Further welcome news from the FCA – this time on co-manufacturing

Following on from our earlier blog, our review of the FCA's 'Discussion Paper' (DP24/1) continues, this time considering the rules relating to co-manufacturers of insurance products. 

Echoing the sentiments in our earlier blog, the FCA's review and proposals in respect of its product governance and co-manufacturer rules are likely to be welcomed by the market.

Under current rules, product manufacturers are responsible for creating, developing, designing and/or underwriting insurance products and it is not uncommon for products to be manufactured by multiple firms (co-manufacturers). An insurer is automatically a manufacturer of insurance products but an intermediary can also be a manufacturer where it has a decision-making role in designing and developing the product.  Where there are co-manufacturers, product governance rules require them to agree in writing their roles and responsibilities. Existing rules and guidance (PS21/5) provide that all co-manufacturers are equally responsible for meeting all product governance rules and firms cannot contract out of that responsibility, but one party can take the lead on the product approval process. 

Potential for duplication and conflicting approaches to product approvals

We have seen this sharing of responsibility lead to the potential for duplication of process and a lack of clarity on who is doing what, something the FCA observes in DP24/1. The FCA believes this may also lead to conflicting product governance assessments where co-manufacturers reach different conclusions. As a result, this has led to a lack of clarity around, for example: (i) whether it's necessary for each co-manufacturer to approve the product separately; and (ii) the extent to which co-manufacturers can share out responsibilities under the rules e.g. should co-manufacturers be using one single set of data or independently producing their own data?

The FCA also notes that it is aware of distributors being approached by each co-manufacturer individually for information, and in some cases the requested data is different. This may be due to firms assessing value in different ways. 

Therefore, the FCA is reconsidering its approach to co-manufacturing and the sharing of responsibility. Most importantly, the FCA is seeking to improve clarity around which firm is responsible for ensuring good customer outcomes, and to prevent situations where each firm thinks that another is taking responsibility, resulting in customer harm. To address these issues, the FCA has proposed the following three options and the FCA is also seeking feedback on other related points and data to help inform their thinking on this.

Options proposed by the FCA

• Option 1: designating responsibility to the lead insurer. This rule change would mean that where multiple insurers are involved with a product, one 'lead' insurer would be responsible for complying with the product approval process (PROD4.2). Other manufacturers would need to cooperate with, and provide information to, the lead. It's also envisaged that the rules would define who may be 'lead' in a number of different co-manufacturing scenarios, and the FCA has indicated that they would expect that the insurer taking the greatest proportion of the risk and/or the insurer responsible for claims handling will be the 'lead'. 

This approach would also reflect market practice in other areas; for example, claims handling, where follow insurers delegate to the lead.

The FCA is also considering whether this option could apply to intermediary-insurer structures, given that some specialist intermediaries currently do much of the manufacturing. However, the FCA has expressed concern that permitting delegation to intermediaries may result in issues related to fair value, and refers to recent examples where insurers have had little involvement with the product. The FCA also notes the potential for conflict where an intermediary is responsible for assessing the value of its own remuneration and has asked for firms' views here too. 

• Option 2: allowing co-manufacturers to determine responsibility for compliance. This would permit co-manufacturers to determine who is responsible for compliance and here one manufacturer could be appointed as lead, with sole responsibility for product approval / fair value assessment, or this responsibility could be shared. This would need to be clearly recorded and detailed between the parties.

Here, the FCA acknowledges the complexity of the commercial market, and so is asking for views on whether the flexibility of this Option 2 would be more helpful. 

• Option 3: additional guidance. This would mean the FCA providing clarificatory guidance to address how the rules apply to co-manufacturing arrangements, which may help to address issues of misunderstanding (e.g. that one firm is permitted to collate and analyse fair value data). The FCA recognises that this might not address all issues but that it may promote greater consistency in application of the rules. 

In our view, and we are still canvassing views from clients, we think Options 1 and 2 look preferable and ultimately an approach that combines these options may be used by the FCA. For example, Option 1 (agreeing a lead insurer) seems to work where there are multiple insurers, and Option 2 could work where manufacturing is shared between insurers and intermediaries. 

Again, echoing the sentiments of our last blog, the proposed changes seem to be pragmatic and aimed at being more efficient regarding firms' management of resources in approving insurance products. More broadly, we consider it a positive sign that the FCA is giving due consideration to industry feedback on the practical application of the product approval rules. 

If you'd like to discuss these proposed changes, please do get in touch.

We will also be covering the final chapter of the Discussion Paper relating to bespoke products in a further blog.

Notes:

• Responses are requested by 16 September 2024 and can be submitted here.
• The Discussion Paper is available to read here.