Value and Values in GI Distribution

Last November the FCA issued:-

•        its Finalised Guidance (FG19/5) on “The GI Distribution Chain”; and
•        a summary of the feedback which the FCA received to its May 2019 Consultation on the above Guidance; with FCA comments and reactions included.

The first, and in some ways most important, point to make is that, while I have headed this Article with the word “value” – the Guidance does not include this word in its title.

There is a very good reason for this.

The FCA is acutely aware of the problems it may be walking into if it starts to equate “value” with “price”. The sensitivity was so great that, in the Consultation, the FCA magnificently managed to fail to define what it meant by “value” – relegating its understanding to a footnote.

One of the changes which the FCA have made to the Finalised Guidance is to include its meaning of “value” into the main text of the Guidance. You will find this on Page 7:-

“By ‘value’ we mean the interaction between the overall costs to the end customer and the quality of the product and services. This stems from the effects of the rules which apply to manufacturers and distributors and the overall consideration of what is being provided to customers. This includes the manufacturer’s consideration of whether the product is compatible with the objectives, interests and characteristics of the target market, as well as the cost and charges of the product itself. Product quality might include a range of benefits for the end customer, including the level of cover under the policy, how claims are handled or other services provided by the manufacture or other parties in the chain”

So, “value” is, in the FCA’s view within the Guidance, not purely monetary – but cost/price does have a key role in the assessment of value. In this connection it is instructive to look at why the FCA says that it needed to issue this Guidance – following its Thematic Review of GI Distribution Chains.

This is what the FCA says:-

“In summary, the findings of [the Thematic Review], are:-

•  There is a potential for harm to customers arising from the product development and distribution approaches used in some sectors of the GI market
•  Many customers paid prices which appeared significantly higher than the production and delivery costs of the products. This was due to very high levels of commission within the distribution chain
•  Many firms did not adequately consider risks of harm to customers when developing products and their related distribution arrangements
•  Some product manufacturers were giving control of the product design (including pricing) to other parties in the distribution chain without proper oversight and without considering the impact on the value of the product and outcomes for customers
•  Some firms had a lack of appropriate due diligence and oversight of distribution partners. This meant they were failing to consider the suitability and ability of parties to whom authority, control or responsibility is being delegated or passed”

So, whilst a huge amount of the Guidance is focused on anything but price – (guiding firms to meet much broader product governance and oversight obligations, whether as manufacturers or distributors) – price, as a component of product value, is clearly signposted as the elephant in the room by the FCA.

This has caused a lot of concern and confusion in the market, with the FCA clearly saying that it is not adding anything to existing rules and principles based compliance – but nevertheless signposting, at every opportunity, that it sees a fundamental problem with the interaction between control in the distribution chain, price and then “value”.

Some manufacturers have taken the view that the FCA is so nervous of “price control” that the lack of specific guidance on price means that all they have to do is to be seen to have undertaken the required PROD oversight and governance. They then think that, provided they can find some “justification” for the price paid for the product by the customer, then the FCA can take them no further.

Others are much less sanguine!

Let us just analyse this diversion of views.

The FCA are saying (in effect) that, whilst price is not “value” – a failure of a firm to evaluate the impact of price on the value which customer’s might reasonably expect – arising from the remuneration taken within the distribution chain – is a key measure of behaviour in (or not in) the best interests of customers.

Put another way, the FCA is saying (in my words, not theirs):-

“We are not going to tell you what value is, but the effect of our Guidance is intended to drive down remuneration within distribution chains to levels which we will not specify, but about which we will set expectations (without price control) – and if that has the effect of driving products out of the market, then that is fine by us”.

On 6 January 2020 the FCA sent a Dear CEO letter to wholesale general insurance firms – setting out its expectations regarding the tackling of non-financial misconduct in the sector. This follows the implementation of the SM&CR on 9 December last year. The FCA is clearly drawing a new, and very clear, connection between the responsibilities of senior managers under the SM&CR, not only for their conduct related to regulated activities – but also their conduct relating to the overall management of their firm – and the cultures and outcomes which this delivers (whether the outcome is regulated or not).

The FCA says that how a firm handles non-financial misconduct (including discrimination, harassment, victimisation and bullying) is “indicative of a firm’s culture”. It goes on to say that it sees such misconduct as:-

“obstacles to creating an environment in which it is safe to speak up, the best talent is retained, the best business choices are made, and the best risk decisions are taken”.

The FCA expects senior managers to mirror the FCA’s own regulatory focus on the following non-financial misconduct issues:-

•            leadership;
•            clarity of purpose;
•            the approach to rewarding and managing people; and
•            governance and systems and controls.

The sting in the tail of all of this is the observation, by the FCA, that any failure to address non-financial misconduct may lead to senior managers failing to be fit and proper under the SM&CR.

I think this is something of which all firms need to be aware when considering the issue of “value”.

The FCA is using the extended SM&CR as something of a weapon to achieve behaviours which it wishes to see, irrespective (necessarily) of commercial or other justification.

In a regulatory environment in which:-

• a duty of care to consumers;
• the delivery of customer’s best interests; and
• good corporate culture

are being developed as the bases upon which the FCA will judge fit and proper management,

This means that, if and to the extent that the FCA may struggle with the concept (and maybe competition law legality) of “value” in distribution chains – no matter.

When challenged on its assessment of value in the distribution chain, the FCA has shown a willingness to shift its criteria, on what is acceptable, away from being based on the value of a specific product, and scenario, and on to a valuation of what the FCA thinks is right and proper.

The FCA then will cast that valuation onto senior management in the market.

Thereby we move from assessment of “value” onto an assessment of “values”. It is a subtle shift, but one which will allow the FCA a greater (and more dangerous) leeway in the ongoing debate.

If you require any more information regarding our support to firms in the GI market, then please contact Malcolm via malcolm@paginator.co.uk