Regulatory reflections: the impact of regulatory developments in the (re)insurance sector
2019 provided some important regulatory developments for the UK’s financial services industry. We take a look at three of those which we think will continue to have a particularly significant impact on the insurance sector.
Case management companies
The first is the Financial Conduct Authority (FCA) becoming the regulator of case management companies (CMCs) from 1 April 2019. This was widely welcomed by the industry in the hope that tighter regulation should start to reduce the number of vexatious claims incited by irresponsible CMCs, with knock on benefits to both the industry and those with legitimate claims.
CMCs had been a cause of increasing concern since the Claims Management Regulation Unit (CMRU) was established within the Ministry of Justice in April 2007 (originally as an interim measure and well before the industry grew as a result of the 2013 Jackson Reforms). In 2015 the UK government commissioned the independent Brady Review to assess the problems in the market and make recommendations to improve the way the claims management sector was regulated. The Brady Review recommended that regulation of CMCs be transferred to the FCA.
The FCA quickly identified several problem cases referred to in its “Dear CEO” letter issued last June, including cases where CMCs were acting for customers without obtaining appropriate consent or completed letters of authority, cases of their submitting letters of authority and claims in fictitious customer names and cases where there was no relationship between the customer and financial service provider receiving the claim. The FCA stated it intended to focus on CMCs with a high uphold rate for complaints submitted to the Financial Ombudsman Service (FOS). In August the FCA announced that CMCs must raise their advertising standards and introduced new rules in relation to financial promotions. Action taken on the back of these findings so far has included the FCA using its powers to ban formal financial promotions where a CMC appeared to be using a celebrity endorsement without the individual’s permission.
There has been little other enforcement action reported so far. However, we expect 2020 to see an increase in regulatory investigations and enforcement actions. We may by the end of this year have data to start to assess whether the FCA’s focus on helping consumers make more informed choices about CMCs is actually driving a reduction in vexatious claims encouraged by CMCs and improving perceptions of the insurance industry in dealing with legitimate claims.
Senior Managers & Certification Regime
The end of 2019 marked one year of the application to the insurance industry of the Senior Managers & Certification Regime (SM&CR). Evidence is limited regarding the impact so far. The FCA’s 2019 fines table shows that since the SM&CR came into force no enforcement action for culture, governance or fitness and propriety breaches has yet been concluded against any individuals in the insurance sector. Regulatory enforcement processes can take years to reach a conclusion, however, so in may take some time yet before an enforcement picture emerges more clearly.
In the meantime, we can make some predictions. Last August the FCA published its stocktake report on the implementation of the SM&CR in the banking sector. This highlighted some of the difficulties experienced by banking firms in meeting the regime’s requirements. In particular, banking firms are struggling to implement the SM&CR below senior manager level, which prompted the FCA to advise that it will increase its supervisory focus on the conduct rules and continue to build on the links between the SM&CR and firm culture and governance. We envisage that the experience in the insurance sector may very well follow the same pattern.
The Prudential Regulation Authority (PRA) has also commented that the effectiveness of firms’ governance and control arrangements is central to its supervisory approach and stated in its last business plan that it would begin to evaluate the effectiveness of the SM&CR and remuneration policies for (re)insurers in 2019/20. Insurers should not expect regulatory enthusiasm for ensuring the effective operation of the SM&CR regime to diminish any time soon.
General Insurance Pricing Practices
The FCA’s investigation into general insurance pricing practices has rumbled on. In October 2019 the FCA published MS18/1.2, the interim report of its General Insurance Pricing Practices Market Study. The interim report said competition was not working well for all consumers in the home and motor insurance markets, with around 6 million customers paying too much for their insurance.
The FCA has said that it is considering remedies such as banning or restricting practices like raising prices for consumers who renew year-on-year, or automatically moving consumers to cheaper equivalent deals, or restricting the way that firms use auto-renewal. The specific remedies the FCA actually chooses to adopt will be revealed in its final report (due for publication in Q1 2020). Whatever remedies are implemented shall sit within the broader regulatory context of the Insurance Distribution Directive (IDD) and the SM&CR. Firms will not only need to comply with the remedial action implemented but also provide evidence that compliance. This potentially may be burdensome.
The potential remedies suggested by the FCA have significant potential for impact, especially in terms of insurer earnings. The FCA has the protection of “vulnerable” customers as its focus but some may feel the remedies proposed bring the regulator close to quasi-pricing regulation, if not in name. In practical terms it remains to be seen whether the FCA’s next steps will bring any short-term volatility in pricing. Insurers will in any event continue to watch closely for any indication that the FCA might start to look at pricing practices in other classes of business in the name of customer protection.
2020 will undoubtedly bring new regulatory challenges and developments. As we wait to see the detail of Boris Johnson’s domestic agenda the full scope of these cannot yet be predicted. However the regulatory developments of the past year will continue to have a significant impact and contribute to the industry’s ongoing transformation and evolution.