Insurers and intermediaries: UK legal and regulatory certainties for 2022 - Part 1: Key issues
As the pandemic continues, once again businesses are starting the New Year looking for more certainty. We are therefore taking a high level look at some key legal and regulatory certainties likely to have a significant impact on insurers and intermediaries in 2022. The following proposals are already (or imminently) either in force or in consultation.
We will be picking up on some of these developments in more detail throughout the year.
Coming into force
Pricing and value
The latest instalment of the FCA’s work on general insurance pricing practices came into force on 1 January 2022. It covers the ‘price-walking’ ban for motor and home policies and easier opt-outs from auto-renewal by consumers for most types of general insurance policy.
The fair value requirements for product governance of a much wider range of products are still recent, having come into force on 1 October 2021. Firms’ compliance in creating and updating products of value to customers will no doubt be a supervisory focus of the FCA in the coming months (for more detail see our previous article on product governance).
Operational Resilience & Outsourcing
With the deadline of 31 March 2022 fast approaching, firms will need to have finalised identification of their important business services and related impact tolerances, ready for potential supervisory engagement with the FCA on firms’ readiness (for more detail see our previous article on operational resilience). We do not expect leeway from the UK regulator for any delay in implementing these rules, which focus on continuing to meet clients’ requirements, despite operational disruptions.
Dual-regulated insurers (authorised by the PRA, including as third-country branches) will also need to comply by 31 March 2022 with the PRA’s outsourcing and third party risk management requirements (SS2/21).
These requirements expressly complement the regulators’ expectations on operational resilience, as well as implementing recent outsourcing guidance from the European Supervisory Authorities. They also aim, in the words of the Bank of England, to “facilitate resilience and adoption of the cloud and other new technologies”.
Consultations in progress or new for 2022
Appointed Representatives (ARs)
The FCA have reacted to the disproportionately-high levels of complaints and supervisory cases against principals of ARs (compared to other authorised firms) by issuing a consultation to address their concerns. The regulator wants to be sure that authorised principals fully understand their own regulatory responsibilities and carry out sufficient due diligence and oversight over their ARs. As part of the proposals, the FCA will be requiring more information from principals on the ARs they wish to appoint. The consultation is aimed at the use of ARs across financial services, which will include insurers and intermediaries.
Firms that use or intend to appoint ARs, and ARs themselves, should pay careful attention to this consultation (CP21/34), which is open for responses until 3 March 2022. Despite previous reviews by the FCA on ARs focusing on insurance specifically, the regulator will still be looking for further improvements across the industry in the process of appointment and monitoring ARs. It is worth noting that there will be more to come on the scope of the AR regime following Treasury Select Committee’s recommendations in 2021 in the wake of Greensill and the subsequent HM Treasury Call for Evidence and FCA commitment to review the regime’s scope.
Diversity & Inclusion (D&I)
The PRA and FCA are looking to move the D&I dial in the financial services sector and are proposing to follow their 2021 joint Discussion Paper with consultation and policy statements in this area in 2022. The regulators see clear benefits of D&I in improving the quality of decision-making and expect this to lead to better consumer outcomes. This will no longer just be a matter for firms to consider internally, as the regulators are looking to set clear minimum expectations for firms to meet, or face the consequences of falling short.
New Consumer Duty
The FCA are pushing ahead with the new consumer duty, aiming to produce final rules by the end of July 2022 and implement them by April 2023. The new Consumer Duty will be built on the Consumer Principle that “a firm must act to deliver good outcomes for retail clients”.
Underpinning this new principle are ‘cross-cutting’ rules for firms to (1) act in good faith, (2) avoid causing foreseeable harm to customers and (3) enable and support customers to pursue their financial objectives.
The FCA has issued a detailed consultation document (CP21/36) covering those areas and the intended “good outcomes”.
These outcomes can be summarised as firms needing to ensure that consumers get products that are fit for purpose and at a fair value, that the consumers have enough understanding to make informed decisions and benefit from support that meets their needs.
Although it may be tempting to view the new duty as a different way to describe existing FCA Principles and rules, the new duty is designed to set a “higher standard of care and expectation” beyond those Principles and rules. The broad nature of this duty will enable the FCA to pursue its objectives more easily and take action against firms that it sees as not being sufficiently consumer-focused. Even firms that already put customers at the heart of their approach will need to review their activity further in light of this more outcomes-focused regime that the FCA sees as a fundamental change for firms.
Environmental, Social & Governance (ESG) issues
Following its appointment of Director of ESG, the FCA set out its ESG priorities in a strategy document published in November 2021. Unsurprisingly, the regulator has put ESG matters “high on the regulatory agenda” and highlighted transparency and trust as key themes.
The FCA is increasing climate-related disclosure requirements for life insurers (as well as listed companies generally, FCA-regulated pension providers and asset managers). This includes introducing (in PS 21/24) a new ESG sourcebook from June 2022 that will apply to certain life insurers and pension providers (in addition to asset managers). The FCA is seeking better outcomes for clients and consumers, better management of climate-related risks and opportunities and a coordinated flow of information along the investment chain.
Dual-regulated firms authorised by the PRA already need to demonstrate compliance with the PRA’s climate change supervisory statement (SS3/19) and have allocated responsibilities to a senior manager. In addition, subject to parliamentary approval, new climate-related disclosure regulations are set to apply from 6 April 2022 to large UK companies and LLPs (e.g. with over 500 employees) including insurers.
As important rules come into force on product governance and resilience, there is also a clear pipeline of developments affecting the distribution models and decision making of insurers and intermediaries. In the longer term, the weight of climate-related requirements is only going in one direction as the UK looks at how to achieve net zero.
Perhaps most importantly for 2022 though, after an uncertain few years, the new Consumer Duty is likely to be finalised in the second half of the year, signalling a significant change in the regulatory approach for the way in which firms deal with consumers.