Matt Brewis, Director, Insurance and Conduct Specialists, FCA talks to BIBA’s Head of Compliance, David Sparkes in the conference FCA regulatory priorities session.
The Covid-19 pandemic saw the FCA increase its focus not just on the financial resilience of firms, but on their operational resilience too, as the industry got used to a new way of operating. The resilience of customers became a high priority also, as forbearance measures and other expectations for firms dealing with customers impacted by the virus became increasingly important for good customer outcomes. So, what are the areas of continued focus for the FCA when it comes to the pandemic, and the considerations for the industry as the world starts to recover…?
Relatively new to insurance regulation but with massive experience in the banking sector Matt agreed there was a great deal to tackle in insurance broking. He joined GI Supervision team as the pandemic hit and has only had 2 days in the office since he joined which he said had been challenging!
During the pandemic he has had a full inbox with emails about direct impact of insurance on consumer lives including because Covid and some of these emails were from brokers.. Seeing examples of travel, BI and wedding insurance as well as flood cover shows how important it is for brokers to find customers the cover they need.
The pandemic clearly led to widespread disruption and was a very large test for the industry including around underestimated claims projections and dealing with increased consumer vulnerability. In fact, he thought a thank you was due to brokers who had to deal with customers where there were no clear answers to give them.
The FCA will be focusing on three areas he said: Business models, financial resilience and issues related to business interruption and professional indemnity cover because the FCA wants its regulated firms to be robust businesses able to serve customers well.
Reacting to the pandemic
At the start of the pandemic there were many uncertainties and firms had to make big decisions about how to continue for example investing in technology to enable remote working and at the same time keeping on top of insurance products as risks were rapidly changing.
During the pandemic the FCA did surveys to check the impacts and to understand areas where there was a risk to customers. It found that there were only issues in a minority of cases but that we could learn from the experience.
Firms’ management of client money was found to be a big issue. There were some examples of commissions being drawn from client money accounts without first completing a client money calculation when firms were in difficulty and sometimes firm’s monies were left in client money accounts when they ought not to be there. Sometimes bank acknowledgement letters were incomplete and there were some examples of inaction on audit findings. The FCA may focus on this in coming years to safeguard customers as we move to a new normal.
Professional indemnity insurance
The FCA recognises that brokers are facing challenges in finding a policy to cover their own PI risk that meets FCA requirements and also in getting some clients PI cover. However the regulator does want the customers to have the comfort of a broker’s PI insurance being in force to provide compensation should things go wrong. It feels that without PI cover a firm could face failure if there was a claim against it.
The fact that there is now less capacity for some risks and in addition, insurers adding exclusions means that there has to be checks against customer needs.
The Grenfell tragedy created a focus on insurance. The FCA is looking at how the insurance market can help those ‘trapped’ in high rise buildings and is aware of the work BIBA is doing in this area. It has a web page on setting up fair value building insurance which indicates the regulator’s expectations.
The Supreme Court case was regarded as the right thing to do – following lock down many SMEs believed they were covered but were told they were not. The FCA wanted to ensure that there was clarity around cover. The judgement was decisive and aimed to ensure that valid claims were paid as quickly as possible. It is asking that all in the sector continue to support policy holders and help progress valid claims with insurers.
FCA has seen lots of good practice and lots of examples of brokers helping customers.
On the speed of response, the fact that the case was brought to bring clarity was reiterated. He said perhaps business interruption claims could have been paid more quickly but that there was a deluge of both valid and invalid claims. Insurer claims data is showing where progress is made and where it is slower than expected. The FCA acknowledged that these are not easy claims to make and brokers can help clients with the quality of data and the information needed to help the claim be processed more quickly.
Asked the question as to whether the transition to home or hybrid working helped to demonstrate the resilience of the insurance broking sector, he said yes. However, there is recognition that for every firm it is different. It needs to be understood that cyber-attacks have increased during the pandemic and dispersed working arrangements make it easier for criminal to carry out an attack. Firms need to protect their systems and their data. This is true for customers and brokers and, he said, that as only 11% SMEs buy cyber cover there is also an opportunity for brokers. Cyber insurance is less understood and the FCA will be concentrating on contract certainty and clarity over exactly what is covered in this area.
The FCA is trying to size the issues in the PI market. They want to get the root cause of the hard market issue by working with insurers and want to work with BIBA to understand the demand side too.
There needs to be a feeling as to whether the issue could be a shorter term one of demand and supply as some providers have pulled out of the market and what the FCA wants to understand the position on claims and pricing and whether this is the new normal or will it ease?
Discussing the requirement for brokers to be mindful of the impact of Covid on customer the question of regulatory fee increases was raised. These are in line with inflation was the answer and the smallest firms will not see any increase in the minimum fee.
The FCA must look at efficiencies in the regulatory family as a whole and will look to achieve an early reduction in harms. It recognises more needs to be done on new authorisations and on acting more quickly on bad behaviours which will reduce calls on the FSCS.
The aim is to build a regulator that works and is effective. The FCA wants customers to receive value not just focus on price. Matt’s team is focused on customers being provided with a product that is right for them at a price that is appropriate.
He ended by emphasising that there is a ‘listening vibe’ at the FCA, but the regulator does have set parameters that are not negotiable and have to be delivered upon.