The FCA published a new Policy Statement (PS25/21) Simplifying the insurance rules in December. Many of the changes should lighten the load. What are they, and what should brokers and MGAs do next? Jess Wills, Head of Governance, Risk & Control Assurance, provides guidance.
The FCA is aiming to support growth and innovation in the UK insurance market and streamline its rules and requirements. Last May it consulted on proposals to achieve more proportionate regulation and optionality. These included:
- Greater balance based on customer size, recognising the differing needs of larger commercial customers, and consumers and smaller commercial customers.
- Greater flexibility for responsibilities under product governance rules and continuing professional development (CPD) requirements.
- Greater proportionality in the frequency of product reviews, and by removing notification and reporting requirements for insurers under Employers’ Liability (EL) rules.
How significant are the changes?
The changes are a positive step towards simplification, which should be well received by brokers and MGAs. The newly-defined larger commercial customers will be critical for brokers and MGAs because of the reduction in Consumer Duty obligations.
At the same time, the changes to product governance and the frequency of product reviews will provide greater clarity and reduce the regulatory burden in an area where many firms have struggled to reach full compliance.
Whilst some of the changes may, on the face of it, appear to be tweaks rather than radical shifts, they all contribute to a less onerous regulatory environment.
What is the impact on brokers and MGAs?
1. New customer definition
The FCA has developed a new definition (or ‘SME watershed’) to help firms identify larger commercial customers who don’t need the same protections as consumers and smaller commercial customers.
It has replaced the previous definition of ‘contracts of large risks’ to include specialist risk contracts (such as aviation or marine) and large commercial customers (using the FOS criteria). This should make things clearer for firms and means certain customers falling within the revised definition will no longer be subject to Consumer Duty requirements, reducing the regulatory burden considerably.
Impact: Firms should reconsider their commercial customer portfolio to identify those meeting the new definition, and make the most of the correspondingly smaller administrative burden. It’s also time to review Consumer Duty frameworks, policies and procedures and scale them back to ensure they’re only applicable to consumers and small commercial customers.
2. Product responsibilities
Where more than one firm manufactures an insurance product, there is now an option to select a lead firm (which must be an insurer) as solely responsible for complying with manufacturer obligations. This option will reduce the duplication of effort across the distribution chain, however co-operation with the lead firm is still expected.
Impact: Firms involved in joint manufacturing should assess the pros and cons of this new option. Despite the much-reduced processing burden on firms where sole responsibility is taken on by the insurer, many MGAs will want to retain responsibility for products in whose design and development they have been instrumental.
Where a lead insurer takes on sole product responsibility, firms in the distribution chain should assess the knock-on impact. They must be clear about what the lead insurer will need from distributors, in terms of frequency, format and level of detail for any data or MI sharing.
3. Product reviews
The FCA has removed compulsory 12-month product reviews and firms are now able to decide their frequency. This means a more risk-based approach, with efforts and resources directed to where they are most needed.
Impact: Firms must set up their own risk-based methods for determining the frequency of product reviews. Core factors, such as product complexity or type and target market, will influence that decision. But they should also consider any triggers that might signal the need for an earlier review.
4. Training and competency
The 15-hour CPD obligation no longer applies, nor the related monitoring and record-keeping requirements. Firms will now be able to choose their own training and competency levels for employees.
Impact: Most firms have established learning and development programmes to support CPD requirements. But this change allows them to re-assess their approach, given the skills, experience and training needs of their employees. This may save money and should reduce the administrative burden of CPD monitoring and record-keeping. But it’s important to think carefully about any major scaling back of training because of the potential effect on staff morale and professional standards. Firms should ensure that appropriate, individually tailored CPD is available to all.
What should brokers and MGAs do next?
The regulatory changes outlined in December took immediate effect. But you will need to assess them and decide which ones you want to take advantage of. Where you adopt a change, it is of course important to apply appropriate governance and decision-making and determine a clear justification and rationale for your decision. Compliance policies, procedures and related documentation will also require review and update to reflect the changes.
How we can help
The FCA will consult on further changes during this year. Brokers, MGAs and your compliance teams should keep a close eye on these developments and act quickly to maximise the regulatory compliance benefits they will hopefully bring.
If you would like further guidance on any issues raised in this article, please contact Jess Wills.
