Fair value under PROD 4: how a small brokerage evidences its own commission

Contents

1. What PROD 4.3 actually asks of a distributor
2. Your remuneration is the part only you can assess
3. Most of the evidence is retrieval, not new work
4. A yearly cycle a five-person firm can run
5. Frequently asked questions

Under PROD 4 of the FCA Handbook your brokerage is not a middleman passing on somebody else's price. You are a distributor, and the commission and fees you take are part of what the customer pays for the product. A policy can be well designed by the insurer and still fail the fair value test once the distribution chain has taken its cut. That is why the rule sits on you as well as on the manufacturer.

The FCA's thematic review TR24/2, published on 21 August 2024, examined 28 manufacturers and 39 distributors across ten general insurance and pure protection products. Manufacturers had materially strengthened their product governance; distributors had made more limited progress, and most did not fully understand their responsibility to consider their own remuneration, the services behind it, and the effect of both on the value of the product. That finding is not aimed only at large consolidators. A five-person commercial brokerage taking renewal commission, a broker fee and a share of premium finance income has exactly the same question to answer: what do we do for that money, and can we show it?

What PROD 4.3 actually asks of a distributor

PROD 4.2 governs manufacturers. PROD 4.3 governs you. Strip back the drafting and there are six things to have in place.

Rule	What it means in a small brokerage
PROD 4.3.1R / 4.3.5R	Have distribution arrangements that obtain all appropriate information about the product from the manufacturer, proportionate to the product's complexity and your scale
PROD 4.3.2R	Understand each product's characteristics and the target market the manufacturer identified
PROD 4.3.8R	Distribute in line with that distribution strategy and that target market
PROD 4.3.6AR	Identify the intended value of the product and assess the effect your own distribution arrangements — including any remuneration you receive — have on overall value
PROD 4.3.10R	Review your distribution arrangements regularly, at intervals justified by your size, scale and complexity and by the potential for customer harm
PROD 4.3.11R	Tell the manufacturer promptly when a product is reaching the wrong people or you see circumstances that could harm customers

Two rows catch small firms out. PROD 4.3.6AR turns commission from a commercial matter into a governance one: you have to state the value the product is meant to deliver, then assess what your arrangements do to it. The evidential provision at PROD 4.3.6ER spells out what a bad answer looks like — remuneration that does not bear a reasonable relationship to the firm's actual costs, or a packaged price that does not bear a reasonable relationship to the overall benefits.

PROD 4.3.11R is the one almost nobody operates. It is a feedback duty running back up the chain. Most brokerages hold exactly the evidence it contemplates — declinature patterns, add-ons nobody claims on, a scheme sold to a segment that keeps cancelling in month three — and never send it to the insurer. Building a two-line quarterly note to each manufacturer is cheap and it is one of the few parts of PROD 4 a reviewer can verify in seconds.

Scope is worth settling before you build anything: PROD 4 does not reach every line you write, since reinsurance and contracts of large risks fall outside it. Read PROD 4.1 against your own book rather than assuming your commercial account is in or out.

Your remuneration is the part only you can assess

The manufacturer's fair value assessment covers the product. It cannot cover you, because the insurer does not see your fee schedule or what you pass on to third parties. Expect a request for that information — manufacturers are required to gather it — and expect the list to be longer than people assume:

1. Initial and renewal commission, including any gap between the two.
2. Broker fees: new business, renewal, mid-term adjustment, cancellation, certificate reissue.
3. Premium finance income — commission, an interest share, or a rate differential.
4. Profit share and contingent commission from an insurer, scheme or binder.
5. Income from add-ons, ancillary covers and claims services.
6. Anything you pay away: introducer fees, appointed representative splits, network fees, payments to managing agents.

Against each line you need the service it buys. Not the service described in your terms of business — the service the client actually received: the mid-term adjustments handled, the claim chased weekly, the renewal remarketed to three carriers, the certificate reissued at six on a Friday. Where you pay part of your income away, the same test applies to the recipient: what did the customer get for that? The FCA's multi-firm review of broker remuneration in multi-occupancy buildings insurance is the clearest illustration of how the question gets asked when a distribution chain is long, and the logic does not stay in that sector.

This is the same value lens the Consumer Duty applies through its price and value outcome. If you are already producing an annual board report on customer outcomes, your fair value work is a chapter of it, not a separate project.

Most of the evidence is retrieval, not new work

Firms tend to picture a fair value assessment as a research exercise. In a small brokerage it is mainly assembling four things you already hold.

• The manufacturer's pack — target market, intended value, expected distribution arrangements. If it has not arrived, chase it: PROD 4.3.1R makes obtaining that information your obligation, not the insurer's favour.
• Your own numbers — average commission and fee income by product, average premium, cancellation rates, claims frequency and declinature reasons.
• Complaints and claims notes — the fastest route to a product that is not delivering what the target market expected.
• The service record — proof that the servicing you charge for happened.

That last point is where messaging changes the picture. If a large share of your servicing now happens over WhatsApp, the evidence that you earned your commission is in those threads — and it is worthless to a reviewer if it lives on an account handler's personal phone. A shared brokerage inbox keeps each conversation attributable to a named handler and retrievable long after they have left; exporting customers and activity to CSV is usually enough to build the sample your assessment needs, alongside your broking system data. The point is not the tool. It is that "we service these clients closely" has to be demonstrable at file level, and for a growing number of brokerages the file is a message thread.

A yearly cycle a five-person firm can run

1. Set the perimeter. List every product you distribute and mark which fall inside PROD 4. Group them — you assess products, not individual policies.
2. Chase the manufacturer information for anything missing, in writing, so the chase itself is evidence.
3. Build one remuneration schedule covering all six income lines above, per product group, including what you pay away.
4. Pull the outcome data — claims, complaints, cancellations, declinatures — for the same period.
5. Write a short assessment per group: intended value, our remuneration, the services behind it, what the data says, and the decision. One page is fine; a conclusion with no data behind it is not.
6. Act and feed back. Where the answer is uncomfortable, change the fee, change the target market or stop distributing — then send the manufacturer the PROD 4.3.11R note. Diarise the next review with the interval you have justified.

Most small firms land on annual, aligned to their board reporting. That is a defensible interval, but PROD 4.3.10R asks you to justify it rather than inherit it, and a product with a spike in complaints or a mid-year pricing change deserves an out-of-cycle look. If your renewal pricing is part of the same conversation, our note on ICOBS 6.5 renewal disclosure covers the customer-facing half. More on the regulatory side of running a brokerage sits in our compliance articles.

Frequently asked questions

We only distribute — does fair value really apply to us?

Yes. PROD 4.3 places obligations directly on distributors, and PROD 4.3.6AR specifically requires you to assess the effect of your own distribution arrangements, including your remuneration, on the overall value of the product. The manufacturer's assessment does not discharge it, because the insurer cannot see your fee schedule or what you pay to third parties.

How detailed does the assessment have to be?

Proportionate to your size, scale and complexity — that phrase appears throughout PROD 4.3. A one-page assessment per product group, with the remuneration figures and the outcome data actually shown, is a stronger answer than a twenty-page template with assertions and no numbers. What is not proportionate is having nothing.

Is a broker fee on top of commission a problem?

Not in itself. The test is whether the total the customer pays bears a reasonable relationship to the benefits, and whether your remuneration bears a reasonable relationship to your actual costs and the service you deliver. A fee that funds genuine work you can evidence is defensible; a fee that exists because it always has is the one to look at first.

What if a manufacturer never sends us its fair value information?

Chase it in writing and keep the trail. The obligation in PROD 4.3.1R and PROD 4.3.5R is on you to have arrangements that obtain the information, so silence from an insurer does not neutralise the rule. If the information never comes, that is itself a fact for your assessment and a reason to question whether you should keep distributing the product.