal dates outside it.
- The FCA has updated the relevant rules (ICOBS TP2 8 R (3)) to make clear that, where a firm uses the transitional provision, it must take retrospective action by 28th February 2022 to provide the required disclosures for all communications made during the transitional period that do not comply with the disclosure rules in ICOBS 6.2.6R and ICOBS 6.5.1R, irrespective of when the contract concludes. This will ensure that consumers who are sent a communication during the relevant period receive the information they need about how auto renewal affects the operation of their policy.
Other administrative changes
ICOBS 6B.2.51 R, SUP 16 Annex 49B G
The new pricing remedy rules are not intended to cap net margin or profits. However, stakeholders have pointed out to the FCA that record keeping rules at ICOBS 6B.2.51 R (1) included a reference to firms recording details of ‘margin earned from’ customers of longer tenure. This was a mistake, and the FCA is now amending the rules to remove this reference.
A number of questions about the operation of the rules in relation to margin have been addressed in the FCA’s Q&As document that was published alongside PS21/11.
Prior year premium reporting
SUP 16 Annex 49B G
Under the final rules and guidance in PS21/5 firms are required to report ‘average prior year premium’ for each reporting category of customers renewing. This will provide an indication of how prices had changed year on year for renewing customers. In the notes to the reporting form the FCA explained that the metric should be the average prior year premium paid.
The FCA has recognised that, in practice, there could be differences between the premium and the premium paid (e.g., monthly, so covering two different reporting periods), affecting the consistency of reporting. The notes to the reporting form have therefore been amended to clarify that the reported prior year premium should be based on the premium itself rather than being dependent on when the premium was paid.
References to product types and product groups
SUP 16.28.10 R, SUP 16 Annex 49A R, SUP 16 Annex 49B G
The reporting rules include references to ‘product types’ and ‘product groups’, which, for reporting purposes have the same meaning. To reduce the risk of confusion about the meaning of the different terms, the FCA is replacing the references to ‘product group’ with references to ‘product type’.
As a reminder, the product types include:
- Motor – cars
- Motor – motorcycles including tricycles
- Motor – other
- Home – buildings only
- Home – buildings and contents
- Home – contents only
Actions for firms
- Review the new requirements alongside final rules and guidance published in PS21/5.
- Consider their impact on your current pricing remedies project and review any provisions you may already have made based on the final rules published in July and whether these need to be amended.
- Document any changes as a result of the clarification.
If you would like any help or information in relation to this update or any FCA-related compliance issues or ICS Services, please contact your usual ICS representative or Head Office on 01892 539600 or email@example.com and we will be happy to discuss further.
FCA Pricing Remedies – Product Governance for Product Distributors
In this next Hot TopICS in the series, we look at the requirements for product governance which come into force on 1st October 2021, and the implications of those requirements for product distributors.
An insurance broker which is a ‘distributor’ but which is also a product manufacturer or co-manufacturer should review our Hot TopICS in relation to the new requirements for product manufacturers / co-manufacturers.
This is the third in a series of Hot TopICS to outline the details of the final rules, to consider changes to the original proposals as set out by the FCA in the Consultation, and the implications of the new rules for and the likely impact on insurance brokers and other distributors.
Hot TopICS in this series published so far
- New rules in relation to general insurance pricing (June 2021)
- FCA pricing remedies – product governance for product manufacturers (July 2021)
We will issue further Hot TopICS in the coming weeks in relation to each of the new remedies.
FCA Pricing Remedies – Product Governance for Product Manufacturers
In our June Hot TopICS we set out an overview of the FCA’s new rules in relation to general insurance pricing – Policy Statement (PS21/5). In the first of a series of Hot TopICS in relation to the new rules and pricing remedies we look at the requirements for product governance which come into force on 1st October 2021, and the implications of those requirements for product manufacturers.
In setting out its new product governance and systems and controls rules and guidance the FCA is looking to build on the existing product governance rules and has introduced the concept of assessing whether products offer fair value for a reasonably foreseeable period. These rules cover consumer and commercial customer general insurance products, including optional extras (such as premium finance), but not including Large Risks.
We will cover the new product governance rules for product distributors in a separate Hot TopICS. The systems and controls requirements that are included within the overall product governance remedy apply in the main to remuneration from premium finance, so that topic will be covered in a premium finance Hot TopICS.
The FCA has published its new Rules in relation to general insurance pricing
The FCA has released its Policy Statement and final rules on general insurance pricing practices. The FCA has largely implemented the policy as set out in its earlier Consultation Paper but has made some concessions around reporting and timings having received over 100 responses to the Consultation.
The FCA is attempting to ban what is known as ‘price-walking’ (charging renewing consumers more than equivalent new business consumers ). The objective in this regard is to ensure that customers do not end up paying higher premiums because they do not switch provider. They have also looked at how firms ‘auto-renew’ consumers as well as how products offer fair value.
Finalised Guidance on the fair treatment of vulnerable customers
The FCA has recently issued Finalised Guidance on the fair treatment of vulnerable customers (FG21/1), setting out the regulator’s view of what firms should do to comply with their obligations under the Principles for Businesses and ensure they treat vulnerable customers fairly.
The regulator is driving improvements to bring about a practical shift in firms’ actions and behaviour. But firms are expected to use their judgement to consider what the Guidance means for them and what they should do to make sure they treat all customers fairly.
This article highlights the main issues for insurance intermediaries seeking to embed good practice, based on the Finalised Guidance.
SM&CR final implementation deadline fast approaching
Firms must ensure they have implemented the SM&CR including the Conduct Rules training requirements and, where necessary, the Certification of relevant personnel by 31 March 2021. Firms are also required to upload their Directory Persons data, if they have any, by the deadline or risk incurring fines. Whether or not firms have already taken the relevant steps, this article provides a reminder of various issues they may need to address.
Business Interruption Test Case – what next, following the Supreme Court judgements?
The Supreme Court judgements provide an authoritative interpretation of common BI wordings and an important steer to insurers as to whether the prevalence of coronavirus, in or near an insured business, should be regarded as the effective cause of loss.
Although the judgments did not go into the ramifications of subsequent UK Government action including ‘local’ or ‘tiered’ lockdowns, they have provided clear-cut guidance and a basis upon which the FCA seeks to ensure that regulated firms do the right thing and treat policyholders fairly.
This article aims to highlight the key messages from FCA on BI claims and some of the practical aspects that brokers should consider in the light of the court rulings.
Coronavirus and insurance customers in financial difficulty
As the pandemic continues to create uncertainties and challenges for many customers, this article provides a reminder of the measures insurance and premium finance firms are expected by the FCA to consider to support their customers.
The underlying principle is that firms have due regard to the interests of their customers and treat them fairly. Firms should bear in mind that customers’ circumstances may change quickly, and in ways that might cause or increase vulnerabilities. The FCA encourages firms in the distribution chain to work together to ensure they achieve good outcomes.
Brexit – passporting ends for UK insurance intermediaries
The Brexit transition period, during which the UK continued to operate as a member of the EU, ended at 11 pm on 31 December 2020. Relevant EU laws have been ‘onshored’ by the UK government so that insurance intermediaries and most other financial firms will see minimal change to the UK regulatory regime. But there is an important exception – Passporting ends!
Financial services do not form part of the trade deal and the UK has become a ‘third country’ for the purposes of applying the Insurance Distribution Directive. This means that UK/Gibraltar insurance intermediaries lose their right to pursue business in other member states on a freedom of establishment and freedom of services basis.
7/11/20 HT 2020-11 Premium Finance
Up to half of all motor and household insurance customers in the UK choose to pay their annual premiums by monthly instalments and enter into a regulated credit agreement with a third-party finance provider. The FCA regulates the consumer credit sector with a focus on fairness, creditworthiness and affordability and firms offering credit are expected to abide by strict rules and guidance that continue to evolve. This article looks at upcoming rule changes and, in particular, the information brokers will need to give to customers about the nature of their earnings and the cost of credit.
13/10/20 HT 2020-10 FCA general insurance pricing proposals
The final report of the FCA’s market study into the pricing of home and motor insurance concludes that pricing practices in home and motor insurance markets has led to many consumers paying unfair insurance premiums. The proposed remedies, which have ramifications for other types of general insurance and premium finance, have been set out in a Consultation Paper with the main aims of enhancing competition, ensuring consumers receive fair value and increasing trust.
The proposals involve new rules to ensure that, when a customer renews their home or motor insurance policy, they pay no more than they would if they were new to their provider through the same sales channel. The FCA is also consulting on other new measures, including:
- Product governance rules requiring firms to consider how they offer fair value to all insurance customers over the longer term
- Requirements on firms to report certain data sets to the FCA so that it can check the rules are being followed
- Clarifying the requirements around automatic renewals across all general insurance products
This article sets out the proposals in detail and steps firms should be taking now to help prepare.
17/09/20 HT 2020-09 Business Interruption Test Case Judgement
The High Court ruled on Tuesday 15 September 2020 that many businesses that held business interruption insurance and lost income due to the COVID-19 pandemic are entitled to be compensated by their insurers.
The judgment did not say that the defendant insurers are liable across all of the 21 different types of policy wording in the representative sample considered by the Court. Each policy needs to be considered against the detailed judgment to work out what it means for that policy. This article looks at the outcome of the case and provides links to further details.
27/08/20 HT2020-08 - New FCA Guidance on the treatment of vulnerable customers
FCA research indicates that nearly half of all UK adults may be “especially susceptible to harm” and that some are “exploited for gain” in relation to financial transactions.
One key element of the FCA’s 2020/21 Business Plan is ensuring that the most vulnerable consumers are protected. The regulator therefore wants firms to do more to protect vulnerable customers and has set out new draft Guidance in a consultation paper (GC20/3). This reflects feedback from its 2019 consultation paper on vulnerable customers (GC19/3) and includes a detailed cost benefit analysis.
This article looks at the new Guidance, how it affects insurance intermediaries and steps firms should be considering now. Any responses to the consultation should be sent to the FCA by 30 September 2020.
27/07/20 HT2020-07 - Adequate financial resources - FCA finalised guidance
Following a consultation in 2019 (reported in Hot TopICS July 2019), the FCA has now published finalised guidance (FG20/1) setting out its expectations on how firms determine that they have adequate financial resources. Although this new guidance does not place specific additional requirements on firms because of Covid-19, the FCA has pointed out that the pandemic underlines the need for all firms to have adequate resources in place and to assess how those needs may change in the future.
Financial adequacy is not just a matter of funding. It involves maintaining systems and controls, governance, leadership and a culture that reduces the risk of harm. This means firms can be in a much better position to put things right if they go wrong and to minimise the fallout should the business fail.
26/06/2020 26/06/2020 HT 2020-06 COVID 19: FCA Guidance in relation to product value and customers in temporary financial difficulty
|This article looks at the finalised FCA guidance on how firms should ensure they continue to provide value to their insurance customers affected by the pandemic.|
7/5/2020 HT 2020 - 05 COVID 19 – FCA Policy Developments
As part of the FCA’s continued efforts to support customers impacted by the Covid-19 pandemic, the FCA has issued proposed guidance for insurance firms to ensure the fair treatment of customers. These apply to insurers and product manufacturers as well as brokers.
The proposed guidance covers 2 key areas:
- Product Value – Ensuring products continue to offer value and are appropriate for customers taking into account the impact of coronavirus and firms’ ability to deliver the benefits promised.
- Helping customers in financial difficulty – Ensuring products continue to offer value and are appropriate for customers taking into account the impact of coronavirus and firms’ ability to deliver the benefits promised.
This article considers the guidance in detail and outlines actions for insurance firms to consider in line with FCA recommendations.
30/4/2020 HT 2020 - 04 COVID 19 – Responsibilities for Training, Learning & CPD
Staff working from home, furloughed or taking unpaid leave means less opportunities for group learning in the workplace. However with the plethora of online resources available it is still possible to ensure staff have the opportunity to maintain their continuing professional development.
In this HT we consider the regulatory requirements for CPD in light of the Covid 19 pandemic and the options available to businesses wishing to ensure their staff still receive learning and development opportunities whilst not in the office.
31/03/2020 HT 2020 – 03 Regulation and the COVID-19 crisis
The FCA is ready to take any steps necessary to ensure customers are protected and markets continue to function well in the face of COVID-19. Firms are expected to provide strong support and service to customers during this uncertain period while actively managing their liquidity and financial resilience. This article looks at what the pandemic might mean for insurance intermediary firms and their business continuity plans.
3/03/2020 HT 2020 – 02 New rules to Improve access to travel insurance for consumers with serious health conditions
New FCA rules will require firms offering retail travel insurance, including insurers, MGAs, intermediaries and appointed representatives, to signpost certain consumers with pre-existing medical conditions to a directory of specialist providers and to add details of the directory to their websites. This article looks at the new requirements and what they might mean for sellers of travel insurance.
24/01/2020 HT 2020 – 01 New Year Messages from the FCA warn GI firms on cultural and operational standards
The FCA has sent a ‘Dear CEO’ letter to Personal Lines and Commercial Lines insurers and firms with similar business models urging them to prioritise conduct and consumer outcomes. This is part of the regulator’s quest to improve culture and to ensure that customers’ best interests are served. Around the same time, wholesale intermediary firms received a ‘Dear CEO’ which said that ‘poor culture in financial services can lead directly to harm to consumers, market participants, employees and markets’. As the Senior Managers and Certification Regime beds in, firms need to take stock of the relevant cultural and operational issues.
18/12/2019 HT 2019 – 12 Whiplash reforms and the motor claims compensation landscape
A number of changes are in the pipeline aimed at capping the amounts claimants can get for whiplash injuries and reducing the incidence of exaggerated or fraudulent claims. This article looks at the reforms which the Ministry of Justice (MoJ) continues to work towards and what they might mean for the compensation landscape.
22/11/2019 HT 2019 – 11 SM&CR Conduct Rules
This article takes a closer look at the SM&CR Conduct Rules which come into effect on 9 December 2019. What steps can firms take to meet the new training and reporting requirements?
24/10/2019 HT 2019-10 General Insurance Pricing Practices – interim report suggests further regulatory intervention
Building on its determination to ensure customers receive good value, appropriate insurance products and fair treatment, the FCA has been carrying out a market study on general insurance pricing practices. We look at the interim report (MS18/1) recently published and the possible remedies being considered by the FCA.
26/09/2019 HT 2019-09 SM&CR – Considerations for Human Resources
This article looks from the Human Resources (HR) point of view at some of the changes that firms may need to make to meet the SM&CR requirements.
28/08/2019 HT 2019-08 Are you ready for the SM&CR?
The Senior Managers and Certification Regime will apply to insurance intermediaries and other solo-regulated firms from 9 December 2019, having been introduced for banking firms in 2016 and insurers in December 2018. This article follows the publication of Policy Statement (PS 19/20), which confirmed the final rules for the SM&CR, and looks further at some of the implications for insurance intermediaries.
24/07/19 HT 2019-07 Assessing adequate financial resources
The FCA has issued a consultation paper (CP19/20) which sets out to provide more clarity over how it assesses the adequacy of a firm’s financial resources, the practices firms can adopt when assessing their resources and the role of adequate financial resources in minimising harm to consumers and markets. This article looks at how this affects UK general insurance intermediaries.