The Financial Conduct Authority (FCA) held its first general insurance conference on June 2, 2014 in which the regulator outlined its strategy for the sector and the key conduct issues that will be addressed over the coming year. Martin Wheatley, FCA Chief Executive Officer, acknowledged the industry’s positive engagement with the regulator over a year of significant change.
Conduct and integrity
Mr Wheatley argues that the industry has an opportunity to create a significantly better post-crisis business environment, with an emphasis on conduct, ethics and prevention. The overall theme of the conference points to a shift in regulatory focus from retail to wholesale markets. Over the next year the FCA will seek to move conduct forward to create greater market integrity in the long run. The main priorities are:
- oversight in the London market. Commercial insurance, Wheatley argues, is just as susceptible to conduct shocks and oversight now needs to extend beyond capital and profitability. A good grasp of conduct issues is equally critical for wholesale firms. Issues include board confidence that a product or service offers value for money to the end customer, fair treatment of customers by cover holders and agents, integration of wholesale and retail markets, and distribution chains that span both. The complexity of these structures has led the FCA to question whether the market is functioning effectively and achieving good consumer outcomes. Conduct oversight at board level will remain a key concern, as well as other challenges such as whether commercial insurers are treating smaller businesses fairly, whether products meet consumer needs and, importantly, dealing with unregulated customer-facing distributors (for example mobile phone distributors); and
- the broader challenges in the retail market. With the conduct agenda more firmly established in the retail sector, Mr Wheatley suggests that both the FCA and firms have a role in creating greater certainty and integrity, with the regulator seeking to prevent conduct crises and firms identifying and mitigating future risks internally before official intervention is required. Back-book consumer inertia, technological innovation and disclosure are identified as the key challenges for the year ahead. The pre-crisis reliance on disclosure and the ‘tick-box’ approach, encouraged by regulators, has largely failed. The FCA’s work on behavioural economics will continue with the aim of delivering better communications to consumers. Mr Wheatley welcomes industry-led initiatives on disclosure, such as the possibility of a two-pages terms and conditions document. The FCA is expected to publish a consultation paper on the retail sector challenges, along with potential Handbook changes, later this year.
Supervision shifts to wholesale markets
Clive Adamson, FCA Director of Supervision, in his speech focused on the industry’s response to the conduct agenda and how it plays into the regulator’s supervisory approach. For the general insurance sector, the FCA wants to see an industry that operates to the highest standards of integrity from top to bottom and is genuinely built around the interests of its customers. Mr Adamson reiterates previous comments on the FCA’s outcomes-focused philosophy and how this translates into better business models and good conduct, culture and governance. Firms have addressed these issues in various ways including strengthening compliance, setting risk appetite, building in cultural and behavioural change programmes, changing incentive structures, and reviewing business models.
In response to comments from firms that the FCA is doing too much, Mr Adamson argues that the industry has had less regulatory oversight from a conduct perspective than others so there is some catching up to do. The FCA acknowledges, however, that it needs to ensure its work is properly focused, coordinated and carried out as efficiently as possible. From the regulator’s work so far, Mr Adamson notes that broadly firms do work in the interests of their customers but retail consumer outcomes vary markedly, largely due to culture and business model. Conflicts of interest, however, are a problem and further work will be done to ensure effective conflict management.
Mr Adamson concludes that more can be done to embrace the conduct agenda and the FCA will continue to work towards raising conduct standards. While the retail sector should focus on maintaining the progress made over the past year, wholesale markets should prepare for increased regulatory focus on board engagement in consumer outcomes, distribution chains including cover holders, and the connectivity between commercial and retail markets. Upcoming thematic work will focus on more complex distribution structures, specifically the key risks and mixed responsibilities in the chain including cultural risks in relation to product design, sales and post-sales handling. Building on its retail claims and conflict of interest thematic reviews, the FCA will look at whether commercial customers’ expectations are met in the claims process and whether poor behaviour has an impact on consumer outcomes and market trust. As noted by Mr Wheatley, a significant part of FCA supervision will be dedicated to Lloyd’s and London market firms over the next year.
Finally, Christopher Woolard, Director of Policy, Risk and Research, discussed how the FCA sees its role in promoting competitive markets. The FCA’s main tool in achieving its competition objective is its programme of market studies, the first of which focused on general insurance add-ons. Work is ongoing in this area but Mr Woolard raises the following key ‘take-aways’ of this study that will inform the regulator’s thinking about competition:
- information matters. The FCA will seek to better understand consumers’ behaviour. How information is presented and structured has been shown to have a significant impact on consumer choice and understanding. More innovative presentation of information is expected rather than traditional legalistic disclosure;
- realistic and proportionate action. Low claims ratios in guaranteed asset protection (GAP) suggested there was a problem with the product, however, in situations like this, the FCA will look to make markets work better rather than resorting to outright bans; and
- focus on value. The FCA does not want to regulate prices but will take steps to improve transparency around pricing and ‘shine a light’ on value for money. The FCA believes that claims ratios are a useful measure of the value of products and should prompt firms to consider questions about product design and distribution to identify features that could result in poor value.
The FCA acknowledges that it has more to do to promote competition and, later this year, will look at barriers to entry created by its authorisation procedure and how competition is dealt with in the wider Handbook.
View Martin Wheatley – Good conduct and market integrity, 2 June 2014
View Clive Adamson – Our supervision overview, 2 June 2014
View Christopher Woolard – Competition and insurance, 2 June 2014