The FCA has published a blog article and accompanying guidance on how insurance firms should manage conflicts of interest in vertically integrated business models.
The blog, written by the FCA’s new Director of Insurance, Chris Knight, explains that conflicts can arise where a single group of companies operates across several parts of the insurance chain, such as underwriting, distribution, premium finance and related services. Similar risks may also arise through ownership, investment or financing relationships, whether these are publicly disclosed or private.
The FCA acknowledges that these arrangements can make good commercial and operational sense. However, it is concerned that they can also create conflicts of interest, particularly where they influence customer journeys, commercial incentives or the way value is distributed across the chain.
Key points to note
Firms should actively identify, manage and evidence conflicts of interest. This includes having effective governance, clear senior management accountability and controls that work in practice, not just on paper.
Disclosure alone is not enough. The FCA is clear that simply telling customers about a conflict does not remove the firm’s obligation to manage it properly.
Firms should consider whether product and panel design, customer communications, remuneration structures and customer-facing information are sufficiently transparent and support good customer outcomes.
Where a firm forms part of a wider chain, it should be able to assess and evidence the value added at each stage.
Firms considering new ownership, investment or financing structures should take the FCA’s expectations into account from the outset, particularly where the proposed arrangements could add complexity or create new conflicts.
The FCA has said it has written to some firms where it considers business models may be creating heightened risks of conflicts of interest. It also indicates that it will continue to monitor developments in this area, may issue ad-hoc data requests, and expects firms to be able to evidence effective controls. Where business models are overly complex or difficult to supervise, firms should consider whether simplification is appropriate.
What should firms do now?
Firms should review whether their current governance arrangements, ownership structures, distribution models and remuneration arrangements create any actual or potential conflicts of interest. Where conflicts are identified, firms should be able to show how these are managed, monitored and escalated, and how their approach supports good customer outcomes under the Consumer Duty.