CP25/12 sets out a number of flexible options to give insurance firms greater choice over how they manage their risks. None of these new opportunities are mandatory – firms that are compliant today will remain compliant without changing their current arrangements. The first question for firms is therefore one of strategy. Should firms overturn established control frameworks and take on change projects with their associated risks, in order to reap the benefits of these proposals? There's no doubt that these benefits could be significant – there are many reasons why firms should pursue this, but they will need to take a considered approach while doing so.
One change that’s likely to be popular across the industry is the reduction in the number of small and medium enterprise (SME) customers captured by the Consumer Duty. The financial and employee count thresholds for applying the Consumer Duty will now align with those used to determine Financial Ombudsman Service (FOS) eligibility. In addition, specific risks, including marine, aviation, goods in transit, and railway rolling stock will be out of scope when sold to a commercial customer, regardless of the size of the risk.
While this appears to be a common-sense amendment, which aligns with broader industry demands, taking advantage of it could require additional work for some firms. As many products will be sold to customers both inside and outside the Consumer Duty perimeter, the ability to differentiate standards and controls between these groups would necessitate two different control frameworks. Not to mention sufficient data collection at the point of sale (and throughout a customer relationship) to identify whether a particular customer is in or out of scope.
The Financial Conduct Authority (FCA) is also proposing to remove the requirement for product manufacturers and distributors to review all products at least once every 12 months. Instead, firms can determine how often to review each of their products, based on the potential for customer harm arising from the product’s risk profile.
This proposal can potentially offer substantial time and operational cost savings. Moving products to less frequent reviews can free up a significant number of person-hours each year. This can allow firms to deploy resources to potentially more profitable activities, and alleviate challenges around recruiting skilled resources to perform this work. As a result, the industry will likely welcome this proposal with open arms.
However, there are key areas to consider when changing the review period. Firms will be required to make and retain a record of the review period determined for each product, including the reasons why they deem it appropriate. There's also an extensive list of factors in the draft rules, which firms need to show they’ve considered as part of this determination. The need to consider this review period also applies on an ongoing basis, so this would not be a ‘once and done’ exercise.
Should customer harm occur between reviews of a product with a longer review period, firms may face regulatory challenge about the level of scrutiny applied to the product. Wider customer outcome monitoring frameworks will therefore need to be sufficiently robust on an ongoing basis.
In addition, the findings of the FCA’s thematic review in this area indicate that many firms have only recently fully embedded the fair value and product governance requirements. For firms that have managed to establish an effective 12-monthly routine, making changes now involves amending the status quo and re-training people.
Where firms collaborate to manufacture an insurance product, the FCA will allow those firms to contractually agree for one to be the ‘lead manufacturer’. The lead manufacturer will then hold responsibility for all product governance activity for the product(s) involved. This won't be mandatory – if no lead manufacturer is specified, the current situation (where co-manufacturers must make a written agreement on their respective roles, and all parties are responsible for compliance) applies.
Although appointing a lead manufacturer could reduce duplication of effort, lead manufacturers must be aware that they're taking on significant potential liabilities. Leads take full responsibility for compliance with the PROD 4 rules, including production of relevant ICOBS disclosures and insurance product information documents. More significantly, unless all parties agree differently in writing, then leads will also bear full responsibility for all breaches, including liability for any redress claims.
The draft rules also clarify the FCA’s position that intermediaries (except Lloyd’s managing agents meeting certain criteria) can't be a lead manufacturer. This could result in additional work for some insurers, who may have attempted to delegate elements of the product governance workload further down the distribution chain.
The FCA has proposed to discard the 15 hour minimum continuous professional development (CPD) requirement, and the associated record keeping and monitoring rules.
Although this removes the need for firms to track the number of hours that their staff have completed, the training requirements themselves remain largely unchanged. The requirements elsewhere in the Handbook for all staff to have the necessary skills, knowledge and expertise for their roles remain, and in fact are reinforced by additional guidance setting out the areas that firms should consider when establishing whether staff are sufficiently competent.
Firms should also consider whether removing this requirement may make them non-compliant with applicable overseas regulatory requirements.
The consultation paper proposes minor updates, such as clarifying the exclusion of bespoke contracts from product intervention and product governance sourcebook (PROD) 4, removing outdated employer’s liability insurance reporting rules, and correcting European Economic Area (EEA) references in the perimeter guidance manual (PERG).
The FCA has also indicated some areas for future discussion. One of these is the possibility of disapplying the insurance conduct of business sourcebook (ICOBS) and PROD 4 for non-investment insurance business outside the UK. This will support the competitiveness of UK firms when selling and distributing products overseas. The paper also signals potential future consultations on removing rules for specific products like payment protection insurance (PPI), packaged bank accounts, guaranteed asset protection (GAP) insurance, and funeral plans.
The FCA has also published CP25/13, proposing a number of financial services industry-wide changes. The FCA’s headline is its desire to “consolidate five existing returns into a single return”. This may sound like a dramatic slashing of red tape, but the reality is less unequivocal. While the number of forms will be slightly reduced, and tailored to a firm’s permissions to avoid submitting numerous nil returns, the data requested is more granular in some key areas.
Of particular interest to insurance sector firms will be the updated list of complaint product categories – the proposed list covers 34 general insurance and 14 pure protection products. While this will undoubtedly give the FCA more useful data in its quest for ever-smarter regulation, it requires firms to work through many more rows of a spreadsheet and to ensure that they can easily identify the required information.
The FCA is also proposing that firms report the numbers of complaints relating to vulnerable customers. Given many firms’ ongoing struggles to accurately identify and record customer vulnerability, this element could prove challenging, and firms may face follow-up questions from the FCA after their first report.
As outlined above, there's a compelling opportunity for firms to capitalise on the efficiencies being introduced by the FCA. While some of these options involve meaningful effort and a degree of risk, they also open the door to significant strategic advantages. With the right approach, firms can align these changes with their business models, strategies, and risk appetites to unlock long-term value.
Those that successfully navigate this landscape stand to benefit from streamlined internal processes and reduced compliance costs – enhancing operational agility. For new entrants, these developments may signal that the UK is becoming an even more attractive environment for doing business. Ultimately, this could serve as a catalyst for long-term growth, driven by smarter regulation, and more efficient operations.
The FCA consultation is open for feedback until 2 July 2025. If you’d like to discuss what these proposed changes could mean for your firm, contact Ben Farmer, Jonathan Sperrin or Blandine Arzur-Kean.
