Since the FCA began its work in April this year, the industry has come under increasing regulatory scrutiny. We advise firms to consider the following health check to ensure their businesses are meeting the new regulatory standards.
Firms should ensure that they have appropriate people in senior roles, especially acting as non-executive directors (NEDs). Recent enforcement action has made it clear that failures in systems and controls will throw light onto board competence. Firms must ensure that the right people are in place with suitable skills and qualifications for their role. That the right people are doing the right jobs in management will be scrutinised in the applications for approval of individuals in senior roles. In particular, NEDs are increasingly viewed as critical to how a regulator judges board competency.
Systems and controls
Firms should ensure that there are suitable systems in place to make sure that information is reaching the right people. Complaints data, sales processes and claims should be monitored to identify common failings and any emerging customer detriment. Suitable reports need to be made to the board by risk managers and compliance teams so that robust action can be taken where appropriate. Information systems need to be able to process data so that risks can be identified while ensuring that data protection is preserved and information is easily digestible. Reporting lines should be examined to ensure that there are appropriate means through which product issues and customer detriment concerns can be swiftly escalated. Regular reviews of customer issues should be considered at board level.
Product development should include stress testing against customer outcomes – does the product work as sold? Is the product reasonable value for money? Firms should identify the target market for the product, whether the product is suitable for that particular market, whether the terms and conditions of the policy are clear, fair and not misleading, and whether there are plans to distribute outside the target market and if so what changes should be made to ensure the product remains suitable.
Firms should consider whether there is sufficient management oversight of the product; including monitoring of complaints and review of sales processes (including sales script reviews).
Can a consumer opinion group be set up or can the firm utilise mystery shopping exercises to ensure they have an accurate view of their sales and after-care?
Distribution methods should be appropriate for the product and target market. A review should be undertaken of how policies are sold. Do agreements with appointed representatives allow sufficient oversight of sales and generate appropriate information to enable suitable control? Would a product ban render any of these agreements unenforceable?
Sales incentives need to be examined to ensure that they are suitable to ensure products sold meet customer demands and needs. Reviews should be undertaken to understand what incentives operate and ensure that they are suitable. Where there are inappropriate targets operating – such as dissuading customers from cancelling policies – these should be reviewed in the light of good customer outcomes.
Are the profit margins from the product such that there are sufficient grounds to show that it is being sold inappropriately? How does the commission structure operate?