FCA sets out supervisory focus for Lloyd’s & London Market

This article is co-authored by India Partridge, Trainee Solicitor, London.

A 2019 FCA study on the wholesale insurance broker market was prematurely concluded due to no findings of significant harm. On 3 November 2020, the FCA published a “Dear CEO” letter, which sets out the FCA’s supervision strategy for Lloyd’s & London Market Intermediaries and Managing General Agents (LLMI). This article summarises those strategies and considers how to minimise risk.

February 2019 wholesale insurance broker market study

The 2019 FCA study, which we discussed in our previous article, noted the FCA’s conclusion that they “have not found evidence of significant levels of harm to competition that merit the introduction of intrusive remedies.” This left readers feeling optimistic about the competitive and transparent state of the market.

The FCA did not however claim perfection and three areas of improvement were identified:

  • Management of conflicts of interest
  • The information that brokers disclose to clients and
  • Contractual arrangements between brokers and insurers.

The FCA concluded that these weaker areas could be addressed with the “usual supervisory processes and/or competition law enforcement processes”.

The approach to supervision

The FCA subsequently published a mission paper on their “Approach to Supervision” in April 2019. The supervisory principles set out objectives to protect consumers, enhance market integrity and promote competition.

The 3 November 2020 letter

The November letter sets out the FCA’s view of the current key risks of harm in the LLMI market and outlines the FCA’s expectation of firms and how firms should be mitigating those risks. The letter informs firms that a series of supervisory strategies have been implemented for each ‘portfolio’ (firms with similar business models have been grouped into collective portfolios).

The letter stresses that the overall aim of the supervision strategy is to “enable a wholesale market that works well for its participants and customers, and preserves the integrity of the markets”.

The supervisory measures are set out in relation to four common themes or “drivers of harm” across the market:

1. Financial resilience and orderly wind down

  • Firms must continue to meet capital requirements and maintain adequate financial resources, particularly in light of the COVID-19 pandemic.
  • Firms should demonstrate an awareness of material developments that could affect a business model, including significant changes in market or economic conditions. This is to ensure firms continue to meet FCA Handbook capital requirements, i.e. having appropriate PI(professional indemnity) cover.
  • Firms are expected to disclose any adverse developments at the “earliest opportunity”.


2. Ineffective governance and oversight of business

  • Good governance is central to the effective running of any financial institution.
  • The Senior Managers & Certification Regime requires senior managers to take responsibility for what happens in their areas of responsibility and are expected to act “quickly and effectively” when things go wrong.
  • There is a statutory obligation on firms to update and resubmit a Statement of Responsibilities if there are ‘significant changes’ to senior management functions (the FCA Handbook includes non-exhaustive examples of potential ‘significant changes’).
  • The FCA have also published positive and negative indicators for Fit and Proper assessments and for Conduct Rules training.

3. Culture and non-financial misconduct

  • Poor culture in financial services is a root cause of major conduct failings, which in turn causes harm to both consumers and markets.
  • The FCA focus on four key drivers of culture: leadership, purpose, approach to rewarding and managing people and governance, systems and controls.
  • “Leading healthy cultures in a post COVID-19 world” is high on the FCA’s agenda. The recent FCA webinar on this discussed the importance of supporting customers and employees throughout the pandemic and emphasised the need to make a huge effort with remote working.
  • Firms are reminded of the “Transforming Culture in Financial Services” papers and of the Conduct Rules. One such example of taking initiative is demonstrated by Lloyd’s of London having recently launched their new Culture Dashboard.

4. Business models which provide poor oversight of distribution chains

Other areas of risk which will be supervised by the FCA include:

  • Cyber risk and operational resilience - particularly in light of remote working.
  • A hardening market – firms are reminded that inadequate insurance coverage is a potential outcome of this.
  • EU withdrawal – passporting will cease with the end of the transition period (31 December 2020) so firms should assess the impact on them and their customers.

Take heed

A word of warning that if and when the FCA contact your firm, you will need to be able to explain what you did in response to the 3 November letter. It is therefore important to make sure you have effective supervision models in place, can demonstrate an awareness of the aforementioned key drivers of harm and can give examples how your firm has mitigated risk. Senior managers in particular are encouraged to become familiar with the materials provided by the FCA.

Read others items in Professions and Financial Lines Brief - December 2020

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