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The Financial Conduct Authority’s (FCA) Thematic Review Report TR24/2 offers a critical examination of the governance and oversight frameworks across both manufacturers and distributors within the financial services sector. This review is particularly relevant in the context of the new Consumer Duty, which demands that all financial products deliver fair value to customers.

The findings from this review reveal significant shortcomings in both sectors, highlighting the need for improved governance structures, detailed Fair Value Assessments (FVAs), and better management of distribution arrangements. The report emphasises the importance of considering vulnerable customers, proactively identifying potential issues, and effectively managing relationships between distributors and manufacturers. By addressing these key areas, firms can ensure that their products not only meet regulatory requirements but also deliver positive outcomes for all customers.

Manufacturers

Commercial Lines

A. Governance and Oversight

The TR24/2 review uncovered significant weaknesses in the governance and oversight practices within the commercial lines sector. Firms often lacked a robust challenge process during product evaluations, despite involving multiple committees and stakeholders. This deficiency in rigorous oversight raises concerns about whether these products are genuinely delivering the intended outcomes to customers, a fundamental expectation under the Product Intervention and Product Governance (PROD) rules and Consumer Duty obligations.

Additionally, the review identified major shortcomings in how firms assessed their products in line with PROD and Consumer Duty requirements. Many firms failed to document clear rationales for product suitability, leading to a lack of transparency and accountability in decision-making. This includes inadequate record-keeping of discussions and decisions at the governing body level, which further weakened the product approval process. Moreover, the FCA stressed the importance of ensuring that the governance process includes specific considerations for vulnerable customers, ensuring that these groups receive appropriate attention during product design, review, and monitoring.

B. Fair Value Assessments (FVAs)

The FCA’s investigation into FVAs within commercial lines revealed that many firms did not adequately identify or mitigate product concerns. Methodologies employed for these assessments were often opaque, lacking clarity on what was included and how limitations were managed. Furthermore, firms frequently overlooked the need to evaluate all revenue-generating components—such as underwriting, claims handling, and other operational costs—when determining fair value.

A significant issue identified was the insufficiency of Management Information (MI) to support effective decision-making. Many firms lacked robust MI systems, leading to governance bodies being ill-equipped to make informed decisions regarding product value. The FCA stressed the importance of having well-trained staff capable of analysing data effectively to improve customer outcomes. Additionally, firms were encouraged to adopt proactive identification strategies to detect potential value issues early and address them before they negatively impact customers, particularly those who are vulnerable.

Firms in the commercial lines sector are required to ensure that their products deliver good outcomes when the end beneficiaries are individual consumers. The Duty applies in instances where the policy holder is a business, albeit the policy affects an individual; for example in the case of landlord insurance covering a multi-occupancy tenancy agreement.

Retail Lines

A. Product Governance

In the retail lines sector, the FCA found similar governance challenges as those in commercial lines. Firms struggled to make clear, evidence-based judgments during product reviews, often failing to document the rationale behind their decisions adequately. This lack of transparency in governance, particularly in recording discussions and challenges at the governing body level, undermines the integrity of the product approval process.

The review also revealed that target market analysis in retail lines was often too high-level and lacked the necessary granularity. Firms frequently did not fully consider the specific needs of the target market or the variety of assets being insured, leading to products being offered to customers who may not be well-suited to them. It is particularly important that product governance frameworks include specific measures to ensure that vulnerable customers are considered at every stage of the product lifecycle, from design to post-sale monitoring​.

B. Fair Value Assessments

The FCA identified significant issues with FVAs in the retail sector. Many assessments failed to adequately outline concerns or detail how identified issues would be mitigated. Methodologies were often unclear, and firms did not adequately explain the limitations or risks associated with the product. The FCA suggested that more frequent assessments might be necessary to ensure ongoing fair value. Additionally, firms must adopt proactive identification measures to detect and resolve potential issues before they result in poor outcomes for customers, particularly vulnerable groups​.

Another critical finding was the lack of sufficient MI to monitor distributor remuneration and its impact on fair value. The FCA highlighted the need for well-documented distribution arrangements and a comprehensive rationale behind these arrangements. Firms were also found lacking in providing adequate detail to distributors, which is essential for effective FVA and compliance with PROD 4.3 requirements.

C. Distributor Relationships

The FCA’s review also highlighted significant weaknesses in how firms manage their relationships with distributors. Many firms failed to monitor distributor remuneration effectively, particularly where commissions were tied to premiums. This lack of oversight can lead to a misalignment between the value provided to customers and the remuneration received by distributors. The FCA stressed that firms must ensure that their distribution arrangements do not undermine the overall value proposition for the end customer, especially when vulnerable customers are involved​.

Distributors

Commercial Lines

A. Governance and Oversight

In the commercial lines sector, the FCA found that while some distributors have made improvements in governance and oversight, many others continue to face significant challenges. For example, where improvements have been noted, senior managers have taken responsibility for ensuring that their activities and remuneration align with delivering fair value to customers. However, many distributors still struggle with unclear governance structures, making it difficult to determine responsibility and oversight within the distribution chain.

Another significant issue is the lack of adequate Management Information (MI) to assess the impact of distribution activities on product value. Many distributors in commercial lines were unable to provide sufficient evidence of decision-making and oversight, often lacking necessary documentation such as minutes or records that would support their governance processes. This deficiency directly impacts their ability to meet PROD 4.3 obligations​.

B. Fair Value Assessments and Distribution Arrangements

The review highlighted that distribution arrangements in the commercial lines often lacked sufficient detail, particularly in areas like distribution strategy, remuneration, and obtaining necessary information from manufacturers. This lack of detail is problematic as it hinders distributors from fully understanding and ensuring the fair value of the products they distribute.

In commercial lines, many distributors failed to ensure that their remuneration structures, such as commission levels, were consistent with delivering fair value, particularly for large premiums. Moreover, distributors often did not amend their distribution strategy when issues were identified, which could have helped mitigate potential negative impacts on product value, especially when insurance products were bundled with other services.

C. Conflicts of Interest (CoI) Management

The FCA found that many commercial line distributors lacked comprehensive policies to manage conflicts of interest effectively. These firms should focus on strengthening their internal controls and processes to identify and mitigate both material and potential conflicts of interest, which could otherwise compromise the value of the products.

Retail lines

A. Governance and Oversight

The FCA’s findings in the retail lines sector revealed similar governance challenges as those found in commercial lines. Many retail distributors have not made sufficient progress in understanding their responsibilities under PROD 4.3. Governance structures often remain unclear, making it difficult to establish who is responsible for oversight. The lack of clear governance is compounded by inadequate MI, which prevents distributors from fully assessing the impact of their activities on product value.

The review also noted that some retail distributors failed to maintain adequate records of their decision-making processes, which further weakened their governance and oversight. This lack of documentation impacts their ability to demonstrate compliance with regulatory requirements and to ensure that products are delivering fair value to customers​.

B. Fair Value Assessments and Distribution Arrangements

Retail line distributors also struggled with detailing their distribution arrangements, particularly concerning remuneration and obtaining necessary information from manufacturers. This lack of detail is especially problematic in retail lines, where understanding the full scope of product value is critical to ensuring that products meet the needs of their target markets.

In retail lines, distributors often did not adequately assess whether their remuneration structures provided fair value, particularly for bundled products or packages. The FCA emphasised the need for distributors to consider the impact of bundling insurance products with other services, as this can lead to duplication of cover or other issues that undermine the product’s value.

C. Distribution Strategies (PROD 4.3.8 R)

Distributors have specific obligations under PROD 4.3 to ensure that their activities do not detract from the product’s value. The review highlighted several shortcomings in how distributors manage these responsibilities. Many distributors lacked detailed distribution strategies, particularly in relation to remuneration structures and the acquisition of necessary information from manufacturers. Without this detailed strategy, distributors struggle to assess and ensure the product's fair value to customers. Moreover, the review found that distributors often failed to amend their distribution strategies when issues were identified, which could have helped mitigate potential negative impacts on product value. This is particularly important when insurance products are bundled with other services, as the combined offerings must still deliver fair value to the customer.

Additionally, distributors frequently overlooked the impact of their remuneration models on product value, especially where commissions were tied to premiums. The FCA stressed the importance of ensuring that all elements of a distributor's remuneration are transparent and justified in terms of the value they add to the customer. The need for frequent and rigorous assessments to ensure that distribution practices do not undermine the product’s intended value is crucial under PROD 4.3. Furthermore, distributors must establish robust controls to manage conflicts of interest effectively, ensuring that any potential conflicts are identified and mitigated to avoid compromising the product's value.

D. Distributor and Co-Manufacturer Relationships

As part of these improvements, the FCA also emphasised the importance of managing relationships with distributors and co-manufacturers. Firms must ensure that these partners are fully aligned with their product governance frameworks, and that their practices do not undermine the value or suitability of the products for end customers. Clear, documented responsibility maps and well-defined governance structures are essential in ensuring that all parties involved in the product lifecycle contribute to positive customer outcomes and compliance with regulatory standards.

Next Steps

The FCA is currently considering the most appropriate supervisory and regulatory actions to urgently address the issues identified in the TR24/2 review for both manufacturers and distributors. The FCA may require firms to undertake remedial actions to rectify these deficiencies, which will be supported by attestations from senior management to ensure accountability. In cases where the FCA identifies significant harm to customers, it will take decisive action to hold firms and their senior managers accountable for these failings. This may include enforcing measures to remediate the harm caused, ensuring that affected customers receive the necessary redress. The FCA’s approach underscores the seriousness with which it views these governance and oversight failures and its commitment to ensuring fair outcomes for all customers.

Conclusion

The FCA’s TR24/2 thematic review reveals pervasive issues in product governance and oversight across both manufacturers and distributors in commercial and retail lines. While some progress has been made, especially in the area of senior management taking responsibility, many firms still face significant challenges in aligning their practices with regulatory expectations. These challenges include managing conflicts of interest, ensuring adequate Management Information (MI), and refining remuneration structures to deliver fair value to customers.