Clifford Chance

New FCA approach could be game-changer for insurers

12 December 2019

Digitisation, innovation and changing customer habits are pushing the regulator to think anew about its approach to regulation.

The Financial Conduct Authority’s (FCA) new focus on outcomes could have a big impact on insurers’ product design, sales and claims management processes.

The shift in approach was announced by the FCA’s executive director of strategy and competition, Christopher Woolard, in a speech on October 21. He said the FCA intends to take a broad look at the way it approaches conduct regulation and consider whether it needs to be updated. The speech acknowledged the UK regulatory system was developed in response to the financial crisis and the fact over the intervening 10 years, the “rules of the game have been shifting”. Post-crisis regulation has achieved some of its key aims, with firms being better capitalised and personal responsibility of managers becoming embedded in culture.

However, new challenges have also arisen. Innovation and digitisation have led to more online sales. Customer expectations have also changed, including, in a world where people save less, a lower tolerance for loss. In particular, the FCA says its regulatory approach, which focuses very much on firm disclosures, has not in many cases generated the desired results.

How should the regulator respond? It appears clear the FCA thinks the right direction of travel is away from compliance with specific rules towards an outcomes-based system. This, the regulator says, comes from the public, who do not care whether particular rules have been followed, only whether a fair outcome has been reached.

The regulator also seems keen to simplify regulation. It acknow¬ledges the FCA Handbook can be hard for both customers and firms to follow. A shift to an outcomes-based approach could make regulation clearer and easier to understand, rather than continuing to add additional layers of rules and advice. An example given in the regulator’s speech is the principle that firms should communicate in a way that is “fair, clear and not misleading and pays due regard to the information needs of its clients”. The FCA says this is both complicated and potentially a low bar and might be better formulated as the outcome of the customer understanding its options.
For an insurer, however, this is potentially complex – how does an insurer confirm at the point of sale a customer has understood its options and what processes would it need to put in place to make sure this outcome was reached for each potential policyholder? A key question will be what guidance will be provided to firms to allow them to comply with any new outcomes-based regulation.

The FCA also says its approach to technology requires an update. In a statement that will ring true with many practitioners, it acknow¬ledges the rules of the Handbook recognise the use of technology but in a way that is somewhat “analogue”. Change will be required to fully embrace the way technology is used in the insurance and financial services industries and anticipate its increasingly central role.

The speech announced the regulator’s intention to open a dialogue with firms on these issues. In the coming year it proposes to publish an analysis of future market dynamics and a discussion paper on the FCA’s principles, as well as a consultation paper on the introduction of a formal duty of care. Insurers therefore have an important opportunity to provide feedback on what could be very significant changes to conduct regulation in the UK and should keep a keen eye on the FCA’s publications over the coming months.

This article first appeared in Insurance Day