Insurance Advisory

The Consumer Duty, which comes into force on 31 July 2023, will deliver a significant shift in what the Financial Conduct Authority (FCA) expects of firms. A particular focus will be on the distribution of insurance products, both to retail customers and SMEs, and the duties owed by the different parties in the distribution chain. There will need to be a high level of co-operation and information sharing between all parties involved in distributing insurance products if the FCA’s expectations under the Consumer Duty are to be met, particularly in the area of price and value. In May 2022, the FCA observed “we frequently see examples of harm caused by mis-selling, where firms lack customer-centric cultures and where consumer outcomes have not been appropriately considered”. Existing distribution arrangements should be reviewed carefully through a Consumer Duty lens, and it would not be a surprise to see further FCA action in this area.

The Financial Conduct Authority (FCA) is set to build on the experience of the pandemic in making clear its expectations of firms who deal with customers exhibiting vulnerability as a result of the current cost of living crisis. It has expressly referred firms in the insurance sector to its guidance previously issued in relation to COVID-19 and customers in financial difficulty. The FCA will expect firms proactively to support such policyholders, rather than relying on their strict legal rights. This might include offering greater flexibility for policyholders who cannot meet their monthly premium instalments, rather than simply cancelling the policy. Firms may be expected to suggest alternative products that might meet a customer’s changed needs, rather than simply accepting a cancellation. The FCA will also look closely at the interest rate applied to loans to fund insurance products, with the suggestion that a high rate on a loan with a low credit risk may be in breach of the FCA’s existing rules.

Recent political uncertainty in the UK has made it hard to be confident about the government’s intentions for the future of financial services regulation. The UK’s departure from the EU makes it theoretically possible to radically re-shape the UK rulebook. However, the legacy of the financial crisis of 2008 can still be seen within government and UK regulators, with demands for tougher regulation, particularly in the retail space, never far away. While the theory of a more proportionate and streamlined approach to regulation sounds compelling, therefore, we predict that, while we will see progress in some areas, the reality is likely to disappoint many. In the longer term, the Financial Services and Markets Bill currently before Parliament offers potential for greater innovation in financial services and the evolution of a regulatory culture which facilitates innovative and more cost-effective ways of achieving the same or better outcomes.

Environmental, social and governance issues will play an increasingly prominent role in shaping the strategies of the insurance sector; this is being driven at least as much by insureds and other market participants as by governments or regulators. However, many firms are still in the process of articulating a clear ESG strategy and then giving practical effect to it in different areas of their business. Regulators are increasingly focusing on issues such as how insurers identify and manage the financial risks arising from climate change, as well as the role of good governance in effectively managing risk. However, they have also highlighted the importance of diversity and inclusion as indicators of effective risk management, good conduct and innovation. We can only see this trend continuing, and firms who lag behind in this area or are unable to articulate a convincing narrative can expect increasing regulatory attention.

Gender inclusivity and opportunity is critical in both modernising the workplace, attracting talent and generating the positive effects in addressing climate change for businesses and wider society. The European Central Bank published a working paper in February 2022 with the eye-catching statement that a 1 percentage point increase in the proportion of female managers within a firm is linked to a 0.5% decrease in CO2 emissions. Further, firms with greater gender diversity reduced CO2 emissions by about 5% more than those with more male managers. Businesses must focus on representation and engaging women in leadership pipelines, particularly intensifying efforts to get more women into STEM education and roles. This therefore starts earlier in the employment life cycle with the need for government and organisations to engage women (girls) in the green economy and climate change challenge from school age to develop the pipeline for gender equity in the workplace for the future.

The impact of the Lloyd’s Blueprint Two initiative will begin to have a noticeable benefit to the speed, efficiency and cost of doing business in the London Market. If the full benefits of digitalisation of the market are to accrue to all participants, however, this will require all to engage in the process and to adopt an appropriate digital strategy. This includes, as a minimum, integrating and adopting the mandatory transition requirements in time for market-wide cut-over, scheduled for Q2 2024. Doing nothing is therefore not an option, and while some elements of the initiative have been postponed, the fact that John Neal, Lloyd’s CEO, has stated that the success of the Lloyd’s market depends on the effective implementation of the plan means that it would be foolish to downplay its significance.

The Financial Services and Markets Bill is designed to recast the UK’s financial services regulatory framework following the UK’s departure from the European Union. It goes well beyond purely technical changes, however, implementing proposals coming out of the Future Regulatory Framework Review and the Wholesale Markets Review, facilitating the use of stablecoins (referred to as digital settlement assets) when used as a means of payment, and amending the insolvency regime for insurance companies, among other things. The Bill will also introduce a new secondary objective for the Financial Conduct Authority and the Prudential Regulation Authority to support medium to long-term growth and international competitiveness. While this has been widely welcomed, the test will be to what extent in practice the UK regulators emphasise growth and competitiveness when set against the other competing objectives and indeed political demands to which they are subject. A change in culture, and a willingness to take risks, will be needed if the intended benefits of proportionate regulation that supports growth is to be achieved.