‘No bonfire’ of UK insurance regs post-Brexit but potential move towards principle-based rules, says FCA

There will be “no bonfire” of UK insurance regulations post-Brexit, but the Financial Conduct Authority (FCA) believes it is an opportunity to consider a move towards more principle-based, rather than detailed, rules, according to its director of general insurance and conduct specialist supervision. Addressing the British Insurance Brokers’ Association Conference this week, Karina McTeague also said the FCA continues to work with European authorities to reduce no-deal Brexit risks, and told the audience she has been impressed by the UK insurance industry’s approach to Brexit. However, she is less impressed by the UK insurance industry’s response to other regulatory issues. “Stronger prudential and conduct regulation has been built globally over the last ten years. Brexit is not going to significantly impact this global initiative. There will be no bonfire of our rules in any post-Brexit scenario. However, there will be opportunity for the UK to consider a regulatory system based more on principles and less on detailed rules,” she said. She added that the FCA is planning for a range of Brexit scenarios and is working with pan-European authorities to mitigate the potential harms caused by a no-deal Brexit. “We have been taking the lead in preparing for a transition period and envisaging a post-Brexit regulatory environment,” Ms McTeague said. She said there are still a number of regulatory questions to be answered on a range of Brexit topics, not least regulatory equivalence with the EU. The regulator said the FCA is clear that any equivalence arrangements must have substance and deliver a framework that provides predictability for financial markets, their firms and regulators. “But wherever we end up, our markets will remain closely linked with the EU and we expect you to remain close to developments in this area and support your customers,” Ms McTeague told BIBA delegates. “As you seek to navigate through all of this, I would simply encourage you to hold to your north star of sustainable and trustworthy strategies and business models, and a customer-focused culture supported by openness, honesty and professionalism,” she added. The regulator has been “very impressed” by how the UK insurance industry has responded to Brexit and helped the FCA understand its implications for consumers, particularly in a hard Brexit scenario. “I have been impressed with the planning that has been put in place and how firms have thought through what this is going to mean for their customers, putting in place communications to provide their customers with information and assurance,” said Ms McTeague. “That customer-focused approach is great, I really encourage it. It is the sort of culture that we want to see more widely,” she added. Ms McTeague encouraged the insurance industry to plan for a range of Brexit scenarios and continue to communicate what these might mean for its customers. “Be prepared for whatever and whenever the outcome,” she said. Ms McTeague advised UK insurance intermediaries that intend to continue distributing to European Economic Area (EEA) policyholders and for EEA risks, to agree arrangements with local regulators and seek legal advice where appropriate. “I know there are various models proposed for continuation of these activities. I know it is complex. Complexity is the watchword it would appear for much of the discussion on Brexit. But we expect you to be able to translate that complexity into communications that your customers can understand. As intermediaries, you are often the first point of contact. So, it is critical for you to have a clear strategy for communicating with your customers,” the regulator added. But Ms McTeague was critical of the UK insurance market when it comes to other regulatory areas. She said the insurance industry is on a similar regulatory journey that banks have been on, but is “arguably progressing more slowly in relation to maturity of understanding and implementation of the FCA’s conduct agenda, in particular culture”. She hopes that the insurance sector can make a “step change” in its approach to conduct and culture with the support of the Senior Managers & Certification Regime (SM&CR). The regime was introduced for UK insurance industry firms at the end of last year, and follows the implementation for banks back in March 2016. “As an organisation, we will support firms to make that step change towards embedding a healthy culture, with customers at your heart, drawing on the lessons of banks and hopefully avoiding the banks’ missteps,” said Ms McTeague. Those lessons include setting the tone from the top, encouraging behaviours by matching words with actions, and creating a working environment that helps everyone to speak up. Ms McTeague said there was some initial resistance to the SM&CR when it was introduced to other financial service sectors, but said it quickly became accepted and even welcomed. “We have seen, and continue to see, how quickly executives very much welcome the clarity of responsibility and accountabilities that the SM&CR has given them. I have had CEOs say: ‘Thank you, this has helped me as a CEO or MD to better manage my business.’ This clarity isn’t therefore just a matter of regulatory compliance. It is good business practice. It is beneficial for firms of all sizes,” said Ms McTeague. “I see the SM&CR as raising standards, so everyone in business understands what their role is in supporting good customer outcomes. If it is not clear in business who is responsible for something, the chances are it might not be done very well or at all. So the SM&CR is designed to facilitate business to work out and understand who is responsible for what… I would put forward the SM&CR as an opportunity rather than more regulation,” she added. Ms McTeague also said the FCA has “regrettably” observed areas of the insurance market that fall short of certain Insurance Distribution Directive requirements. “We have seen firms failing to ask appropriate questions to identify customers’ needs. For example, failing to ask if the customer has alternative cover. Or falling to find out if the customer is willing to contribute to the cost of the claim. We have also seen firms overloading the customer with product information, rather than focusing on disclosing the key, appropriate and relevant product information,” said Ms McTeague. “Firms must address any shortfalls in compliance quickly. To be clear, we will take action if we identify harm occurring,” she warned.

‘No bonfire’ of UK insurance regs post-Brexit but potential move towards principle-based rules, says FCA

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