The FCA has warned insurance firms that they must improve clarity on commissions they pay to intermediaries on insurance products and prove that commissions are not excessive.

The warning is part of a ‘pull your socks up’ message to insurance firms on new general insurance product governance rules arriving in October designed to ensure insurance provides fair value.

The review suggests some firms may be paying commissions to intermediaries which are not justified by the work involved.

The FCA has also been concerned about the so-called 'loyalty penalty' - the higher premiums sometimes paid by loyal customers who do not shop around each year.

In its new review - General insurance product value and coronavirus (Covid-19) Guidance – update of the market - the Financial Conduct Authority (FCA) says many insurers are not doing enough to ensure fair value and clarity to consumers.

The review looked at how firms “designed, sold and reviewed their products” to ensure they met the needs of their customers.

The watchdog said that some firms had made good progress in meeting the FCA’s rules on product governance and value, issued in 2018 and 2019, as well as against temporary guidance on product value, issued in response to Covid-19 last year, however too many were “not fully meeting the FCA’s standards.”

The regulator says its review also suggests that many firms are likely to be unprepared to meet new enhanced rules on product governance, which come into force on 1 October. 

The new rules are part of a number remedies introduced by the FCA to tackle the loyalty penalty and ensure that firms focus on providing fair value to all their customers.

The review found weaknesses including:

• Insufficient focus on customers, outcomes and product value, including when considering value in the context of Covid-19
• Shortcomings in governance and oversight of products

On commissions the FCA said it was not always clear firms have adequate processes in place to assess whether intermediary remuneration bears “reasonable relationship” to the costs or workload required to distribute the product, as required under the rules applicable from 1 October.

Sheldon Mills, executive director for supervision, policy and competition at the FCA, said: “We know some firms are doing the right thing but with the deadline for implementing our enhanced rules less than two months away, it’s worrying that some firms may not be ready.

"Where firms are not consistently meeting existing requirements and expectations, it risks harm through poor value products or products being sold to the wrong customers. These firms have significant work to do urgently to be able to comply with the enhanced product governance rules. Firms that fail to do that work risk regulatory action.”

The FCA’s enhanced product governance rules were introduced following its General insurance pricing practices market study which found home and motor insurance markets were not working well for consumers, particularly loyal customers. The rules are designed to ensure that firms have processes in place to deliver products that offer fair value to customers (all non‑investment insurance contracts, not only home and motor insurance).