Articles - Key areas of focus on conduct regulation


Over the past few years the FCA has been through the implementation of a number of large pieces of regulation such as MiFID II, Senior Managers & Certification Regime and the Insurance Distribution Directive to name just a few. After all these significant developments, what does the future hold for conduct regulation?

 By Kareline Daguer, Director, PwC

 I believe we will see more regulatory developments driven by market, economic and social trends that firms will find harder to anticipate. In this context, understanding the FCA plan and the motivation behind some of its initiatives will become more important in the years ahead. The areas I’d like to discuss in more depth today are the treatment of existing customers and the use of outsourcing.

 The treatment of existing customers in the general insurance market has been on the regulator’s radar for some time and is intertwined with the review of pricing practices. For a long time insurers have been benefiting from customers’ inertia when it comes to renewing insurance policies. This results in existing customers paying premiums significantly above those paid by new customers and therefore cross subsidiarisation between groups of customers.

 The FCA has conducted diagnostic work to understand the pricing practices of both insurers and intermediaries in general insurance. This work included looking at the types of systems and data firms used to decide final prices. As a result of this work the FCA is now planning to initiate an open debate on the impact of Big Data on insurance pricing and whether current pricing practices support customers. This could become a very important debate for insurers, and one that could determine how the industry uses Big Data in the future, with an impact on the type of products that could be developed.

 In connection with this theme, early in May the ABI and BIBA released their ‘Guiding principles and action points for general insurance pricing’. In doing so, the ABI and BIBA showed a proactive approach to regulatory concerns. The principles acknowledge that, as it stands, excessive differences between new and renewal premiums unfairly penalise long standing customers, that the approach to existing customers should be given Board or senior management priority, plus they should be incorporated into firms’ procedures for determining renewal premiums.

 Insurers are expected to review their pricing approaches relating to customers of more than five years and the ABI and BIBA will publish a report within two years to demonstrate how the market has incorporated these principles and actions into their practices. This is an example of an industry willing to self regulate to ensure fair customer outcomes. When the Big Data / pricing debate opens up in the next few months the ABI will be able to argue that the industry is already acting to regulate itself, not just waiting for externally imposed rules.

 The second theme I took away from the FCA Business Plan is its focus on outsourcing and firms’ resilience. This is a cross sector theme that will undoubtedly resonate with insurers. It is well known that outsourcing is a significant tool in the operational structure of most insurance companies in the UK. Issues arise when the complexity of outsourcing relationships - either with third parties or intra group - become difficult to manage. Firms are expected to have appropriate oversight and control over third party providers. In this context, the FCA plans to learn more about outsourced services across sectors through thematic and firm-specific work.

 What does this mean for insurers? Getting your house in order is important but so is gaining clarity on what is requested from third party providers as part of the oversight and control framework. Within any one large firm it is common to see wide differences in the quality and type of information obtained from third parties, leading to inconsistency in oversight and controls. Senior management and executive boards understand that some of these providers are critical but lack the necessary information to exercise appropriate scrutiny. I believe this is one area where there is ample room for improvement. Once again, whilst some firms might wait for the regulator to drive such improvements, most firms would do even better by considering their own outsourcing arrangements and how oversight and controls could be made more effective.

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