'Step-change in culture' needed from personal and commercial insurers

The regulator has set out the areas on which it intends to focus over the next 12 months in a letter to the boards of these firms (6-page / 89KB PDF). Its main areas of concern are poor oversight of and remuneration practices in distribution chains; the risks of consumers being provided with unsuitable or poor value products; concerns over pricing practices; ineffective management of some regulatory changes; and poor operational controls.

"Our view of the General Insurance (GI) sector overall is that there are significant risks of harm that both the market and individual firms need to address," the FCA said in its letter.

"Firms should consider the degree to which they present risks of harm to consumers and markets and have implemented effective strategies to mitigate these risks. Where we identify firms that have not taken sufficient steps to do so we will intervene and consider all our regulatory tools to take appropriate action," it said.

Insurance law expert Tobin Ashby of Pinsent Masons, the law firm behind Out-Law, said: "Whilst the FCA's letter does not open up new ground - referring back to the work it has carried out in relation to distribution chains, pricing, governance and culture and operational resilience in particular – the tone of the letter should serve as a warning to all insurance firms within the GI sector of the seriousness with which the FCA intends to approach and monitor these issues".

"The FCA expects board level focus on each of the identified issues in turn and warns that it expects boards of directors to hold senior management to account on their engagement with, and timely delivery of, regulatory change. Whilst many general insurance firms have already been grappling with the issues raised, boards will now need to give the highest priority to work streams to review processes and address any identified concerns," he said.

Iain Sawers of Pinsent Masons, explains that "The FCA makes it clear it will focus on firms' effective implementation of regulatory change on the basis this is fundamental to treating customers fairly and to those customers having products that suit their needs. Firms will need to ensure not only that regulatory changes have been properly implemented, but also that there is a clear audit trail to provide evidence of effective implementation to the regulator if necessary."

"It is also clear from the letter that the FCA regards proper implementation by firms of the changes resulting from the Insurance Distribution Directive (IDD) as being a core concern," he said. "We have already seen and can continue to expect supervisory focus on firms' compliance with the IDD requirements, meaning that firms will need to be in a position to evidence a robust project that has delivered the necessary changes."

The FCA has divided the risks it has identified into three categories: firm business models and strategies; governance arrangements and culture; and poor operational controls.

Poor oversight of, and poor remuneration practice in, distribution chains remains an area of concern for the regulator following its April 2019 report on general insurance distribution chains. The FCA is concerned that the way in which brokers and other product distributors are remunerated may be driving up prices for consumers. So-called 'loyalty penalties' and pricing practices in general are also of concern, as identified in the FCA's October 2019 interim report on household insurance pricing practices. The FCA is also monitoring the risk of consumers being provided with unsuitable or poor value products in connection with inadequate implementation of the requirements of the IDD; and the extent to which firms are properly assessing consumer creditworthiness.

The FCA has identified weaknesses around firms' governance arrangements and culture in connection with pricing strategies, distribution chain incentive arrangements and management of some regulatory changes - in particular the IDD and new rules on complaints handling and disclosure at renewal. The letter also references firms' implementation of parts of the Senior Managers and Certification Regime (SMCR), and reminds them that the certification regime and conduct rules are equally fundamental as the rules for senior managers.

Operational resilience remains an area of focus for the FCA, as identified in its discussion paper on operational resilience and subsequent coordinated consultation with the Bank of England and the Prudential Regulation Authority (PRA). The letter also identifies the UK's planned departure from the EU as a potential risk and notes that firms are expected to consider how the anticipated end of the Brexit implementation period in December 2020 will affect them and their customers.

The FCA intends to write to this group of firms again in early 2021 to provide an updated view on the risks that they face and how these are being mitigated, according to the letter.