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FCA's Perimeter Report – observations for the insurance market

15 November 2021. Published by Jonathan Charwat, Senior Associate

In late October, the FCA published this year's version of its Perimeter Report.

The Perimeter Report is intended to clarify some of the complexities about what the FCA does and does not regulate. It also sets out some areas where the FCA sees potential for customer harm.

Here are some of the key takeaways from the report for the insurance market:

1. Appointed representatives (AR) - the FCA intends to intensify its scrutiny of all principal firms, and applicants which intend to appoint ARs. The FCA also notes that in a pilot study on AR applications, 50% of applicant firms intending to appoint ARs either withdrew their applications or their applications were refused.

2. Outsourcing - the FCA suggests that regulated firms have an increasing dependency on unregulated service providers (especially in technology and information systems) and reminds regulated firms that they need to:

  • identify and manage their third party risks; and
  • notify the FCA of critical, important or material outsourcings.

3. Operational Resilience - related to the point on 'Outsourcing' above, the FCA notes that while the new Operational Resilience rules do not apply directly to unregulated third party service providers (or to insurance brokers), the new rules will require insurers to work effectively with third party service providers to ensure that services can be mapped and tested to identify vulnerabilities.  In essence, this means that outsourcing agreements will need to include provisions ensuring that insurers can monitor, oversee and control where necessary, and take steps to address any vulnerabilities or issues in third party services.

4. The definition of insurance - The FCA notes that there is sometimes uncertainty on whether some products should be classed as insurance and that some in the market have attempted to structure products to be outside the regulatory remit when the FCA considers these products should properly be considered insurance. The two areas of concern outlined below are mentioned specifically by the FCA and the FCA also notes that it may be looking to update its guidance as a result (Perimeter / PERG):

  • Discretionary products - some providers have sought to structure contracts so that claim payments are made on a discretionary basis in an attempt to circumvent the principle that an insurance contract requires an undertaking to pay money or provide a benefit to a recipient. In some cases the FCA suggests that such discretion could either be an illusion or in fact be considered an unfair term and questions whether in these cases, the contract should be categorised as insurance; and
  • Warranty repair services - the FCA considers that many warranties which are mainly repair service contracts with a minor indemnity element are artificially described and in reality are insurance contracts.

5. BI Test Case - the FCA speaks about its role in the BI Test Case but also notes that it is aware of policyholders continuing to dispute coverage, causation and calculation of claims and policyholders pursuing these disputes in the court and at the Financial Ombudsman Service. The FCA further confirmed that it (together with the PRA) will be considering this over the coming year.