This chapter does not affect the application of other requirements in the FCA Handbook applying to firms in relation to their insurance distribution activities including but not limited to:

1. (1)

   disclosure (ICOBS 2.2, ICOBS 6.1, COBS 4 and COBS 14.2);

2. (2)

   suitability (COBS 9 or COBS 9A);

3. (3)

   appropriateness (COBS 10A);

4. (4)

   identification and management of conflicts of interest (SYSC 10.1 for intermediaries or SYSC 3.3 for insurers); and

5. (5)

   inducements (COBS 2.3A).

[Note: article 25(3) of the IDD]

A firm which manufactures any insurance product must maintain, operate and review a process for the approval of:

1. (1)

   each insurance product; and

2. (2)

   significant adaptations of an existing insurance product,

in each case before it is marketed or distributed to customers.

[Note: first subparagraph of article 25(1) of the IDD]

The product approval process referred to in PROD 4.2.1R must be proportionate and appropriate to the nature of the insurance product.

[Note: second subparagraph of article 25(1) of the IDD]

3For a non-investment insurance product, a firm must ensure a product approval process has all necessary measures and procedures for identifying whether the product is, or remains, appropriate to be marketed or distributed to customers in light of the requirements in PROD 4.2.14A (Fair value for non-investment insurance products: individual insurance product and packages) to PROD 4.2.14SR (Fair value for non-investment insurance products: additional provisions).

In circumstances other than PROD 4.2.13UK2, when firms collaborate to manufacture an insurance product, they must outline their mutual responsibilities in a written agreement.

3For a non-investment insurance product, a firm must ensure that the product approval process identifies whether the product provides fair value to customers in the target market including whether it will continue to do so for a reasonably foreseeable period (including following renewal).

1. (1)

   3Where a non-investment insurance product is intended to be distributed with one or more additional products, a firm must identify whether:

   1. (a)

      each component product; and

   2. (b)

      the package as a whole,

   will provide fair value to the customer including that it will continue to do so for a reasonably foreseeable period (including following renewal).

2. (2)

   The assessment referred to in (1) must include (but is not limited to) consideration of:

   1. (a)

      the value of the core insurance product;

   2. (b)

      the value of any additional products; and

   3. (c)

      the overall price of the package to the customer, taking into account the proposed distribution arrangements.

3. (3)

   A firm is not required to assess the value of a component product under (1) where the component is a non-investment insurance product for which the firm is not a manufacturer.

1. (1)

   3A firm must:

   1. (a)

      be able to clearly demonstrate how any non-investment insurance product, additional product or package provides (and will provide for a reasonably foreseeable period) fair value; and

   2. (b)

      make and retain a record of the value assessment required by PROD 4.2.14AR and, where relevant, PROD 4.2.14BR.

2. (2)

   Where a firm is unable to both:

   1. (a)

      identify; and

   2. (b)

      clearly demonstrate,

   that the insurance product and, where relevant, the package will provide fair value, the firm must not market the product or permit the product to be distributed (whether directly or through another person), or must have ensured appropriate changes have been made so that fair value will be provided.

3A firm must consider the value considerations in PROD 4.2.14AR and, where relevant, PROD 4.2.14BR throughout every stage of the product approval process in PROD 4 including, in particular, when:

1. (1)

   identifying the target market and the interests, needs, objectives and characteristics of such customers (PROD 4.2.15R to PROD 4.2.21AG);

2. (2)

   undertaking product testing (PROD 4.2.22UK to PROD 4.2.26G); and

3. (3)

   selecting any distribution channel (PROD 4.2.27UK to PROD 4.2.32DR).

3In PROD 4, ‘value’ means the relationship between the overall price to the customer and the quality of the product(s) and/or services provided. The assessment of value must include consideration of at least the following:

1. (1)

   the nature of the product including the benefits that will be provided, their quality, and any limitations (for example in the scope of cover, exclusions, excesses or other features);

2. (2)

   the type and quality of services provided to customers;

3. (3)

   the expected total price to be paid by the customer when buying or renewing the insurance product, and the elements that make up the total price. This will need to include consideration of at least the following:

   1. (a)

      the pricing model used to calculate the risk premium:

      1. (i)

         for the initial policy term; and

      2. (ii)

         any future renewal;

   2. (b)

      the overall cost to the firm of the insurance product (including the underwriting and operating of the product) and, where relevant, any other components of a package;

   3. (c)

      the individual elements of the expected total price to be paid by the customer including, but not limited to, the price paid for:

      1. (i)

         the insurance product, including any additional features which are part of the same non-investment insurance contract;

      2. (ii)

         any additional products, including retail premium finance, offered alongside the insurance product;

      3. (iii)

         the distribution arrangements, including the remuneration of any relevant person in the distribution arrangements, and including where the final decision on setting the price is taken by another person);

4. (4)

   how the intended distribution arrangements support, and will not adversely affect, the intended value of the product.

3When considering the value of a non-investment insurance product under PROD 4.2.14A and, where relevant, PROD 4.2.14BR, a firm must not rely on individual customers to consider whether they are making fair value purchases in place of any part of the firm’s own assessment, in particular where an insurance product is manufactured to be distributed either with additional products or on an ancillary basis to another good or service.

1. (1)

   3When assessing value, a firm must use all necessary and appropriate data and information available to it.

2. (2)

   For the purposes of (1) the data and information a firm should consider using includes, but is not limited to:

   1. (a)

      information available to the firm internally including:

      1. (i)

         customer research;

      2. (ii)

         claims information such as handling times, frequency, severity of claims costs (including total costs and average per claim), claims ratios, rates of and reasons for claim acceptance/declinature, both expected for the product and/or any actual information from a comparable product; and

      3. (iii)

         complaints data (including root cause analysis and handling times), both expected for the product itself and/or any actual information from a comparable product;

   2. (b)

      public information or information obtainable by the firm from external sources including analysis of similar insurance products available from other firms and, where relevant, data published as part of the FCA’s work on value measures in the general insurance market;

   3. (c)

      information available to the firm specifically from persons in the distribution arrangements, including:

      1. (i)

         remuneration and its impact on the value of the product, package or component part;

      2. (ii)

         levels or quality of service provided by any person in the distribution arrangements; and

      3. (iii)

         any results of monitoring and oversight of the processes of any persons in the distribution arrangement (for example, call monitoring or file checks) including in relation to other products that person distributes.

3A firm must, as far as reasonably possible, ensure the distribution arrangements for a non-investment insurance product avoid or minimise the risk of negatively impacting the fair value of the insurance product or package. This includes, but is not limited to:

1. (1)

   avoiding or reducing the risks arising from:

   1. (a)

      any remuneration of a party, or parties, involved in the distribution arrangements increasing, directly or indirectly, the total price paid by the customer without adequate monitoring or oversight of the nature, level and fairness justification for their inclusion; or

   2. (b)

      providing discretion to another person to set the final price, for example through a net pricing arrangement, without adequate monitoring or oversight of the final price paid by the customer;

2. (2)

   ensuring that appropriate arrangements will be in place to identify if the actions of another person involved in the distribution arrangements would adversely affect the value of the insurance product or package; and

3. (3)

   reducing the scope for the overall effect of any distribution arrangements to detrimentally affect the value of the products or package including where the cumulative effects of the remuneration of multiple parties unreasonably add to the overall price paid by the customer.

3A firm must obtain from any person in the distribution arrangements all necessary and relevant information to enable it to identify the remuneration associated with the distribution arrangements to allow it to assess the ongoing value of the product, including at least:

1. (1)

   the type and amount of remuneration of each person in the distribution arrangement where this is part of the premium or otherwise paid directly by the customer, including in relation to additional products (other than where this relates to another non-investment insurance product for which the firm is not a manufacturer);

2. (2)

   an explanation of the services provided by each person in the distribution arrangements; and

3. (3)

   confirmation from any firm in the distribution arrangements that any remuneration is consistent with their regulatory obligations including SYSC 19F.2 (IDD remuneration incentives).

3A firmmanufacturing a non-investment insurance product must ensure the manufacture of an insurance product is driven by features that benefit the customer and not by a business model which relies on poor customer outcomes to be profitable.

3In relation to a non-investment insurance product to be sold in a package with additional products, a firm must not set or increase the price of those additional products to the customer in a way that detrimentally impacts the package delivering fair value, including where this is done to minimise the financial effects on the firm of reducing the price of, or making other changes to, an insurance product as a result of the fair value assessment.

For each insurance product the product approval process must:

1. (1)

   specify an identified target market;

2. (2)

   ensure that all relevant risks to the identified target market are assessed;

3. (3)

   ensure that the intended distribution strategy is consistent with the identified target market; and

4. (4)

   require the manufacturer to take reasonable steps to ensure that the insurance product is distributed to the identified target market.

[Note: third subparagraph of article 25(1) of the IDD]

3The effect of PROD 4.2.14AR and, where relevant, PROD 4.2.14BR, when taken together with PROD 4.2.15R, is that a firm will need to be able to show that a non-investment insurance product offers fair value to the specified target market, taking into account in particular their needs, objectives, interests and characteristics.

1. (1)

   3For a non-investment insurance product, when identifying the target market a firm must identify if there are groups of customers for whom the product or package would not provide the intended level of value identified for PROD 4.2.14AR and, where relevant, PROD 4.2.14BR.

2. (2)

   A firm must take reasonable steps in its use of the distribution arrangements to ensure the product is not distributed to any such groups of customers identified in (1). The information required in PROD 4.2.29R to be provided to distributors must include a clear description of these customers.

Manufacturers must consider the charging structure proposed for each insurance product, including examination of the following:

1. (1)

   whether the costs and charges of the insurance product are compatible with the needs, objectives and characteristics of the target market;

2. (2)

   where relevant, whether the charging structure of the insurance product is appropriately transparent for the target market, such as that it does not disguise charges or is too complex to understand; and

3. (3)

   where relevant, whether the charges undermine the return expectations of the insurance product, such as where the costs or charges equal, exceed or remove almost all the expected tax advantages linked to a life policy.

A firm which manufactures an insurance product, must make available to a distributor:

1. (1)

   all appropriate information on the insurance product

2. (2)

   all appropriate information on the product approval process; and

3. (3)

   the identified target market of the insurance product.

[Note: fifth subparagraph of article 25(1) of the IDD]

1. (1)

   A manufacturer must make available to any distributor information about the target market assessment.

2. (2)

   The information made available under (1) must be of an adequate standard to enable distributors to:

   1. (a)

      comprehend the identified target market for the insurance products; and

   2. (b)

      be able to identify any customers for whom the insurance product is not compatible with their needs, characteristics and objectives.

3. (3)

   A manufacturer is not required to disclose specific information objectively considered to be commercially sensitive if the information it does make available would still allow distributors to meet (2)(a) and (b).

3In relation to a non-investment insurance product, a firm must not use a distribution channel unless it is able to demonstrate clearly that the channel results in fair value to customers in the target market.

3In relation to a non-investment insurance product, whenever making a change to the distribution arrangements a firm must:

1. (1)

   obtain all necessary information from the distributor or any other person who will be involved with the distribution arrangement, including that set out in PROD 4.2.14PR; and

2. (2)

   identify whether the proposed change to the distribution arrangements is consistent with the fair value requirement in PROD 4.2.14AR and, where relevant, PROD 4.2.14BR.

A firm must understand the insurance products it offers or markets.

[Note: fourth subparagraph of article 25(1) of the IDD]

A firm must regularly review the insurance products it offers or markets taking into account any event that could materially affect the potential risk to the identified target market. In doing so, the firm must assess at least the following:

1. (1)

   whether the insurance product remains consistent with the needs of the identified target market; 3

2. (2)

   (in relation to a non-investment insurance product) whether the insurance product remains consistent with the fair value assessment required under PROD 4.2.14AR and, where relevant, PROD 4.2.14BR; and3

3. (3)

   3whether the intended distribution strategy remains appropriate.

[Note: fourth subparagraph of article 25(1) of the IDD]

3For a non-investment insurance product, a firm must undertake the regular review required by PROD 4.2.34R:

1. (1)

   every 12 months; or

2. (2)

   more frequently where the potential risk associated with the product makes it appropriate to do so.

3A firm must obtain all necessary and relevant information in order to enable it to properly understand and monitor a non-investment insurance product including verification of the information in PROD 4.2.14PR.

1. (1)

   3When reviewing a non-investment insurance product, a firm must consider:

   1. (a)

      whether the insurance product, and where relevant the package, is providing the intended fair value to customers;

   2. (b)

      any impact which the distribution arrangements are having on the value including whether the distribution channels remain appropriate; and

   3. (c)

      whether the use of any retail premium finance arrangement remains appropriate including whether when distributed in a package with a non-investment insurance product it provides fair value.

2. (2)

   A firm in (1) must:

   1. (a)

      ensure that it has sufficient, good quality management information; and

   2. (b)

      use all appropriate and necessary data and information available to it (whether it holds this information already, the information is publicly available or it is able to obtain it from another person),

   to enable it to consider and assess value including the value actually being provided by the insurance product.

3. (3)

   The information in (2) that a firm needs to consider whether to use includes, but is not limited to:

   1. (a)

      information available to the firm internally including:

      1. (i)

         customer research;

      2. (ii)

         claims information (such as handling times, frequency, rates of and reasons for claim acceptance and declinature, severity of claims costs (including total costs and average per claim) and claims ratios); and

      3. (iii)

         complaints data (including root cause analysis and handling times);

   2. (b)

      public information or information obtainable by the firm from external sources including analysis of similar insurance products available from other firms and, where relevant, data published as part of the FCA’s work on value measures in the general insurance market;

   3. (c)

      information available to the firm (including what it would be reasonably able to obtain) in relation to any distribution arrangements through which the product is distributed, including:

      1. (i)

         remuneration information;

      2. (ii)

         levels and quality of service provided by the distributor;

      3. (iii)

         ongoing monitoring and oversight reports relating to the distributor’s processes, for example call monitoring or file reviews.

3For the purposes of showing the requirements in PROD 4.2.1R and PROD 4.2.5UK are met, where a firm makes a change to a non-investment insurance product it must make and retain a record of:

1. (1)

   the assessment of whether that change would amount to a significant adaptation of the insurance product; and

2. (2)

   where the assessment in (1) is that the change would not be a significant adaptation, the reasons for that decision.

3For a non-investment insurance product, the review process must:

1. (1)

   have the necessary measures to be able to identify if the insurance product is not providing fair value; and

2. (2)

   provide that appropriate actions be taken:

   1. (a)

      for the mitigation and any potential remediation of the harm to existing customers; and

   2. (b)

      to prevent harm to new customers.

3In relation to a non-investment insurance contract, where a firm identifies that the distribution is detrimentally affecting the intended value of the insurance product it must take appropriate remedial measures including, but not limited to:

1. (1)

   amending the distribution arrangements, including ceasing to use certain distributors or distribution channels;

2. (2)

   amending remuneration structures;

3. (3)

   withdrawing the insurance product from continued marketing or distribution.

Where a firm distributes insurance products which it does not manufacture it must have in place adequate arrangements to obtain the information in PROD 4.2.29R from the manufacturer.

[Note: sixth sub-paragraph of article 25(1) of the IDD]

Where a firm distributes insurance products which it does not manufacture, it must have in place adequate arrangements to understand:

1. (1)

   the characteristics of each insurance product; and

2. (2)

   the identified target market of each insurance product.

[Note: sixth sub-paragraph of article 25(1) of the IDD]

3In relation to a non-investment insurance product, the arrangements in PROD 4.3.2R must enable the distributor to understand:

1. (1)

   the outcome of the value assessment required by PROD 4.2.14AR and, where relevant, PROD 4.2.14BR; and

2. (2)

   any identified group of customers for whom the insurance product is not expected to provide fair value.

A distributor must take all reasonable steps to obtain the information in PROD 4.2.29R when distributing insurance products manufactured by any person to which 2product governance requirements in PROD 4.2 or2 requirements of the IDD POG Regulation2 do not apply.

1. (1)

   3In relation to a non-investment insurance product, the product distribution arrangements in PROD 4.3.2R must enable the distributor to identify:

   1. (a)

      the value that the insurance product is intended to provide to the customer; and

   2. (b)

      the impact that the distribution arrangements (including any remuneration it, or another person in the distribution chain to which it belongs, receives) has on the overall value of the insurance product to the customer.

2. (2)

   Any distribution strategy set up or applied by the distributor must be consistent with the aim of providing fair value to the customer.

3. (3)

   For the purposes of (1) and (2) a firm must consider at least the following:

   1. (a)

      the benefits the product is intended to provide to the customer;

   2. (b)

      the characteristics, objectives, interests and needs of the target market;

   3. (c)

      the interaction between the price paid by the customer and the extent and quality of any services the distributor (or any person connected to it) provides;

   4. (d)

      whether any remuneration it receives in relation to the insurance product would result in the product ceasing to provide fair value to the customer;

   5. (e)

      any potential detrimental effect on the intended value where the insurance product is to be distributed as part of a package with, or as part of the same agreement which provides, another product or service; and

   6. (f)

      where the distribution strategy involves offering, or arranging for the customer to be offered, retail premium finance, the firm must ensure that, taking into account the costs (including any charges/interest) of the retail premium finance, the customer does not pay a price that means, if seen as a package, the customer will not receive fair value.

3A firm must review its product distribution arrangements in relation to a non-investment insurance product at least every 12 months.

3For the purposes of PROD 4.3.10UK, a distributor must provide on request to a manufacturer of a non-investment insurance product:

1. (1)

   information on the distributor’s remuneration in connection with the distribution of the insurance product;

2. (2)

   information on any ancillary product or service that the distributor provides to the customer (including insurance add-ons, non-insurance additional products and retail premium finance), which may affect the manufacturer’s intended value of the insurance product; and

3. (3)

   confirmation that the distribution arrangements are consistent with the obligations of the firm under the FCA Handbook including in particular in SYSC 10 (Conflicts of interest) and SYSC 19F.2 (IDD remuneration incentives).

1. (1)

   3For a non-investment insurance product, a distributor must take appropriate remedial and mitigating action, including to amend its product distribution arrangements, where it identifies:

   1. (a)

      the insurance product (or, where relevant, the package) is not providing fair value for customers; or

   2. (b)

      any aspects of a product or package that may mean it does not offer fair value; or

   3. (c)

      the distribution arrangements including remuneration structures may mean the customer is not being provided with fair value.

2. (2)

   The actions which the distributor takes for (1) must:

   1. (a)

      aim to mitigate the situation and prevent further occurrences of any possible harm to customers, including, where appropriate, amending the distribution strategy for that product (and, where relevant, the package); and

   2. (b)

      include informing any relevant manufacturers promptly about any concerns they have and any action the distributor is taking.

1 PROD 4.5 applies to a firm which manufactures or distributes a general insurance contract product which is the subject of a reporting requirement within SUP 16.27 (General insurance value measures reporting).

1A firm which manufactures (in whole or in part) a value measures product must comply with the requirements in PROD 4.5.4R.

1The requirements on manufacturers referred to in PROD 4.5.3R are:

1. (1)

   that in relation to existing value measures products the firm has effective procedures in place to ensure that, on a continuing basis, the product offers fair value to customers in the target market, taking into account, among other things:

   1. (a)

      the needs of the target market;

   2. (b)

      the firm’s reasonable assessment of the value expectations of customers in the target market;

   3. (c)

      the value measures information, within a reasonable period;

   4. (d)

      any particular features of the product or the terms and conditions that may give rise to concerns about poor value;

   5. (e)

      appropriate product testing including scenario analysis and testing on consumers; and

   6. (f)

      the charging structure of the product including examination of whether the costs and charges are compatible with how useful the product is to consumers and the transparency of costs and charges.

   [Note: The requirement in PROD 4.5.4R(1)(c) applies from 1 July 2021, when SUP 16.2 will be in force.]

2. (2)

   that in relation to new products and significant adaptations to existing products, the firm’s product approval process in PROD 4.2.1R, product testing in PROD 4.2.22UK2 including considerations in PROD 4.2.25R and the review of products in PROD 4.2.34R3 also incorporate the procedures and considerations in (1) above.

3. (3)

   manufacturers that identify any aspects of a product that may mean the product does not offer fair value, must:

   1. (a)

      take appropriate action to mitigate the situation and/or prevent further occurrences of any possible detriment to customers;

   2. (b)

      inform any relevant distributors promptly about remedial action being taken; and

   3. (c)

      where relevant, not bring new products to market or make any proposed changes.

4. (4)

   manufacturers must regularly review the products it offers or markets to ensure they continue to offer fair value taking into account any event that could materially affect whether this remains the case.

5. (5)

   where the firm is required to submit a value measures report by SUP 16.27.7R, that the firm takes all reasonable steps to set up arrangements with firms entering into contracts of insurance as principal in relation to those products, to enable it to obtain the value measures data required to be included in the value measures report.

6. (6)

   where there is more than one manufacturer they must all outline in writing their mutual responsibilities arising under PROD 4.5.3R and 4.5.4R.

1Where a firmdistributes a value measures product that it does not manufacture it must comply with the requirements in PROD 4.5.7R.

1The requirements on distributors referred to in PROD 4.5.6R are:

1. (1)

   that in relation to existing products it distributes, and any new products it proposes to distribute, the firm has procedures in place to consider, on a continuing basis, whether the product offers fair value to customers in the target market, taking into account the factors in PROD 4.5.4R(1)(a) to (f);

2. (2)

   where the firm is required to submit a value measures report by SUP 16.27.7R, that the firm takes all reasonable steps to have arrangements with the manufacturer of the value measures products and/or firms or persons entering into contracts of insurance as principal in relation to those products, to enable it to obtain the value measures data required to be included in the value measures report;

3. (3)

   distributors that identify any aspects of a product that may mean the product does not offer fair value, must:

   1. (a)

      take appropriate action to mitigate the situation and/or prevent further occurrences of any possible detriment to customers, including, where appropriate, amending their distribution strategy for that product; and

   2. (b)

      inform any relevant manufacturers promptly about any concerns they have and any action the distributor is taking.

1 PROD 4.6 applies to:

1. (1)

   the manufacturer of a legacy non-investment insurance product, which includes:

   1. (a)

      an insurance intermediary which has a decision-making role (in whole or in part) in relation to the manufacture of a legacy non-investment insurance product;

   2. (b)

      an insurer that is responsible for the manufacture of a legacy non-investment insurance product including whoever currently underwrites the legacy non-investment insurance product; and

2. (2)

   a firm that distributes (including the renewal of an existing policy) a legacy non-investment insurance product.

1For a product falling within (2)(b) of the definition of a legacy non-investment insurance product, any reference to distribution or renewal is to be treated as including the ongoing collection of premiums in relation to a policy that remains in force.

1A manufacturer of a legacy non-investment insurance product must apply the product approval process in PROD 4.2 to that insurance product.

1. (1)

   1A firm must determine whether the legacy non-investment insurance product should continue to be marketed and distributed (including renewals for existing customers).

2. (2)

   Where a firm does not approve the continued marketing and distribution of the product, including where the firm has been unable to identify that the product, or where relevant, the package provides fair value for the purposes of PROD 4.2.14AR or, where relevant, 4.2.14BR, it must immediately:

   1. (a)

      cease marketing or distributing the product or package (whether directly or indirectly), including any renewal for an existing customer; and/or

   2. (b)

      make such changes as are necessary for the product or package to provide fair value.

1. (1)

   1A firm which distributes, or will distribute, a legacy non-investment insurance product must meet the requirements in PROD 4.3 in relation to that insurance product.

2. (2)

   A firm must put in place the necessary arrangements for the purposes of (1), including for:

   1. (a)

      obtaining any necessary information from the manufacturer;

   2. (b)

      providing any necessary or relevant information to the manufacturer;

   3. (c)

      understanding the product, identified target market and value assessment;

   4. (d)

      ensuring adequate oversight, including the ability to obtain necessary or relevant information, of any other persons involved in the distribution with whom the distributor has a direct relationship; and

   5. (e)

      the regular review of the product distribution arrangements including to take appropriate action in order to avert the risk of consumer detriment.