Distributors get three-month forbearance because of late Fair Value Assessments

The Financial Conduct Authority (FCA) is to allow distributors to continue distributing GI products from 1 October 2022 where they have not received the information necessary to understand the outcome of manufacturers’ value assessments (FVAs).  The forbearance only applies where certain criteria are met.

Under the rules and in the absence of this forbearance, distributors unable to comply with PROD 4.3 are required to stop distributing a product in order to prevent detriment to consumers.

The move comes on the back of the completion of the first phase of a multi-firm review (MFR) by the regulator to assess whether manufacturers of general insurance and pure protection products were undertaking the necessary work to comply with PROD 4 of the FCA Handbook. This work considered whether a sample of firms manufacturing insurance products were:

undertaking the necessary work to comply with rules and guidance in relation to product governance and oversight under PROD 4.2; and
putting in place product approval processes that identified whether their products provide fair value to consumers and will continue to do so for a reasonably foreseeable period in line with PROD 4.2, PROD 4.3 and PROD 4.5.

A key finding of the FCA’s review was that manufacturers were leaving it very late to complete the product reviews which was impacting on distributors’ ability to fully comply with the PROD rules.

Around a third of manufacturers surveyed were found to have scheduled a significant proportion of their product reviews including the FVAs in Q3 2022 meaning many may be leaving it too late.

Manufacturers have until 30 September 2022 to complete their first annual round of FVAs. BIBA has been raising concern with the FCA that the slow pace of the process will mean that intermediaries could be left facing a barrage of fair value assessments during the last fortnight of September 2022, leaving them insufficient time to complete information requests and their own reviews.

Matt Brewis, Director, Insurance, FCA, explained the decision to grant forbearance, under certain circumstances, in a letter to distributors, saying that the regulator had to ‘now act to prevent significant harm being caused to customers through the withdrawal of products from distribution due to distributors not being in a position to comply with their obligations in full by the end of the transition period.’ There was a clear undertone of dissatisfaction where the letter also observed that the regulator ‘would have expected more effective cooperation between manufacturers and distributors’.

This forbearance will last for 3 months until 1 January 2023. It will ONLY be applied IF the following circumstances can be met:

The distributor has identified the impact that the distribution arrangements have on the value of the product by 30 September 2022 and has completed any identified remedial action as a result of its assessment.
The distributor has complied with any requests from the manufacturer for information specified in PROD 4.3.10BR.
The distributor is able to demonstrate that they received the manufacturer’s value assessment too late for them to be reasonably expected to meet their obligations by 30 September 2022.

In a separate feedback letter sent to all GI And Pure Protection Firms, Mr Brewis, noted: ‘We are disappointed with the progress made by many manufacturers which falls short of our expectations on timely implementation…’

The feedback letter to the MFR goes on to set out the FCA’s expectations for manufacturers and distributors. The regulator will also be providing individual feedback to firms included in the review.

It will be undertaking a second phase of the multi-firm review which would encompass both manufacturers and distributors and would focus on the appropriateness of firms’ product oversight and governance frameworks. This would include the product approval process and the product review (including FVAs) carried out in accordance with PROD 4.

The regulator was also considering how to address feedback from firms about the practical difficulties they have experienced in meeting the PROD 4.2 requirement to obtain information from overseas distributors when undertaking FVAs.

BIBA members’ compliance and regulation queries should be directed to: compliance@biba.org.uk quoting their membership number.

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